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Table of Contents
PART III
TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 20-F
o | Registration Statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 | |
or | ||
ý | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, | |
or | ||
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
or | ||
o | Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Date of event requiring this shell company report
Commission file number 333-12032
MOBILE TELESYSTEMS OJSCPUBLIC JOINT STOCK COMPANY
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
RUSSIAN FEDERATION
(Jurisdiction of incorporation or organization)
4 Marksistskaya Street, Moscow 109147 Russian Federation
(Address of Principal Executive Offices)
Joshua B. Tulgan
Director, Corporate Finance and Investor Relations
Mobile TeleSystems OJSCPJSC
5 Vorontsovskaya Street, bldg. 2, 109147 Moscow Russian Federation
Phone: +7 495 223 20 25, Fax: +7 495 911 65 67
E-mail: ir@mts.ru
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on which Registered | |
---|---|---|
AMERICAN DEPOSITARY SHARES, | ||
EACH REPRESENTING 2 SHARES OF COMMON STOCK | NEW YORK STOCK EXCHANGE | |
COMMON STOCK, PAR VALUE 0.10 RUSSIAN RUBLES PER SHARE | NEW YORK STOCK EXCHANGE(1) |
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:
NONE
(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 1,211,515,6261,190,401,654 ordinary shares, par value 0.10 Russian rubles each and 388,698,252398,248,937 American Depositary Shares as of December 31, 2014.2016.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. o Yes ý No
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
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. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: ý No: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer ý | Accelerated Filer o | Non-accelerated filer o |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP | International Financial Reporting Standards as issued by | Othero | ||
the International Accounting Standards Board |
If "Other" has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
Cautionary Statement Regarding Forward-Looking Statements | 1 | |||||
Item 1. | Identity of Directors, Senior Management and Advisors | 3 | ||||
Item 2. | Offer Statistics and Expected Timetable | 3 | ||||
Item 3. | Key Information | 3 | ||||
A. | Selected Financial Data | 3 | ||||
B. | Capitalization and Indebtedness | |||||
C. | Reasons for the Offer and Use of Proceeds | |||||
D. | Risk Factors | |||||
Item 4. | Information on Our Company | |||||
A. | History and Development | |||||
B. | Business Overview | |||||
C. | Organizational Structure | |||||
D. | Property, Plant and Equipment | |||||
Item 4A. | Unresolved Staff Comments | |||||
Item 5. | Operating and Financial Review and Prospects | |||||
A. | Operating Results | |||||
B. | Liquidity and Capital Resources | |||||
C. | Research and Development, Patents and Licenses, etc. | |||||
D. | Trend Information | |||||
E. | Off-balance Sheet Arrangements | |||||
F. | Tabular Disclosure of Contractual Obligations | |||||
Item 6. | Directors, Senior Management and Employees | |||||
A. | Directors and Senior Management | |||||
B. | Compensation of Directors and Senior Management | |||||
C. | Board Practices | |||||
D. | Employees | |||||
E. | Share Ownership | |||||
Item 7. | Major Shareholders and Related Party Transactions | |||||
A. | Major Shareholders | |||||
B. | Related Party Transactions | |||||
C. | Interests of Experts and Counsel | |||||
Item 8. | Financial Information | |||||
A. | Consolidated Statements and Other Financial Information | |||||
B. | Significant Changes | |||||
Item 9. | Offer and Listing Details | |||||
A.4. | Market Price Information | |||||
C. | Markets | |||||
Item 10. | Additional Information | |||||
A. | Share Capital | |||||
B. | Charter and Certain Requirements of Russian Legislation | |||||
C. | Material Contracts | |||||
D. | Exchange Controls | |||||
E. | Taxation | |||||
F. | Dividends and Paying Agents | |||||
G. | Statement by Experts | |||||
H. | Documents on Display | |||||
I. | Subsidiary Information | |||||
Item 11. | Quantitative and Qualitative Disclosures about Market Risk |
i
Item 12. | Description of Securities Other Than Equity Securities | |||||
D. | American Depositary Shares | |||||
Item 13. | Defaults, Dividend Arrearages and Delinquencies | |||||
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | |||||
Item 15. | Controls and Procedures | |||||
Item 16A. | Audit Committee Financial Expert | |||||
Item 16B. | Code of Ethics | |||||
Item 16C. | Principal Accountant Fees and Services | |||||
Item 16D. | Exemption from the Listing Standards for Audit Committees | |||||
Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | |||||
Item 16F. | Change in Registrant's Certifying Accountant | |||||
Item 16G. | Corporate Governance | |||||
Item 17. | Financial Statements | |||||
Item 18. | Financial Statements | |||||
Item 19. | Exhibits |
Unless otherwise indicated or unless the context requires otherwise, references in this document to (i) "MTS," "the Group," "we," "us," or "our" refer to Mobile TeleSystems OJSCPublic Joint Stock Company and its subsidiaries; (ii) "MTS Ukraine" is to MTS Ukraine Private Joint Stock Company "MTS Ukraine" (formerly CJSC Ukrainian Mobile Communications), our Ukrainian subsidiary;subsidiary which works under Vodafone brand; (iii) "Uzdunrobita" is to our former subsidiary in Uzbekistan, which was deconsolidated in 2013; (iv) "MTS-Turkmenistan" our Turkmenistan subsidiary and "BCTI" are to Barash Communication Technologies, Inc., our former Turkmenistan subsidiary; (v) "Comstar" or "Comstar-UTS" are to COMSTAR—United TeleSystems, our former fixed line subsidiary, which was merged into Mobile TeleSystems OJSCMTS PJSC in 2011; (vi) "MGTS" is to Public Joint Stock Company Moscow City Telephone Network, our Moscow public switched telephone network ("PSTN") fixed line subsidiary; and (vii) "K-Telecom" or "VivaCell-MTS" are to K-Telecom CJSC,Closed Joint-Stock Company, our Armenian subsidiary; and (viii) "UMS" is to Universal Mobile Systems LLC, our newly establishedformer subsidiary in Uzbekistan;Uzbekistan which was deconsolidated in 2016; (ix) NVision our subsidiaries which provides integration services and (ix)(x) "Sistema" is to Sistema Joint-StockPublic Joint Stock Financial Corporation, our majority shareholder. We refer to Mobile TeleSystems LLC, our 49% owned equity investee in Belarus, as "MTS Belarus." We refer to MTS Bank PJSC, our 27%26.6% owned equity investee as "MTS Bank." As MTS Belarus and MTS Bank are equity investees, our revenues and subscriber data do not include MTS Belarus and MTS Bank.
In 2013, we changed our reporting currency to the Russian Ruble. Previously, we have presented our consolidated financial statements in the U.S. Dollar. The change in the reporting currency is to allow a greater transparency of our financial and operating performance as it more closely reflects the profile of our revenue and operating income, a major portion of which are generated in Russian rubles. In accordance with authoritative guidance, comparative information was restated in Russian rubles.
In this document, references to "U.S. dollars," "dollars," "$" or "USD" are to the lawful currency of the United States, "Russian rubles," "rubles" or "RUB" are to the lawful currency of the Russian Federation, "hryvnias" are to the lawful currency of Ukraine, "soms" are to the lawful currency of Uzbekistan, "manats" are to the lawful currency of Turkmenistan, "dram" are to the lawful currency of Armenia and "€," "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. References in this document to "shares" or "ordinary shares" refers to our ordinary shares, "ADSs" refers to our American depositary shares, each of which represents two ordinary shares, and "ADRs" refers to the American depositary receipts that evidence our ADSs. Prior to May 3, 2010, each ADS represented five ordinary shares of our common stock. "CIS" refers to the Commonwealth of Independent States. "CBR" refers to the Central Bank of Russia.
ii
The following tables show, for the periods indicated, certain information regarding the exchange rate between the ruble and the U.S. dollar, based on data published by the CBR. These rates may differ from the actual rates used in preparation of our financial statements and other financial information provided herein.
| Rubles per U.S. dollar | Rubles per U.S. dollar | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years ended December 31, | High | Low | Average(1) | Period End | High | Low | Average(1) | Period End | ||||||||||||||||||
2010 | 31.78 | 28.93 | 30.37 | 30.48 | ||||||||||||||||||||||
2011 | 32.68 | 27.26 | 29.38 | 32.20 | ||||||||||||||||||||||
2012 | 34.04 | 28.95 | 30.97 | 30.37 | 34.04 | 28.95 | 30.97 | 30.37 | ||||||||||||||||||
2013 | 33.47 | 29.93 | 31.98 | 32.73 | 33.47 | 29.93 | 31.98 | 32.73 | ||||||||||||||||||
2014 | 67.79 | 32.66 | 39.34 | 56.26 | 67.79 | 32.66 | 39.34 | 56.26 | ||||||||||||||||||
2015 | 72.88 | 49.18 | 60.96 | 72.88 | ||||||||||||||||||||||
2016 | 83.59 | 60.27 | 67.03 | 60.66 |
| Rubles per U.S. dollar | ||||||
---|---|---|---|---|---|---|---|
| High | Low | |||||
July 2014 | 35.73 | 33.84 | |||||
August 2014 | 36.93 | 35.44 | |||||
September 2014 | 39.39 | 36.80 | |||||
October 2014 | 43.39 | 39.38 | |||||
November 2014 | 49.32 | 41.96 | |||||
December 2014 | 67.79 | 49.32 | |||||
January 2015 | 68.93 | 56.24 | |||||
February 2015 | 69.66 | 60.71 | |||||
March 2015 | 62.68 | 56.43 |
| Rubles per U.S. dollar | ||||||
---|---|---|---|---|---|---|---|
| High | Low | |||||
July 2016 | 67.05 | 62.99 | |||||
August 2016 | 67.05 | 63.55 | |||||
September 2016 | 65.87 | 63.16 | |||||
October 2016 | 63.40 | 62.05 | |||||
November 2016 | 65.86 | 63.20 | |||||
December 2016 | 65.24 | 63.27 | |||||
January 2017 | 60.66 | 59.15 | |||||
February 2017 | 60.31 | 56.77 | |||||
March 2017 | 59.22 | 56.38 |
Source: CBR.
The exchange rate between the ruble and the U.S. dollar quoted by the CBR for April 18, 201521, 2017 was 50.5256.42 rubles per U.S. dollar.
iii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed in this document may constitute forward-looking 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.
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. We have based these forward- lookingforward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. The words "believe," "expect," "anticipate," "intend," "estimate," "forecast," "project," "predict," "plan," "may," "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," "Item 5. Operating and Financial Review and Prospects,"Prospects" and "Item 11. Quantitative and Qualitative Disclosures about Market Risk" and include statements regarding:
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 cannot assure you that we will achieve or accomplish these expectations, beliefs or projections. In addition to these important factors and matters
discussed elsewhere herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include:
All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. Readers are cautioned not to place undue reliance on these forward-looking statements. 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.
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
A. Selected Financial Data
The selected consolidated financial data for the years ended December 31, 2012, 2013 and 2014, and as of December 31, 2013 and 2014, are derivedWe adopted International Financial Reporting Standards ("IFRS") starting from the audited consolidated financial statements, prepared in accordance with U.S. GAAP included elsewhere in this document. The numbers presented in the following table for thefiscal year ended December 31, 2010 and as2015 by applying IFRS 1, First-Time Adoption of December 31, 2010 and 2011 were derived from our audited consolidated financial statements presented in U.S. dollars and restated in Russian rubles using average monthly exchange rates and period end exchange rates between the U.S. dollars and the Russian rubles based on data published by the CBR, except for data derived from the statementsInternational Financial Reporting Standards. The date of cash flows. Cash flows data for the year ended 2010 were restated in Russian rubles using average annual rates between the U.S. dollar and the Russian ruble based on data published by the CBR.transition to IFRS is January 1, 2014. Our results of operations for all periods presented in the following table exclude financial data of Uzdunrobita, our former subsidiary in Uzbekistan. The results of operations of Uzdunrobita are reported as discontinued operations in our audited consolidated financial statements for the years ended December 31, 2011, 20122014 were originally prepared in accordance with U.S. GAAP and 2013,were restated in accordance with IFRS. An explanation of how the transition to IFRS from U.S. GAAP has affected our reported financial position, financial performance and as ofcash flows is provided in Note 4 to our consolidated financial statements for the year ended December 31, 20122015.
Pursuant to the transitional relief granted by the U.S. SEC in respect of the first-time adoption of IFRS, we have only provided financial statements and 2013.financial information for three fiscal years ended December 31, 2016, 2015 and 2014 as presented under IFRS.
Because of the sale of our stake in UMS in August 2016, the results of UMS were reported as discontinued operations in the accompanying consolidated statements of profit or loss for all periods presented. The consolidated statements of financial postiion and consilidated statements of cash flows for all periods presented were not retrospectively restated as a result of the sale of UMS. Please see Note 26 to our audited consolidated financial statements.
The selected financial data should be read in conjunction with our audited consolidated financial statements, included elsewhere in this document, "Item 3. Key Information—D. Risk Factors" and "Item 5. Operating and Financial Review and Prospects." Certain industry and operating data are also provided below.
| Years Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||
| (Amounts in millions of Russian Rubles, except share and per share amounts, industry and operating data and ratios) | |||||||||||||||
Consolidated statements of operations data: | ||||||||||||||||
Services revenue and connection fees | 308,007 | 322,546 | 349,338 | 371,950 | 381,822 | |||||||||||
Sales of handsets and accessories | 21,542 | 26,025 | 28,902 | 26,493 | 28,936 | |||||||||||
| | | | | | | | | | | | | | | | |
Total net operating revenues | 329,549 | 348,571 | 378,240 | 398,443 | 410,758 | |||||||||||
Operating expenses: | ||||||||||||||||
Cost of services, excluding depreciation and amortization shown separately below | 66,067 | 74,753 | 83,051 | 83,777 | 89,589 | |||||||||||
Cost of handsets and accessories | 22,001 | 26,286 | 25,042 | 22,636 | 25,093 | |||||||||||
Sales and marketing expenses | 25,143 | 24,800 | 21,667 | 22,861 | 21,908 | |||||||||||
Depreciation and amortization expense | 57,197 | 63,932 | 67,910 | 73,253 | 74,710 | |||||||||||
Sundry operating expenses(1) | 75,972 | 78,505 | 86,776 | 94,158 | 97,109 | |||||||||||
Net operating income | 83,169 | 80,295 | 93,794 | 101,758 | 102,349 | |||||||||||
Currency exchange and transaction loss/(gain) | (877 | ) | 4,403 | (3,952 | ) | 5,473 | 18,024 | |||||||||
| | | | | | | | | | | | | | | | |
Other (income) expenses: | ||||||||||||||||
Interest income | (2,554 | ) | (1,850 | ) | (2,588 | ) | (2,793 | ) | (4,519 | ) | ||||||
Interest expense, net of capitalized interest | 23,578 | 19,333 | 17,673 | 15,498 | 16,453 | |||||||||||
Equity in net (income)/loss of associates | (2,147 | ) | (1,430 | ) | (869 | ) | (2,472 | ) | 2,880 | |||||||
Other expenses/(income), net | 1,983 | 180 | 688 | (10,636 | ) | 771 |
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | |||||||
| (Amounts in millions of Russian rubles, except share and per share amounts, industry and operating data and ratios) | |||||||||
Consolidated statements of profit or loss data: | ||||||||||
Services revenue | 381,143 | 386,159 | 386,486 | |||||||
Sales of goods | 29,535 | 40,480 | 49,206 | |||||||
| | | | | | | | | | |
Total operating revenues | 410,678 | 426,639 | 435,692 | |||||||
Operating expenses: | ||||||||||
Cost of services | 119,053 | 126,805 | 130,158 | |||||||
Cost of goods | 25,445 | 36,555 | 45,574 | |||||||
Selling, general and administrative expenses | 88,095 | 87,340 | 94,046 | |||||||
Depreciation and amortization | 74,734 | 77,843 | 81,582 | |||||||
Operating share of the profit of associates | (3,459 | ) | (3,456 | ) | (3,115 | ) | ||||
Provision for investment in distressed Ukrainian banks | 5,138 | 1,698 | — | |||||||
Impairment of goodwill in Armenia | — | 3,516 | — | |||||||
Other expenses/ (income)(1) | 1,814 | 2,415 | (222 | ) | ||||||
| | | | | | | | | | |
| Years Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||
| (Amounts in millions of Russian Rubles, except share and per share amounts, industry and operating data and ratios) | |||||||||||||||
Total other expenses/(income), net | 20,860 | 16,233 | 14,904 | (403 | ) | 15,585 | ||||||||||
| | | | | | | | | | | | | | | | |
Income from continuing operations before provision for income taxes | 58,934 | 59,659 | 82,842 | 96,688 | 68,740 | |||||||||||
| | | | | | | | | | | | | | | | |
Provision for income taxes | 15,660 | 15,526 | 19,384 | 19,633 | 16,347 | |||||||||||
Net income from continuing operations | 43,243 | 44,133 | 63,458 | 77,055 | 52,393 | |||||||||||
Net income/(loss) from discontinued operations | 3,580 | 1,806 | (32,846 | ) | 3,733 | — | ||||||||||
Net income attributable to the noncontrolling interest | 5,080 | 3,624 | 970 | 949 | 571 | |||||||||||
Net income attributable to the Group | 41,773 | 42,315 | 29,642 | 79,839 | 51,822 | |||||||||||
Dividends declared(2) | 30,697 | 30,046 | 30,397 | 40,956 | 51,247 | |||||||||||
| | | | | | | | | | | | | | | | |
Earnings per share, basic and diluted, RUB | 21.79 | 21.5 | 14.9 | 40.1 | 26.1 | |||||||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Earnings per share from continuing operations, basic and diluted, RUB | 19.92 | 20.6 | 31.4 | 38.3 | 26.1 | |||||||||||
Earnings/(loss) per share from discontinued operations, basic and diluted, RUB | 1.87 | 0.9 | (16.5 | ) | 1.9 | — | ||||||||||
Annual Dividends declared per share, rubles | 15.40 | 14.54 | 14.71 | 14.6 | 18.6 | |||||||||||
Semi—annual Dividends declared per share, rubles | — | — | — | 5.2 | 6.2 | |||||||||||
Number of common shares outstanding | 1,916,869,262 | 1,988,916,837 | 1,988,919,177 | 1,988,831,184 | 1,988,912,130 | |||||||||||
Weighted average number of common shares outstanding—basic | 1,916,869,262 | 1,970,953,129 | 1,988,918,528 | 1,988,849,281 | 1,988,757,022 | |||||||||||
Weighted average number of common shares outstanding—diluted | 1,916,869,262 | 1,970,953,129 | 1,988,918,528 | 1,988,849,281 | 1,988,757,022 | |||||||||||
Consolidated statement of cash flows data: | ||||||||||||||||
Cash provided by operating activities | 109,851 | 113,562 | 132,123 | 159,377 | 159,518 | |||||||||||
Cash used in investing activities | (66,254 | ) | (77,210 | ) | (93,367 | ) | (96,671 | ) | (105,588 | ) | ||||||
(of which capital expenditures)(3) | (80,391 | ) | (72,802 | ) | (87,783 | ) | (81,575 | ) | (92,599 | ) | ||||||
Cash used in financing activities | (92,214 | ) | (5,630 | ) | (75,346 | ) | (55,145 | ) | (33,171 | ) | ||||||
Consolidated statement of financial position (end of period): | ||||||||||||||||
Cash, cash equivalents and short-term investments | 38,440 | 62,366 | 26,048 | 45,245 | 71,259 | |||||||||||
Property, plant and equipment, net | 242,957 | 265,376 | 271,781 | 270,660 | 299,479 | |||||||||||
Total assets | 441,246 | 493,474 | 454,978 | 485,524 | 608,927 | |||||||||||
Total debt (long-term and short-term)(4) | 218,233 | 280,596 | 232,105 | 219,148 | 292,391 | |||||||||||
Total shareholders' equity | 126,686 | 114,960 | 113,991 | 156,053 | 175,925 | |||||||||||
Common stock less treasury stock | (25,884 | ) | (24,255 | ) | (24,255 | ) | (24,275 | ) | (24,257 | ) | ||||||
Financial ratios (end of period): | ||||||||||||||||
Total debt/total capitalization(5) | 63.3% | 70.9% | 67.1% | 58.4% | 62.4% | |||||||||||
Mobile industry and operating data:(6) | ||||||||||||||||
Mobile penetration in Russia (end of period) | 151% | 157% | 161% | 166% | 168% | |||||||||||
Mobile penetration in Ukraine (end of period) | 118% | 118% | 126% | 124% | 132% | |||||||||||
Mobile subscribers in Russia (end of period, thousands)(7) | 71,442 | 69,954 | 71,227 | 69,351 | 74,562 | |||||||||||
Mobile subscribers in Ukraine (end of period, thousands)(7) | 18,240 | 19,223 | 20,709 | 21,487 | 20,221 | |||||||||||
Overall market share in Russia (end of period) | 33% | 31% | 31% | 29% | 31% |
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | |||||||
| (Amounts in millions of Russian rubles, except share and per share amounts, industry and operating data and ratios) | |||||||||
Operating profit | 99,858 | 93,923 | 87,669 | |||||||
| | | | | | | | | | |
Finance income | (4,519 | ) | (8,368 | ) | (5,273 | ) | ||||
Finance costs | 17,252 | 26,422 | 27,136 | |||||||
Non-operating share of the loss of associates | 6,537 | 3,780 | 1,287 | |||||||
Change in fair value of financial instruments | 95 | (1,014 | ) | (166 | ) | |||||
Other expenses/(income), net | 937 | (54 | ) | 317 | ||||||
Currency exchange loss/(gain) | 17,926 | 6,154 | (3,241 | ) | ||||||
| | | | | | | | | | |
Profit before tax | 61,630 | 67,003 | 67,609 | |||||||
| | | | | | | | | | |
Income tax expense | 15,909 | 13,931 | 15,138 | |||||||
| | | | | | | | | | |
Profit for the period from continuing operations | 45,721 | 53,072 | 52,471 | |||||||
| | | | | | | | | | |
(Income)/Loss from discontinued operations, net of tax | (5,775 | ) | 5,668 | 4,021 | ||||||
| | | | | | | | | | |
Profit for the period | 51,496 | 47,404 | 48,450 | |||||||
| | | | | | | | | | |
Attributable to: | ||||||||||
Owners of the company | 51,306 | 49,489 | 48,474 | |||||||
Non-controlling interests | 190 | (2,085 | ) | (24 | ) | |||||
Dividends declared(2) | 51,247 | 52,011 | 51,958 | |||||||
Earnings per share, basic, RUB | 25.80 | 24.88 | 24.37 | |||||||
Earnings per share, diluted, RUB | 25.78 | 24.87 | 24.35 | |||||||
Earnings per share from continuing operations, basic, RUB | 22.67 | 26.31 | 26.06 | |||||||
Earnings per share from continuing operations, diluted, RUB | 22.66 | 26.29 | 26.04 | |||||||
Earnings per share from discontinued operations, basic, RUB | 3.13 | (1.43 | ) | (1.69 | ) | |||||
Earnings per share from discontinued operations, basic and diluted, RUB | 3.13 | (1.42 | ) | (1.69 | ) | |||||
Annual Dividends declared per share, RUB | 24.80 | 25.17 | 25.99 | |||||||
Semi—annual Dividends declared per share, RUB | 6.20 | 5.61 | 11.99 | |||||||
Number of common shares outstanding | 1,988,912,130 | 1,988,892,399 | 1,986,899,529 | |||||||
Weighted average number of common shares outstanding—basic | 1,988,757,022 | 1,988,728,000 | 1,989,281,930 | |||||||
Weighted average number of common shares outstanding—diluted | 1,989,977,971 | 1,990,195,552 | 1,990,693,983 | |||||||
Consolidated statement of cash flows data: | ||||||||||
Cash provided by operating activities | 158,979 | 144,088 | 130,565 | |||||||
Cash used in investing activities | (105,008 | ) | (145,356 | ) | (57,302 | ) | ||||
(of which capital expenditures)(3) | (91,929 | ) | (106,537 | ) | (86,149 | ) | ||||
Cash used in financing activities | (33,212 | ) | (27,595 | ) | (83,038 | ) | ||||
Consolidated statement of financial position (end of period): | ||||||||||
Cash, cash equivalents and short-term investments | 71,352 | 83,304 | 27,127 | |||||||
Property, plant and equipment, net | 299,023 | 302,662 | 272,841 | |||||||
Total assets | 599,304 | 653,378 | 544,470 | |||||||
Total debt (long-term and short-term)(4) | 289,965 | 345,869 | 284,320 |
| Years Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||
| (Amounts in millions of Russian Rubles, except share and per share amounts, industry and operating data and ratios) | |||||||||||||||
Overall market share in Ukraine (end of period) | 34% | 36% | 36% | 38% | 34% | |||||||||||
Average monthly usage per subscriber in Russia (minutes)(8) | 234 | 269 | 304 | 359 | 372 | |||||||||||
Average monthly usage per subscriber in Ukraine (minutes)(8) | 535 | 580 | 597 | 608 | 554 | |||||||||||
Average monthly service revenue per subscriber in Russia(9), rubles | 253 | 273 | 297 | 339 | 339 | |||||||||||
Average monthly service revenue per subscriber in Ukraine(9), rubles | 146 | 143 | 153 | 158 | 129 | |||||||||||
Subscriber acquisition costs in Ukraine(10),rubles | 244 | 241 | 236 | 218 | 185 | |||||||||||
Churn in Russia(11) | 45.9% | 47.6% | 42.4% | 38.1% | 41.0% | |||||||||||
Churn in Ukraine(11) | 31.0% | 30.7% | 30.5% | 27.2% | 34.2% |
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | |||||||
| (Amounts in millions of Russian rubles, except share and per share amounts, industry and operating data and ratios) | |||||||||
Total shareholders' equity | 178,622 | 168,371 | 143,948 | |||||||
Common stock less treasury stock | (24,257 | ) | (24,261 | ) | (548 | ) | ||||
Financial ratios (end of period): | ||||||||||
Total debt/total capitalization(5) | 61.9 | % | 67.3 | % | 66.8 | % | ||||
Mobile industry and operating data:(6) | ||||||||||
Mobile penetration in Russia (end of period) | 168 | % | 176 | % | 179 | % | ||||
Mobile penetration in Ukraine (end of period) | 136 | % | 134 | % | 136 | % | ||||
Mobile subscribers in Russia (end of period, thousands)(7) | 74,562 | 77,277 | 80,032 | |||||||
Mobile subscribers in Ukraine (end of period, thousands)(7) | 20,221 | 20,431 | 20,856 | |||||||
Overall market share in Russia (end of period) | 31 | % | 31 | % | 31 | % | ||||
Overall market share in Ukraine (end of period) | 34 | % | 35 | % | 36 | % |
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 certain degree of risk. in our securities involves a certain 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 coulcould be materially adversely affected. In that case, the value of our securities could also decline and you could lose all or part of your investment. In addition, please read "Cautionary Statement Regarding Forward LookingForward-Looking Statements" where we describe additional uncertainties associated with our business and the forward looking statements included in this document.
Risks Relating to Business Operations in Emerging Markets
Emerging markets such as the Russian Federation, Ukraine and other CIS countries are subject to greater risks than more developed markets, including significant legal, economic, tax and political risks.
Investors in emerging markets such as the Russian Federation, Armenia, Ukraine, Turkmenistan Kyrgyzstan, Uzbekistan and other CIS countries should be aware that these markets are subject to greater risk than more developed markets, including in some cases, significant legal, economic, tax and political risks. Investors should also note that emerging economies such as the economies of the Russian Federation, Ukraine and Ukraineother CIS countries are subject to rapid change and that the information set out herein may become outdated relatively quickly.
Global financial or economic crises or even financial turmoil in any large emerging market country tend to adversely affect prices in equity markets of most or all emerging market countries as investors move their money to more stable, developed markets. Beginning inOver the second half of 2008,past few years, the Russian equity markets have been highly volatile, principally due to the impact of the global financialeconomic slowdown resulting from various factors, including the European sovereign debt crisis, the Chinese economic decline and economic crisis on the Russian economydramatic fall in oil prices, as well as the current crisis in Ukraine. Such volatility has caused market regulators to temporarily suspend trading on the Moscow Interbank Currency Exchange ("MICEX") and the Russian Trading System ("RTS") multiple times. MICEX and RTS stock market indices have experienced significant overall declines since their peaks in May 2008, including a significant fall during 2014 (MICEX decreased by 7.15% and the dollar- denominated RTS index decreased by 45.19%) in response to the current crisis in Ukraine and deepening concerns over the strengthdeteriorating conditions of the Russian economy. As has happened in the past, financial problems such as significant ruble depreciation, capital outflows and a decrease in other leading economic indicators or an increase in the perceived risks associated with investing in emerging economies due to,inter alia, geopolitical disputes such as the current crisis in Ukraine, could dampen foreign investment in Russia and adversely affect the Russian economy. In addition, during such times, businesses that operate in emerging markets can face severe liquidity constraints as funding sources are withdrawn. Furthermore, in doing business in various countries of the CIS, we face risks similar to (and sometimes more significant than) those that we face in Russia and Ukraine. For example, see "—Legal Risks and Uncertainties—The inability of MTS-Turkmenistan to sustain its operations in Turkmenistan on commercially acceptable terms or at all may adversely affect our business, financial condition and results of operations,"operations" and "—The inability of our subsidiaries in the
countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations." 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 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
The telecommunications services market is characterized by rapid technological change, which could render our services obsolete or non-competitive and result in the loss of our market share and a decrease in our revenues.
The telecommunications industry is subject to rapid and significant changes in technology and is characterized by the continuous introduction of new products and services. The mobile telecommunications industry in Russia is also experiencing significant technological change, as evidenced by the introduction in recent years of new standards for radio telecommunications, such as Wi-Fi, Worldwide Inter-operability for Microwave Access ("Wi-Max"), Enhanced Data Rates for Global Evolution ("EDGE"), Universal Mobile Telecommunications System ("UMTS"), and Long Term Evolution ("LTE"), as well as ongoing improvements in the capacity and quality of communications, shorter development cycles for new products and enhancements and changes in customer requirements and preferences. Such continuing technological advances make it difficult to predict the extent of the future competition we may face and it is possible that existing, proposed or as yet undeveloped technologies will become dominant in the future and render the technologies we use less profitable or
even obsolete. New products and services that are more commercially effective than our products and services may also be developed. Furthermore, we may not be successful in responding in a timely and cost-effective way to keep up with these developments. Changing our products or services in response to market demand may require the adoption of new technologies that could render many of the technologies that we are currently implementing less competitive or obsolete. To respond successfully to technological advances and emerging industry standards, we may require substantial capital expenditures and access to related or enabling technologies in order to integrate the new technology with our existing technology.
We face increasing competition in the markets where we operate, which may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing policies.
The wireless telecommunications services markets in which we operate are highly competitive, particularly in Russia and Ukraine, where mobile penetration exceeds 100%.Ukraine. We also face increased competition in our cable TV and fixed line business, wherewhile the market for fixed line communications services in Russia is rapidly evolving and becoming increasingly competitive. Competition is generally based on price, product functionality, range of service offerings and customer service.
Generally, increased levels of competition, including from the potential entry of new mobile operators, government-backed operators, mobile virtual network operators and alternative fixed line operators in the markets where we operate, as well as the strengthening of existing operators, increased use of Internet protocol telephony and other services, provided via the internet, may adversely affect our ability to increase the number of subscribers. This in turn could result in reduced operating margins and a loss of market share, as well as necessitating different pricing, service or marketing policies, which may have a material adverse effect on our business, financial condition and results of our operations.
Competition in the Russian market
Our principal wireless competitors in Russia are OpenPublic Joint Stock Company "Vimpel Communications," or "VimpelCom," and Open"Vimpel-Communications" ("VimpelCom"), Public Joint Stock Company MegaFon ("MegaFon"). We also face competition from several regional operators, as well as from the fourth federal cellular operator established onin 2014 by the basiscombination of Tele2 Russia and the mobile assets of OpenPublic Joint Stock Company Long-Distance and International Telecommunications "Rostelecom" ("Rostelecom").
In addition, on April 1, 2011, the Russian government completed the reorganization As of state-controlled telecommunications companies Svyazinvest Telecommunications Investment Joint Stock Company ("Svyazinvest"), and Rostelecom. As a result, Rostelecom is currently the largest fixed-line operator.
In October 2010, Sistema and Svyazinvest entered into an exchange transaction, upon completion of which, Svyazinvest obtained control over 100% of the share capital in Sky Link, Sistema acquired the
23.33% stake in MGTS controlled by Svyazinvest and Comstar transferred 25% plus 1December 31, 2016, MTS' market share in SvyazinvestRussia amounted to Rostelecom for cash consideration31% (while the market shares of 26 billion rubles. Sky Link is a Moscow-based code division multiple access ("CDMA") operator holding GSM licenses for a majority of Russian regions. In July 2012, Rostelecom acquired 100% of Sky Link which at the time of this acquisition held licenses in 76 Russian regions covering more than 90% of the total Russian population. In addition, Rostelecom won tenders for 39 out of 40 licenses to provide fourth-generation ("4G") wireless services within the 2.3-2.4 GHz frequency bandMegaFon, VimpelCom and in November 2011 received permission from the Ministry of Defense to use the allotted frequencies for the creation of a 4G network.
On April 4, 2013, the Federal Antimonopoly Service approved a transaction for Airport Alliance, a member of VTB Group, to acquire 100% of Tele2 Russia, which was later completed. Subsequently, VTB Bank sold 50% of Tele2 Russia to a consortium of private investors, including affiliates of Bank "Rossiya," whose main shareholder is Mr. Yury Kovalchuk,were 30%, 23% and also entities linked to Mr. Alexey Mordashov. Both of these individuals are reputedly among Russia's most successful and influential businessmen. On December, 30, 2013 shareholders of Rostelecom approved a reorganization plan which led15% respectively), according to the spin-out of its mobile business into RT-Mobile Ltd. RT-Mobile Ltd's business was contributed as capital for a new joint venture concluded between Rostelecom and Tele2 Russia, under the name of "T2 Rus Holding," later reorganized into "T2 RTK Holding." On February 6, 2014, Tele2 Russia and Rostelecom signed an agreement on integration of mobile assets on the basis of LLC "T2 RTK Holding." At the end of March 2014, Tele2 Russia and Rostelecom closed the first stage of the deal consisting of integration of Rostelecom's mobile assets and establishment of a new joint venture. On March 28, 2014, Tele2 Russia received the following seven mobile subsidiaries of Rostelecom under its operational and financial control: SkyLink, Nizhniy Novgorod Mobile Networks, Baykalvestkom, BIT, Volgograd GSM, Enisey Telecom and AKOS. Tele2 RussiaAC&M-Consulting cellular statistics. We also gained control over Rostelecom's assets in the regions where the network development is in progress, including Moscow and Saint Petersburg. During the integration process, Tele2 Russia changed its mobile coverage macroface competition from several regional structure by creating nine macro regions instead of seven that existed before, with more than 60 regions out of which the company has frequency allocations. Following closing of the deal's first stage, Rostelecom acquired 45% of the voting shares, as well as 26% of the economic share in the joint venture.operators.
On August 6, 2014, it was declared that Tele2 Russia and Rostelecom closed the second stage of the deal on integration of mobile assets. Therefore, the companies ended legal procedures on setting up a new federal mobile operator on the basis of Tele 2 Russia that currently provides telecommunication services to over 38 million subscribers in more than 60 regions. The new mobile operator earlierWe also gained control over 2G/3G licenses in all federal districts and a license for 4G spectrum on the entire Russian territory.
Joint venture, LLC "T2 RTK Holding" may therefore become one of the key players in the mobile telecommunications market in Russia, which may materially adversely affect our business, financial condition and results of operations.
In addition, at the end of January 2015, mass media reported that the Moscow Arbitrazh Court upheld the claim filed by Antares Group against the Ministry of Communications and the State Commission for Radio Frequencies and ruled to grant extra bands to Antares Group for development of a fourth generation network (LTE) in the 1900 MHz range. This may lead to the establishment of a new LTE operator in Russia and increasedface competition in the data transmission services market.
fixed line telecommunication business, in particular from Rostelecom. According to Direct INFO,TMT Consulting, Rostelecom controls 75%69% of all fixed line telecommunications services in Russia. The emergence of Rostelecom as an integrated nationwide provider of fixed line local and long distance communications services as well as its reorganized business holdings in mobile communications services may significantly increase competition in our markets. In particular, a new mobile operator involving this state-controlled group may receive favorable pricing terms to interconnect from the regional fixed line operators within its group, putting us at a competitive disadvantage. See also "—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."
Of the telecommunication services we provide, broadband Internet access is among the most competitive. While the Moscow and St. Petersburg markets have become mature in recent years, regional markets are the fastest growing markets, and it is expected that regional markets will follow the same trend as the Moscow and St. Petersburg markets in the coming years, with competition in such markets becoming extremely intense. If we fail to obtain and maintain a substantial share of the broadband Internet access market, our business, financial condition, results of operations or prospects or the value of the ADSs may be materially adversely affected.
In addition, we believe that Rostelecom, as a state-controlled company, is currently able to influence telecommunications policy and regulation in Russia and may cause substantial increases in interconnect rates for access to fixed line operators' networks by mobile cellular operators. Similarly, Rostelecom may cause substantial decreases in interconnect rates for access to mobile cellular operators' networks by fixed line operators, which could cause our revenues to decrease and may materially adversely affect our business, financial condition and results of operations. See also "—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 and margins."
Competition in the Ukrainian wireless telecommunications market has significantly intensified over the last several years and may further intensify as a result of the current political crisis. See "—Political and Social Risks—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations," and "—A deterioration in relations between Russia and other former Soviet republics and/or the United States and the European Union could materially adversely affect our business, financial condition, results of operations and prospects and the valueforeign markets of our shares and ADSs."
In October 2010, the Antimonopoly Committee of Ukraine (the "AMC"), approved the merger of Kyivstar, our primary mobile competitor in Ukraine, with URS and Golden Telecom Ukraine, a Ukrainian mobile operator controlled by Vimpelcom, in connection with Vimpelcom's restructuring. On September 4, 2013, Golden Telecom ceased to provide mobile telecommunication services in Ukraine, and its subscribers were invited to re-connect to Kyivstar. Aggressive pricing by our competitors in Ukraine, driven primarily by Astelit, has driven down the price per minute levels in recent years for mobile communication, which in conjunction with the economic crisis in Ukraine has contributed to the slowdown in the growth rate of the Ukrainian wireless telecommunications market. Presently, the controlled rise of prices, monetization of services, the customer experience of our services and value for money are the most important drivers for the competitive situation in Ukraine.operation
The economic part of the Association Agreement with the European Union signed by Ukraine on June 27, 2014, may adversely affect our own business, financial condition and results of operations due
to a possible increase in competition. The implementation of the Association Agreement requires harmonization of Ukrainian legislation and adoption of certain EU regulations on telecommunications services. In this regards, no assurance can be given as to the exact nature of the intended changes, their potential implementation and possible impact on our business.
The competitive situation for our services in Ukraine may beis influenced by the expectedlaunch of 3G/UMTS services. Through cooperation with Vodafone, MTS Ukraine started operating in Ukraine under the Vodafone brand. The competitive situation may be also influenced by the introduction of a mobile number portability ("MNP") service (however the terms of MNP implementation are still unknown), and also afterlaunch of LTE networks as well as possible entry of new virtual mobile operators into the issue of 3G licenses (the auction for 3G licenses was held on February 23, 2015 and, as a result, MTS Ukraine won the lot for use of 1950-1965/2140-2155 MHz frequency bands). Similar provisionsmarket. Provisions regarding MNP are already in force in Russia, see also "—Legal Risks and Uncertainties—Regulatory changes in Russia, including the reduction of settlement rate, regulation of other inter-carrier and subscriber tariffs, the mobile number portability principle and others, as well as regulatory changes at the international level may have a material adverse effect on our financial condition and results of operations."
Table of ContentsRussia.
In Belarus, we faceour associate MTS Belarus faces increasing competition and aggressive pricing from Best CJSC, a subsidiary of System Capital Management and Turkcell Iletisim Hizmetleri A.S. ("Turkcell") operating in Belarus under the "life:)" brand. Additionally, in 2011, the government of Belarus announced its intention to hold a public tender to privatize a 51% ownership interest in MTS Belarus with an opening price of $1.0 billion (RUBapproximately RUB 29.4 billion).billion. The public tender was scheduled to be held on December 23, 2011, but was cancelled due to a lack of bidders. The latest attempt to find an investor for the 51% state-owned stake in MTS Belarus took place in February 2014 (the state-owned stake was priced at $863 million).2014. However, it did not proceed due to the same reason, a lack of bidders. A date for the next tender has not yet been specified. The terms of the share disposal have not yet been determined, although it may be conducted either through a public tender or by entering into a direct contract with a particular purchaser. If we are unable to acquire this ownership interest at a commercially reasonable price, or if it is acquired by one of our competitors, it may impact our competitive position and results of operations in Belarus.
We also face competition in Armenia. In 2009, France Telecom operating under theOn July 22, 2015, Orange brand enteredannounced its decision to leave the Armenian telecommunications market and began offering voice and data transmission services, as well as mobile phones at highly competitive prices. By100% of Orange Armenia's shares were sold to an Armenian internet service provider, Ucom. The transaction was approved by the endPublic Services Regulatory Commission of 2014, Orange had a market sharethe Republic of 17.8% and continued to pursue its strategy of providing telecommunication services (voice and internet) at highly competitive prices.Armenia on August 20, 2015.
��Following the resumption of our operations in Turkmenistan we continue to face price competition from our main competitor Altyn Asyr on international roaming rates and also capacity restrictions that impact on the development of our third-generation "3G" mobile data network in Turkmenistan. MTS-Turkmenistan is required to route both international traffic signals as well as domestic traffic signals entirely through the telecommunications network infrastructure of the state owned telecom operator Turkmentelekom. However, in spite of our further requests for additional network capacity in accordance with our interconnection agreements with Turkmentelekom, there has not been a corresponding increase in capacity made available to us to accommodate the volume of MTS-Turkmenistan's traffic signals. In addition, Turkmentelekom may also refuse to lease communication lines needed for the day-to-day operation of MTS-Turkmenistan's 3G network. As a result, the data service of MTS-Turkmenistan could become less attractive for the subscribers, which could adversely affect the results of our operations in Turkmenistan.
Generally, increased levels of competition, including from the potential entry of new mobile operators, government-backed operators, mobile virtual network operators and alternative fixed line operators in the markets where we operate, as well as the strengthening of existing operators and increased use of Internet protocol telephony, may adversely affect our ability to increase the number of subscribers. This in turn could result in reduced operating margins and a loss of market share, as well as necessitating different pricing, service or marketing policies, which may have a material adverse effect on our business, financial condition and results of our operations.
We are subject to anti-corruption laws in the jurisdictions in which we operate, including anti-corruption laws of Russia and the US Foreign Corrupt Practices Act (the "FCPA"), and we may be subject to the UK Bribery Act of 2010 (the "UK Bribery Act"). Our failure to comply therewith could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. We may also be subject to the UK Bribery Act. The UK Bribery Act is broader in scope than the FCPA in that it directly addresses
commercial bribery in addition to bribery of public officials and it does not recognize certain exceptions, notably facilitation payments that are permitted by the FCPA.
Although we regularly review and update our policies and procedures designed to ensure that we, our employees, distributors and other intermediaries comply with the anti-corruption laws to which we are subject, there is no assurance that such policies or procedures will work effectively all of the time or protect us against liability under these or other laws for actions taken by our employees, distributors and other intermediaries with respect to our business or any businesses that we may acquire. We operate primarily in Russia and other countries of the former Soviet Union, many of which pose elevated risks of corruption violations. We and certain of our subsidiaries are in frequent contact with persons who may be considered "foreign public officials" under the FCPA and UK Bribery Act, and therefore, are subject to an increased risk of potential FCPA and UK Bribery Act violations. If we are not in compliance with the FCPA, the UK Bribery Act and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.
As disclosed in our public filings, in March 2014, we received requests for the provision of information from the United States Securities and Exchange Commission and the United States Department of Justice relating to an investigation of the Group's former subsidiary in Uzbekistan. See also Note 3028 to our audited consolidated financial statements. MTS is cooperating with those agencies and has provided and is continuing to provide information in response to their requests. We cannot predict the outcome of the investigations, including any fines or penalties that may be imposed, and such fines or penalties could be significant. Any investigation of any potential violations of the FCPA, the UK Bribery Act or other anti-corruption laws by the US, the UK or foreign authorities could have an adverse impact on our business, financial condition and results of operations.
Our controlling shareholder has the ability to take actions that may conflict with the interests of other holders of our securities.
We are controlled by Sistema, which owns 51.46%48.94% of our total charter capital (53.46%(50.03% excluding treasury shares). If not otherwise required by Russian law and/or our charter, resolutions at a shareholders' meeting are adopted by a simple majority in a meeting at which shareholders holding more than half of the issued share capital are present or represented. Accordingly, Sistema has the power to control the outcome of most matters to be decided by vote at a shareholders' meeting and, as long as it holds, either directly or indirectly, a majority of our shares, Sistema will control the appointment of a majority of directors and removal of all directors. Sistema is also able to control or significantly influence the outcome of any vote on matters which require three-quarters majority vote of a shareholders' meeting, such as amendments to the charter, proposed reorganizations, substantial asset sales, and other major corporate transactions, among other things. Thus, Sistema can take actions that may conflict with the interests of other security holders. In addition, under certain circumstances, a disposition by Sistema of its controlling stake in our company could harm our business. See also "—Risks Relating to Ourour Financial Condition—If a change in control occurs, our noteholders and other debt holders may require us to redeem notes or other debt, which could have a material adverse effect on our financial condition and results of operations."
Sistema has a significant amount of outstanding debt. As of December 31, 2014,2016, Sistema had consolidated indebtedness of approximately $129.9RUB 19,512 million (RUB 7,310 million) of short-term debt, $1,598.8RUB 63,596 million (RUB 89,944 million) comprising the short-term portion of its long-term debt, and $6,541.2RUB 395,017 million (RUB 368 billion) of long-term debt (net of the short-term portion). At the corporate level, Sistema had $6.06approximately RUB 189 million (RUB 341 million) of short-term debt, $260.4RUB 2,359 million (RUB 14,649 million) comprising the short-term portion of its long-term debt, and $956.6RUB 94,477 million (RUB 53,818 million) of long-term debt (net of the short-term portion). Therefore, Sistema will require significant funds to meet its obligations, which may come in part from dividends paid by its subsidiaries, including us.
Sistema voted in favor of declaring dividends of RUB 39,405 million in 2009 for 2008, RUB 30,697 million in 2010 for 2009, RUB 30,046 million in 2011 for 2010, RUB 30,397 million in 2012 for 2011, RUB 30,168 million in 2013 for 2012. In 2013, MTS started to pay out dividends on a semi-annual basis using interim 6 months and full-year financial results as a foundation, and the amount of semi-annual dividends for 2013 approved by our shareholders was RUB 10,786 million. Our shareholders approved annual cash dividends for the year 2013 in the amount of RUB 38,435 million, semi-annual dividends for 2014 in the amount of RUB 12,812 million. In 2015, our shareholders approved annual dividends for 2014 in the amount of RUB 40,418.86 million and semi-annual dividends for 2015 in the amount of RUB 11,592.58 million. In 2016, our shareholders
approved annual dividends for 2015 in the amount of RUB 27,997.42 million and semi-annual dividends for 2016 in the amount of RUB 23,960.60 million.
Annual dividends are calculated at the exchange rate on the date when dividends are declared at the Annual General Meeting of Shareholders. The indentures relating to our outstanding notes and other debt do not restrict our ability to pay dividends. As a result of paying dividends, our reliance on external sources of financing may increase, our credit rating may decrease, and our cash flow and ability to repay our debt obligations, or make capital expenditures, investments and acquisitions could be materially adversely affected. Furthermore, our credit ratings can be and have been affected in the past by Sistema's activity and credit ratings.
Failure to effectively implement our geographic expansion strategy as well as difficulties with operational management of the acquired businesses could hamper our continued growth and profitability.
Our continued growth depends, in part, on our ability to identify attractive opportunities in markets that will grow and on our ability to manage the operations of acquired or newly established businesses. Our strategy contemplates the acquisition of additional operations within the CIS in both the mobile and fixed broadband segments. These acquisitions may occur in countries that represent new operating environments for us and, in many instances, may be located a great distance from our corporate headquarters in Russia. We therefore may have less control over their activities. We may also face uncertainties with respect to the operational and financial needs of these businesses, and may, in the course of our acquisitions, incur additional debt to finance the acquisitions and/or take on substantial existing debt of the acquired companies. In addition, we anticipateit is possible that the countries into which we may expand will be emerging markets and, as with countries of our current presence, subject to greater political, economic, social and legal risks than more developed markets.
For example, see "—Legal Risks and Uncertainties—The inability of MTS-Turkmenistan to sustain its operations in Turkmenistan on commercially acceptable terms or at all may adversely affect our business, financial condition and results of operations,"operations" and "—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations."
Our failure to identify attractive opportunities for expansion into new markets and to manage the operations of acquired or newly established businesses in these markets could hamper our continued growth and profitability, and have a material adverse effect on our financial condition, results of operations and prospects.
Acquisitions and mergers may pose significant risks to our business.
We have expanded our business through severala number of acquisitions. As part of our growth strategy, weWe will continue to evaluate opportunities to acquire, invest in or merge with other existing operators or license holders in the CIS and in growing markets outside the CIS, as well as other complementary businesses.
Prior to 2009, most of our acquisitions were of regional operators with a focus on expanding our network and subscriber footprint. In 2010, we acquired Sistema Telecom in order to obtain full control over our logos. In 2011 and 2012, our acquisitions focus shifted to acquiring a minority stake in a subsidiary company of Multiregion JSC and other regional cable TV and broadband providers in furtherance of our strategy to become a provider of integrated telecommunications services. In 2014 and 2015, our
acquisition focus also covered regional mobile operators.operators, as well as one of the largest system integrators and complex IT solutions providers in Russia, NVG JSC ("Nvision Group"). In addition,2016, we started to roll-out a hybrid TV service. In the beginningacquired 100% of 2015, we started Satellite TV project based on hybrid TV solution.shares of "SMARTS Yoshkar-Ola" JSC and participated in MTS Bank's additional share issuance.
These and other business combinations entail a number of risks that could materially and adversely affect our business, financial condition, results of operations and prospects, including the following:
For example, in 2014, an impairment charge of RUB 3,225 million related to equity investment in MTS Bank was recognized as an elementin the non-operating share of equity in netthe loss / (income) of the associates in the accompanying consolidated statementsstatement of operations and comprehensive income.profit or loss. See Note 7 to our audited consolidated financial statements. See also Note 157 to our audited consolidated financial statements for information on the Group's share in the net losses of MTS Bank. For other examples, including impairment of goodwill in Armenia, see Note 13 to our audited consolidated financial statements.
See also "—Legal Risks and Uncertainties—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations" and "—Risks Relating to our Financial Condition—We may be adversely affected by the current economic environment."
In addition, companies that we acquire may not have internal policies, including accounting policies and internal control procedures that are compatible, compliant or easily integrated with ours.
If any of our future business combinations is structured as a merger with another company, or we merge with or absorb a company subsequent to its acquisition by us, such a merger would be considered a corporate reorganization under Russian law. In turn, this would provide our creditors with a statutory-based right to file a claim seeking to accelerate their claims or terminate the respective obligations, as well as seek damages. To prevail, the creditors would need to prove in court that we will not perform our obligations in due course and the amount of damages suffered. Secured creditors would be required to further prove that the security provided by us, our shareholders or third parties is not sufficient to secure our obligations. Creditors whose claims are secured by pledges do not have the right to claim additional security.
In April 2013,As of December 31, 2016, we acquired a 25.095%held 26.6% stake in MTS Bank. As a participant of the state recapitalization program, in the end of 2015 MTS Bank received federal loan bonds for total value of RUB 7.25 billion from the Deposit Insurance Agency. In 2013, we also signed a profit-sharing agreement whereby we2016, Sistema and MTS Bank would realize 70% and 30% of the proceeds from the MTS Dengi (MTS Money) project respectively. The MTS Dengi project launched by us and MTS Bank is
aimed at providing customers throughout Russia with payment tools, including credit cards, near-field communications-enabled SIM cards and PoS (point-of-sale) credit. If the risks associated with participatingparticipated in the banking sector lead to our inability to receive the expected profits from MTS Dengi project it could have an adverse effect on our financial statements and results of operations. Within the last quarter of 2014, the Group increased its interest in MTS Bank to 27.0% through participation in an additional share issueissuance of MTS Bank and paid RUB 3,639 million for shares acquired. See Note 15in proportion to our audited consolidated financial statements.direct ownership stakes. In February 2016, MTS signed a binding agreement with MTS Bank, through which we acquired 946,347 ordinary shares of the MTS Bank's additional shares issuance for RUB 1.3 billion. In November 2016, we acquired 2,637,310 ordinary shares of the MTS Bank's additional shares issuance for RUB 2.77 billion.
In April 2014, we acquired a 10.82% stake in OZON Holdings Limited ("OZON"), the Russian e-commerce company, through an additional share issuance for RUB 2,702 million ($ 75 million).million. The acquisition is aimed to provideat providing exclusive access to OZON's sales channels for MTS's products and services as well
as to further enhance our online presence. If we are not successful in expanding our distribution network and developing more effective customer touch points and services, this may have an adverse impact on our business, financial condition and results of operations.business.
In May and December 2014, we acquired from third-party investors 35.59% and 3.52% stakes, respectively, in Teleservice OJSCJSC ("Teleservice"), a broadband and Pay-TV provider in Voronezh. Upon completion of the transactions, MTS Group's stake in Teleservice increased to 93.4%.
In the fourth quarter of 2014, our subsidiary LLC "Telecom Povolzhye" limited liability company (LLC "TP") acquired three regional assets of Smarts Group aiming to strengthen leadership in Bashkortostan market as well as to expand our operations in Penza and Ivanovo regions.
In September 2016, we also signed a purchase contract for 100% of shares of "SMARTS Yoshkar-Ola" JSC for a price of RUB 13 million.
On January 22, 2015, our subsidiary MGTS closed deals on sale of 49.95% stake in Joint Stock Company "Intellect Telecom" and acquisition of the controlling stake in Public Joint Stock Company "Navigation-information systems" comprising of 89.536% of the charter capital. OnIn 2015, we acquired 100% of the shares of NVision Group, one hand,of the acquisitionlargest system integrators and complex IT solutions providers in Russia. These acquisitions will enableallow us to obtain control over our billing system, reduce our billing and IT related expenses, develop our proprietary technological platform for machine-to-machine (M2M) solutions and enhance our presence in the areas of telematics solutions for transport, insurance and security systems, on the other hand,systems. Generally, additional risks relating to the acquired company'scompanies' liabilities and non-achievement of initial financial and operational targets might arise.arise in connection with these acquisitions. See also Note 4 to our audited consolidated financial statements.
We may also be involved in various litigation to protect our title or other rights related to acquired businesses and incur some unpredicted loss. For example, in December 2005, we acquired a 51% stake in Tarino Limited from Nomihold Securities Inc. for $150.0 million (RUB 4,322 million) in cash and entered into a put and call option agreement for the remaining 49% interest for a price of $170 million (RUB 4,898 million) as we believed, that at that time it was the indirect owner of Bitel, a Kyrgyz company holding GSM 900/1800 license for the entire territory of Kyrgyzstan. In the same year, following a decision of the Kyrgyz Supreme Court, Bitel's offices were seized by a third party and we lost operational control over Bitel. In 2007, Nomihold Securities Inc. exercised the put option for the remaining stake in Bitel. During 2005-2013 we wrote down more than $320 million (RUB 8,798 million) relating to the loss of Bitel and other litigation with Nomihold Securities Inc. During the same period we also had other litigation in various jurisdictions to defend our rights relating to Bitel and its assets. In June 2013, an agreement was reached between Nomihold and other associated parties to settle all the claims arising in relation to Bitel and its assets, pursuant to which all proceedings between all the parties involved in such litigation were discontinued and waived and we received a total payment in cash in the amount of $150 million (RUB 4,909 million). The settlement also fully discharged all our outstanding obligations to Nomihold Securities Inc. As a result of the settlement, we released a provision relating to the exercise the put option for acquisition of the remaining stake in Bitel plus damages, interest and other cost that have been provided for in relation to the dispute with Nomihold. See also Note 30 to our audited consolidated financial statements.
In addition, a merger, as well as any corporate reorganization and any business combination that constitutes a "major transaction" under Russian law, would trigger the right of our shareholders who abstain from voting on or vote against such reorganization or transaction to sell, and our obligation to buy, their shares in an amount representing up to 10% of our net assets as
calculated under Russian Accounting Standards. See "—Legal Risks and Uncertainties—Shareholder rights provisions under Russian law could impose additional obligations and costs on us, which could have a material adverse effect on our business, financial condition, results of operations and prospects."
If our purchase of Ukrainian Mobile Communications ("UMC") is found to have violated Ukrainian law or the purchase is unwound, our business, financial condition, results of operations and prospects 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 made to us by Joint Stock Company Ukrtelecom ("Ukrtelecom") of its 51% stake in UMC. The complaint also sought an order prohibiting us from disposing of our 51% stake in UMC until the claim was resolved on the merits. The claim was 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. Although the Cabinet of Ministers of Ukraine had issued a decree in May 2001 specifically authorizing the sale by Ukrtelecom of its entire stake in UMC, the General Prosecutor asserted 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's Office 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. On January 13, 2005, the Constitutional Court of Ukraine refused to initiate the constitutional proceedings arising from the request of the General Prosecutor's Office on the grounds that the request was incompatible with the requirements of Ukrainian constitutional law, and that the issue as it was raised in the request, did not fall within the jurisdiction of the Constitutional Court of Ukraine. The Constitutional Court of Ukraine's decision does not prevent other persons having the right to apply to the Constitutional Court of Ukraine from challenging the constitutionality of provisions of the Ukrainian privatization law applicable to the sale by Ukrtelecom of the UMC shares, and also does not preclude the future challenge of such sale in the commercial courts of Ukraine.
If the Constitutional Court of Ukraine rules that the provisions of the Ukrainian privatization legislation applicable to Ukrtelecom's sale of its stake in UMC are unconstitutional, the Kiev Commercial Court could be requested to re-open the case based on new circumstances and could potentially include additional persons that were not parties to the original proceeding and/or admit additional claims.
In addition, as UMC was formed at a time when Ukraine's legislative framework was developing in an uncertain legal environment, its formation and capital structure may also be subject to challenges. In the event that our purchase of UMC is found to have violated Ukrainian law or the purchase is subject to repeated challenge, or unwound, in whole or in part, our business, financial condition, results of operations and prospects would be materially adversely affected.
If we cannot successfully develop our network, we will be unable to expand our subscriber base and maintain our profitability.
Our ability to increase our subscriber base depends upon the success of our network expansion. We have expended considerable amounts of resources to enable both organic expansion and expansion through acquisitions and plan to continue to do so. Limited information regarding the 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 may not be able to integrate previous or future acquisitions successfully or operate them profitably. Any difficulties encountered in the transition and integration process and in the operation of acquired companies could have a material adverse effect on our results of operations.
The build-out of our network is also subject to risks and uncertainties, which could delay the introduction of services 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, Ukraine and other CIS countries is subject to governmental certification, and periodic renewals of the same. We are also required to receive permits for the operation of telecommunications equipment as well as governmental certification and/or permission for the import
and export of certain network equipment, which can result in procurement delays and slow network development. The failure of any equipment we use to receive timely certification or re-certification could hinder our expansion plans.
For example, the import and export of products containing cryptographic hardware is subject to special documentation requirements and approvals. As telecommunication networks comprise various components with cryptographic hardware, we must comply with these requirements in order to import such components. Moreover, where imported equipment does not contain cryptographic hardware, the federal customs service requires manufacturers to provide written confirmation regarding the absence of such hardware. The range of goods requiring the provision of "certificates of conformance" by suppliers and manufactures prior to their import into Russia has also been expanded to cover most of our key network components, and imported radioelectronic equipment is required to be licensed by the Russian Ministry of Industry and Trade. Similar requirements regarding the import and export of cryptographic hardware exist in Ukraine.
Furthermore, as a result of the downturn in the global financial markets, certain banks have curtailed their lending programs, which may limit our ability to obtain external financing and, in turn, result in the reduction of our capital expenditure program. To the extent we fail to expand our network on a timely basis, we could experience difficulty in expanding our subscriber base. See also "—Risks Relating to Ourour Financial Condition—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, financial condition, results of operations and prospects."
Our inability to develop additional sources of revenue could have a material adverse effect on our business, financial condition, results of operations and prospects.
Mobile penetration in Russia and Ukraine reached 167.6%179% and 137.2%128%, respectively, as of September 30, 2014,December 31, 2016, according to AC&M-Consulting. Until recently, customer growth has been the principal source of revenue growth. Currently, however, increasing competition, market saturation and technological development lead to the increased importance of data services in the Russian market and, to a lesser extent, the markets of other CIS countries. As a result, data services became the key driver of our revenue growth and, therefore, we will need to continue to develop new competitive services, including value-added, 3G, LTE, and others, as well as consider vertical integration opportunities through the development or acquisition of dealers in order to provide us with sources of revenue in addition to standard voice services. Our inability to develop additional sources of revenue could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our failure to further develop and sustain our distribution network as well as the reduction, consolidation or acquisition of independent dealers may lead to a decrease in our subscriber growth rate, market share and revenues.
Following the restructuring of the Euroset Group, the largest mobile handset retailer and leading dealer for major mobile network operators in Russia, as a result of which MegaFon and VimpelcomVimpelCom acquired equal shares of 50%, we have been working on developingdeveloped our proprietary distribution network, have signed an additional agreement with Svyaznoy and have beenwere working to increase our relationship with small regional dealers. In November 2014, Svyaznoy experienced changes in its ownership structure. In summer 2015, MTS announced termination of payments admission and contract sales via Svyaznoy. On September 29, 2015, Svyaznoy Logistika JSC filed a suit against us and our subsidiary Sibintertelecom JSC for not having paid agent commissions related to the previously sold contracts. The settlement agreement among Svyaznoy Logistika JSC, MTS and Sibintertelecom was approved by the Moscow Arbitrazh Court on February 2015, press reports announced that there was a change11, 2016, which resulted in termination of the major shareholderlawsuit. On December 23, 2015, Trellas Enterprise Limited LLC filed a suit against us claiming compensation in amount of Svyaznoy and in April 2015 it was further announced that Megafon and Svyaznoy
agreedRUB 77,653.8 million for the use of Svyaznoy trademark. The lawsuit was terminated on February 11, 2016, due to resume collaboration.the plaintiff's withdrawal of the claim.
Currently we are enhancing our retail sales network and developing distribution channels through cooperation with national, regional and local dealers. If we are not successful in expanding and sustaining our proprietary network and maintaining and further developing our distribution network of national, regional and local retailers, our subscriber growth rate, market share and revenues may decrease, which would have an adverse effect on our business, financial condition, results of operations and prospects. In addition, our ability to attract new customers through Euroset outlets is limited. If competitors continue to expand their footprint in Russia through the acquisition of Svyaznoy's operations, our opportunities for marketing our services through its outlets may be restricted. See "Item 4. Information on Our Company—B. Business Overview—Mobile Operations—Sales and Marketing—Sales and Distribution."
Governmental regulation of SMP operators in Ukraine could adversely affect our results of operations.
The interconnect fees charged by us and our competitors for terminating calls connecting to any of our respective networks are subject to regulation by the National Commission for the State Regulation of Communications and Informatization (the "NCCIR"). See "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in Ukraine—Interconnect" for additional information.
Following the introduction of the "significant market power" (SMP) term to the Telecommunications Law in 2011, in June 2012, the definition of SMP was changed by an amendment to the Telecommunications Law which came into effect on January 8, 2013. From this date qualification as a SMP has been assessed with reference to the market as defined by NCCIR (and not only by reference to the traffic termination market). As previously, criteriai.e. the SMP market share remained the same as in previous version of the Telecommunications Law an operator qualifies as a SMP in a particular market if its share of gross revenue from the provision of traffic transfer services on fixed or mobile telecommunications networks during the last 12 months exceeded 25% of total gross revenues of all telecommunications operators for the same services during the same period.
In the fourth quarter of 2016, new draft laws "On Electronic Communications" (instead of previously rejected homonymous draft laws) were registered in the Verkhovna Rada of Ukraine. The draft laws provide for,inter alia, introduction of a "virtual operator" term, tougher regulation of operators with significant market power, submission of tariffs in certain electronic communication services markets for approval by the national regulator, mandatory registration of subscribers by providers of electronic communications services (this implies provision of individuals' personal data to communication services providers in case contracts are concluded in other than written form), mutual use of operators' infrastructure, as well as financing of radio frequency monitoring within radio frequency ranges set for public use at the expense of the state budget. A number of the initiatives mentioned above have been also included into the draft law of Ukraine "On state administration and regulation in the sphere of electronic communications." In addition, a draft resolution related to segregation of powers between NCCIR and the central executive authority body in charge of communications sphere was registered. The draft law "On Electronic Communications" was populated to include provisions empowering the central executive authority body in charge of communications sphere with ability to control and freely access the networks and regulations relating to networks operation terms during wartime / emergencies, etc. If this draft law or any law with similar provisions is adopted and comes into force, this may influence our revenues which would have an adverse effect on our business, financial condition and results of operations. See also "—Legal Risks and Uncertainties—Changes in Ukrainian telecommunications legislation have caused uncertainty in relation to the regulation of the Ukrainian telecommunications industry and may adversely affect 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.revenues and margins.
Our ability to provide commercially viable services depends on our ability to continue to interconnect cost-effectively with zonal, intercity and international fixed line and mobile operators in Russia, Ukraine and other countries in which we operate. Fees for interconnecting are established by agreements with network operators and vary depending on the network used, the nature of the call and the call destination.
In Ukraine the government completed the privatization of Ukrtelecom. The auction to privatize Ukrtelecom was held by the State Property Fund of Ukraine in December 2010. On March 11, 2011, following the completion of an independent appraisal required by Ukrainian law, the State Property Fund of Ukraine and ESU LLC, a wholly owned subsidiary of European Privatization & Investment Corporation ("EPIC"), signed an agreementinterconnect rates for the saletermination of a 92.8% stake in Ukrtelecom to ESU LLC. On May 11, 2011,traffic on the ownership stake was transferred to ESU LLC upon the paymentnetwork of a purchase price amounting to 10,575.1 million hryvnia (RUB 36,979.8 million as of May 11, 2011) and the fulfillment of certain requirements under Ukrainian law. It is currently unclear how the privatizations of Ukrtelecom will affect our interconnect arrangements and costs, but there is a chance that our ability to interconnect cost-effectively with other telecommunicationsSMP operators could be hampered.are established by NCCIR.
At the end ofFrom 2014 NCCIR approved a plan on preparation of regulatory Acts for 2015-2016, according to which NCCIR is planninghas planned to substantially lower interconnect rates for the termination of traffic on the network of SMP operators. By the resolution dated August 4, 2015 "On introduction of traffic transmission rates over the network of telecommunication operators with significant competitive advantage on traffic transmission services market," NCCIR approved new rates valid from October 1, 2015. As a result, interconnect rates both for termination of national traffic on fixed line telecommunication networks and termination of traffic on mobile networks were lowered, the rates for termination of traffic on local networks remained unchanged. The "Rules for setting traffic transmission rates to the networks of telecommunication operators with significant market advantage" were adopted by NCCIR and sent for state registration by the Ministry of Justice of Ukraine on June 7, 2016 (after they had been approved by the relevant government bodies). The rules were registered, published and came into force on July 26, 2016. Based on the rules mentioned above, new rates for access to the networks of SMP operators in three stages: starting from July 1, 2015,both at national and international levels were introduced and approved by NCCIR on August 30, 2016 and came into force on January 1, 2016 and July 1, 2016. Such actions2017.
The reduction of NCCIRinterconnect rates for termination of traffic on the networks of SMP operators may adversely affect MTS Ukraine revenues.
Although Russian legislation requires that operators of public switched telephone networks that are deemed to be "substantial position"position," operators who cannot refuse to provide interconnects or discriminate against one operator over another, we believe that in practice, some operators attempt to impede wireless operators by delaying interconnect applications and establishing technical conditions for interconnecting that can be met only by certain operators.
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 would have a material adverse effect on our business and results of operations. See also "—If we or any of our mobile operator subsidiaries operating in Russia are identified as an operator occupying a "substantial position," the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations."
In addition, as part of the restructuring of Svyazinvest, thea fourth national mobile operator in Russia was established onby the basiscombination of "Tele2 Russia" and the mobile assets of Rostelecom.Rostelecom in 2014 and started its operations in 2015 under the Tele2 brand. As Svyazinvest controlled regional fixed line operators in all regions of Russia (other than Moscow), a mobile operator established as part of the Svyazinvest group (mobile assets were consolidated into LLC "T2 RTK Holding") may receive preferential terms for interconnecting with these operators, which would allow it greater flexibility in setting tariffs and put us at a competitive disadvantage. It is currently unclear how the establishment of the fourth federal mobile operator may influence our interconnect agreements and our expenses. See also "—We face increasing competition in
the markets where we operate, which may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing policies."
Governmental regulation of SMP operators in Ukraine could adversely affect our results of operations.
On June 24, 2010, MTS Ukraine and its competitors, including Kyivstar, Golden Telecom Ukraine, URS, Ukrtelecom, Astelit, Intertelecom and PEOPLENet, were declared by the AMC to have a dominant position on the network interconnect market. As a result, the interconnect fees charged by us and our competitors for terminating calls connecting to any of our respective networks became subject to regulation by the National Commission for the Regulation on Communications (the "NCRC"), which since November 23, 2011 has been succeeded by the National Commission for the State Regulation of Communications and Informatization (the "NCCIR"). See "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in Ukraine—Competition" for additional information.
In 2011, the NCRC announced its intent to change the telecommunications regulations in Ukraine to regulate the interconnect rates of only those operators deemed by the AMC to have "significant market power." Kyivstar and MTS Ukraine are the largest mobile cellular operators in Ukraine with market shares of 42% and 37%, as of September 30, 2014 respectively, according to AC&M-Consulting.
In December 2011, the Telecommunications Law was amended to introduce the term "significant market power operator on traffic termination market" (SMP). An operator qualifies as a SMP in a particular market if its share of gross revenue from the provision of traffic transfer services on fixed or mobile telecommunications networks during the last 12 months exceeded 25% of total gross revenues of all telecommunications operators for the same services during the same period. Thus, on October 20, 2011, the NCRC recognized all telecommunications operators on the Ukrainian market as SMPs in the market of call termination on their respective networks.
On September 22, 2011, the NCRC proposed a draft law on regulating SMP operators which called for, among other things, non-discriminatory access to their infrastructure for the wholesale market and for regulating the retail market. Under the proposed law, the NCRC may place an obligation on SMP operators to separate the accounting of revenues and costs for different services, to calculate the cost of their services according to NCRC rules and to price the services in accordance with NCRC's rules. In February 2015, NCCIR published on its web site draft law "On electronic communications" that includes provisions mentioned above. The draft law is currently being discussed. The NCCIR has assumed the NCRC's powers to consider interconnect rates and may reduce the interconnect rates that we charge, which, in turn, may have a material adverse effect on our financial condition and results of operations.
In June 2012, the definition of SMP was changed by an amendment to the Telecommunications Law which came into effect on January 8, 2013. From this date qualification as a SMP has been assessed with reference to the market as defined by NCCIR (and not only by reference to the traffic termination market). Criteriai.e. the SMP market share remained the same as in previous version of the Telecommunications Law.
See also "—Legal Risks and Uncertainties—Changes in Ukrainian telecommunications legislation have caused uncertainty in relation to the regulation of the Ukrainian telecommunications industry and may adversely affect our business, financial condition and results of operations."
We may not realize the benefits we expect to receive from our investments in 3G and 4G wireless services, which could have a material adverse effect on our business and results of operations.
In May 2007, the Federal Service for Supervision in the Area of Communications and Mass Media awarded MegaFon, VimpelcomVimpelCom and us a license to provide 3G services in the Russian Federation. In July 2012 these three companies and Rostelecom were awarded licenses to provide 4G services. Following the integration of Rostelecom's mobile assets and Tele2 Russia in 2014, Tele2 Russia got control over licenses to provide 3G and 4G services. The 3G license allows us to provide mobile radio telephone services using the International Mobile Telecommunications-2000 ("IMT-2000/UMTS") standard. The 4G license allows us to provide services using the LTE standard. 4G wireless services are expected to provide faster, higher quality data transfer and streaming capabilities as compared to 2G and 3G and may pose additional competition for 3G providers. Historically, mobile operators that have developed 3G and 4G networks have experienced various difficulties and challenges, including a limited supply of compatible handsets, limited international roaming capabilities, as well as 3G and 4G software and network-related problems. We may experience similar problems or encounter new difficulties when developing our 3G and 4G networks and may be unable to fully resolve them. For example, we cannot be certain that:
See also "—If we cannot successfully develop our network, we will be unable to expand our subscriber base and maintain our profitability."
In addition, Russian military authorities also use frequencies in the 3G and 4G spectrum, which may limit the availability of 3G and 4G frequencies for commercial use in certain areas. During the construction of our 3G and 4G network, there is also a risk that the frequencies assigned to us for commercial use may overlap with frequencies used by the Russian military. For example, conflicts over the availability of frequency reserved for military use in Moscow caused delay in the commercial launch of 3G services in Moscow by all 3G license holders, although some of these frequencies were cleared for commercial use in 2009. If additional overlap were to occur, it could cause problems or delays in the development and operation of our 3G and 4G network in Russia.
We may also face competition from operators using second generation ("2G") or other forms of 3G technology. For example, licenses for the use of CDMA technology have already been granted for the provision of fixed wireless services in a number of regions throughout Russia. CDMA is a 2G digital cellular telephony technology that can be used for the provision of both wireless and fixed services. If CDMA operators were able to develop widespread networks throughout Russia, we would face increased competition.
Potential competition from other 3G CDMA and 4G providers, together with any substantial problem with the rollout of our 3G and 4G network and provision of 3G and 4G services in the future, could materially adversely affect our business, financial condition and results of operations.
In December 2013 and in July 2014, the State Commission for Radio frequencies introduced several modifications to the conditions of using the frequency band for 3G and 4G.mobile radio communication networks. These changes resulted in implementation of the principle of technological neutrality for frequency bands 900 MHz (UMTS and LTE) and 1800 MHz (LTE), and also included the imposition of certain additional obligations on network operators. Pursuant to these modifications, 3G and 4G operators are now able to use bands in the frequency range as supplementary frequencies for GSM, UMTS and LTE coverage. However, in the event that we receive new bandwidth allocation, and also as a result of the renewal of the current decisions of the State Commission for Radio Frequencies or in case of using frequencies on the terms of technological neutrality principle, we are obliged to provide network coverage to settlements with lower subscriber numbers, where the commercial rationale for doing so may otherwise be limited. Such changes lead to additional costs for the construction of our 3G and 4G wireless network and consequently may adversely affect our business, financial condition and results of operations.
If we are unable to successfully develop and/or deploy 4G wireless services in the countries in which we operate or one of the operators in the market obtains significant technological and/or commercial advantage over us in 4G wireless services, it may have a material adverse effect on our business and results of operations in the long term.
The next step in the development of telecommunications in the countries where we operate is the deployment of 4G/LTE networks. The cost of 4G/LTE network development and quality of services (data speed, quality of coverage) depends on the band and the width of frequency range given to an operator.
In September 2011, the Russian government announced its intention to auction frequencies for LTE use on a national level in 2012. Additionally, outside of the auction process, the State Radio Frequencies Commission granted Scartel (operating the Yota retail brand) a paired range of LTE frequencies (2x30 MHz), in the 2.5-2.7 GHz band for use on the whole territory of Russia in exchange for 4G frequencies held by Scartel for Wi-Max technology with a total width of 70MHz. Four sets of frequencies in the 791-862 MHz band were planned to be sold during the auction in 2012, after which the winners of the frequencies would receive frequencies in the 2.5-2.7 GHz band. The remaining frequencies 40 MHz of the 2.5-2.7 GHz band were allocated evenly during the tender among four major market participants (us, Vimpelcom,VimpelCom, MegaFon and Rostelecom).
Initially it was planned that all operators would receive equal access to the Scartel infrastructure, which would allow each operator to reduce its 4G/LTE network development costs. In March 2011, MTS, MegaFon, VimpelcomVimpelCom and Rostelecom signed a non-binding memorandum of understanding with Scartel, according to which MTS, MegaFon, VimpelcomVimpelCom and Rostelecom were to receive access to Scartel's 4G network infrastructure (which was yet to be built) and were to receive options to purchase shares in Scartel in 2014 at a price determined by an independent appraisal. MTS considered a preliminary value assessment of Scartel to be unduly high.
In July 2012, Alisher Usmanov and Scartel shareholders (Telconet Capital and Rostechnologyi) formed a telecommunications holding company, Garsdale. In exchange for an 82% interest in Garsdale, AF Telecom, which is controlled by Alisher Usmanov, contributed 50% of Megafon'sMegaFon's shares into Garsdale's share capital. Rostechnologyi and Telconet Capital, which held 25.1% and 74.9% stakes in Scartel, respectively, contributed 100% of Scartel into Garsdale's share capital, in return for which they received an 18% stake in Garsdale, which was split equally between Rostechnologyi and Telconet Capital. On 12 July 2012, the Federal Service for Supervision in the Area of Communications, Information Technology and Mass
Media ("Roskomnadzor") awarded each of MegaFon, Vimpelcom,VimpelCom, Rostelecom and us a license to provide 4G services using LTE and its subsequent modifications in the frequency range of 791-862 MHz.
On October 1, 2013, MegaFon acquired Maxiten Co Limited, which in turn owned 100% of the shares in Scartel and Yota Ltd. from Garsdale. The transaction was approved by the general
shareholders meeting of MegaFon and by the Federal Antimonopoly Service ("FAS"). At present, MegaFon holds a 4G/LTE network through Scartel as well as controlling the continuous spectrum of frequencies 2 x× 40 MHz in the band of LTE FDD 2600 MHz. As a result of this transaction, MegaFon obtained a competitive advantage in terms of LTE network development costs and may also obtain an advantage in LTE network performance. For example, in February, 2014, MegaFon launched LTE Advanced network in Moscow using LTE FDD 2600 MHz band and announced plans of further roll-out of its LTE Advanced network in the 15 largest cities in Russia. According to Megafon's public disclosure, LTE Advanced network was launched in Saint Petersburg in September 2014. In addition, as a result of the deal, MegaFon consolidated financial and operational indicators of Scartel/Yota which increased its formal market share in the mobile communications market.
According to the decision of State Commission for Radio Frequencies as of March 16, 2012 all telecommunication operators excluding MegaFon and Rostelecom are not permitted to get LTE frequencies in the Krasnodarsky Region until the end of 2016. On April 11, 2013, we filed an application with the State Commission for Radio Frequencies to amend this decision and requested a postponement of the introduction of such restrictions until the end of 2014. The consideration of our application was postponed for the duration of the Olympic Games and on April 16, 2014, the State Commission for Radio Frequencies amended its own decision as of March 16, 2012, which made it possible for communication operators to submit applications for LTE frequencies in the Krasnodarsky region. However, expiration date of the decision of the State Commission for Radio Frequencies which previously allocated LTE frequencies to Rostelecom and Megafon, remained unchanged (until December 31, 2016). At the end of June 2014, Megafon appealed the decision of the State Commission for Radio Frequencies by filing a lawsuit against the State Commission for Radio Frequencies and the Ministry of Communications. On January 26, 2015, the Moscow Arbitrazh Court upheld Megafon's claim and invalidated the decision of the State Commission for Radio Frequencies dated April 16, 2014.
Currently we are appealing the decision of the Moscow Arbitrazh Court. The court hearing is scheduled for the end of April, 2015. Though relying on the technological neutrality principle we have launched 4G network in the frequency range of 1800 MHz in the Krasnodarsky Region since March 2015, our inability to develop an LTE network in the region using 800 and 2600 MHz bands until the end of 2016 may have an adverse effect on our business, financial condition and results of operations.
On September 18, 2013, the mobile operator Altyn Asyr, our major competitor in Turkmenistan, brought into operation a 4G network using LTE technology. AtIn July 2015, MTS Turkmenistan was granted a telecommunication license valid until 2018. The license provides for the moment MTS-Turkmenistan does not have a 4G-licensepossibility of rendering 4G services, however, launch and service quality are limited with frequency band and width of the frequency range, which may lead to the loss of revenues from its data service whichand could have a materialan adverse effect on the results of our operations.
Furthermore, the limited number of available frequencies may prevent us from realizing the full benefits we expect to receive from the development of a 4G network, because our network capacity would be constrained and our ability to expand limited. Moreover, if we cannot develop a commercially viable 4G network, and one of our competitors does, that competitor would have an advantage over us, which in turn may have a material adverse effect on our business.
According to the Decree of the President of Ukraine No. 445/2015 dated July 21, 2015, "On Ensuring Conditions for the Introduction of the Fourth-Generation Mobile Communication System," the Cabinet of Ministers of Ukraine was assigned to develop and approve the 2015-2017 Action Plan for the introduction of the fourth-generation mobile communication system in Ukraine in 2017, in cooperation with NCCIR and other state authorities. The Action Plan was approved by Cabinet of Ministers of Ukraine in the end of 2015 and provides for material changes to technologies in the end of 2017, significant material resources for the introduction of such new technologies may be required from operators which could have a material adverse effect on our business and results of operations.
Service disruptions on our networks could lead to a loss of subscribers, damage to our reputation, violations of the terms of our licenses and subscriber contracts and penalties.
We are able to deliver services only to the extent that we can protect our network systems against damageinformation communication infrastructure and data processed therein is protected from communications failures, computer viruses,unlawful actions, including hacker and targeted attacks, technical malfunctions, power failures, natural disasters, and
unauthorized access.etc. Any system failure, accident or security breach that causes interruptions in our operations could impair our ability to provide services to our customers and materially adversely affect our business and results of operations. In addition, to the extent that any disruption or security breach results in a loss of or damage to customers' data or applications, or inappropriate disclosure of confidential information, we may incur liability as a result, including costs to remedy the damage caused by these disruptions or security breaches.
While we maintain back-up systems for our telecommunications equipment, network management, operations and maintenance systems, these systems may not ensure recovery in the event of a network failure. In particular, in the event of extensive software and/or hardware failures, significant disruptions to our systems could occur, leading to our inability to provide services. The quality of our services in roaming (including roaming between networks) also depends,inter alia, on the network quality of our roaming partners which is out of our control. Disruptions in our provision of services could lead to a loss of subscribers, damage to our reputation, violations of the terms of our licenses and subscriber 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, interconnect failures, physical or software break-ins, viruses and similar events. Although our computer and communications hardware is insured 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 could result in their suspension or termination, which could have a material adverse effect on our business and results of operations.
Each of our mobile licenses requires service to be offered by a specific date and some contain further requirements as to network capacity and territorial coverage to be reached by specified dates. In addition, all of our mobile licenses require us to comply with various telecommunications regulations relating to the use of radio frequencies and numbering capacity allocated to us, network construction, interconnect rules and technical requirements relating to compliance with law enforcement authorities' requests, among others. The license requirements applicable to our fixed line businesses include participation in a federal communications network, adherence to technical standards, investment in network infrastructure, employment of Russian technical personnel and the provision of certain services to the federal government and PSTN subscribers at regulated tariffs, among others. If we fail to comply with the requirements of Russian, Ukrainian or other applicable legislation or we fail to meet any terms of our licenses, our licenses and other authorizations necessary for our operations may be suspended or terminated which could significantly limit our operations. In addition to the impact on our operations, the suspension or loss of certain licenses could also cause an event of default under certain of our debt obligations and certain of our debt to be accelerated. A suspension or termination of our licenses or other necessary governmental authorizations could therefore have a material adverse effect on our business and results of operations.
For example, in February 2015, MTS Ukraine won the lotbid for the use of the 1950-1965/2140-2155 MHz frequency bands in a tender allocating 3G licenses. See "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in Ukraine—3G/UMTS License."
On March 24, 2015, MTS Ukraine paid the entire amount due for the license and received the UMTS license that is valid for a period of 15 years.
According to the tender terms, all regional centers of Ukraine have to be covered with 3G communication (within the bands granted to the successful bidder) within 18 months from the date of the license issuance, all settlements with a population of over 10,000 have to be covered with 3G
communication within the period of 6 years. Successful bidder's portion of radio frequency conversion costs are to be financed under the Plan on Conversion of Radio Frequency Bands approved by NCCIR. Successful bidders are obliged to obtain the approval of NCCIR, "special users," such as military bodies and the Ministry of Internal Affairs of Ukraine, and other 3G licenses purchasers on requirements specification, including description of conversion terms and conditions. After signing a contract on conversion, MTS Ukraine will be able to start the process of obtaining permissive documents on exploitation of 3G network (base stations) equipment. However, the mechanism of conversion is not yet clearly defined, which may have a substantial impact on the terms of service deployment.
Our inability to comply with the license conditions may negatively affect our business. In addition, supplementary investment might be required for conversion of radio frequencies and deployment of 3G services. Either of the foregoing may have a material adverse effect on our business, financial condition, results of operations and prospects.
Failure to renew our licenses or receive renewed or new licenses with similar terms to our existing licenses could have a material adverse effect on our business and results of operations.
Our telecommunications licenses have their expiration dates in various years from 20152017 to 2030. These licenses may be renewed upon application to the relevant governmental authorities. Government officials in Russia and the other CIS countries in which we operate consider the compliance with license requirements as well as the conditions of using the allocated frequency range when deciding whether to renew a license. License renewals may be subject to additional conditions, such as payment obligations or the mandatory modernization of our network.
In addition, we may be subject to penalties or our licenses may be suspended or terminated for non-compliance with the new license requirements. The suspension or loss of certain licenses could significantly limit our operations and cause certain of our debt to be accelerated.
The current license to construct and maintain the telecommunication network and provide services with them was granted to MTS Ukraine on July 20,12, 2010 and terminated on December 3, 2013. On October 15, 2013, NCCIR refused to renew the current license and recommended that MTS Ukraine receive a new license to provide operations in telecommunications sphere. Receiving a new license involves additional costs in comparison with the renewal of the current one and MTS Ukraine filed a lawsuit against NCCIR seeking to declare the failure to renew the license as unlawful. On November 19, 2013, the claims of MTS Ukraine were satisfied and on January 28, 2014, NCCIR prolonged the terms of MTS Ukraine's license for 5 years. At the same time, on January 27, 2014 NCCIR filed an appeal against the decision of the District Administrative Court of Kiev.
Taking into account possible long-term lawsuits on extension of the license for rendering cellular network services in 2G standard, MTS Ukraine asked NCCIR to provide a new license with no restrictions in special conditions (technologically neutral), which may be used for different technologies—GSM, UMTS and LTE. On January 27, 2015, NCCIR made a decision on granting the license for a 15-year period. Obtaining such license will make it possible for MTS Ukraine to reduce expenses and simplify the process of introduction of new technologies.
On January 22, 2015, the SupremeHigh Administrative Court of Ukraine considered the appeal submitted by NCCIR and cancelled decisions of the Court of AppealAppeals and the District Administrative Court and issued a new court decision rejecting the claim of MTS Ukraine. OnIn March 13, 2015, the DistrictHigh Administrative Court of Kiev acceptedUkraine satisfied the application of NCCIR to overturn the execution of the decision on prolongation of our license for rendering cellular network services in 2G standard. AtLater the hearing, it was decidedHigh Administrative Court made a ruling on refusal to postponeoverturn the case till April 27, 2015. The outcomeexecution of the investigation is currently unclear, including any liabilitiesdecision and ordered retrial on the grounds of breach of procedural rules in the first instance court. On April 22, 2016, MTS Ukraine filed an appeal claim against this decision, which was rejected by the Court of Appeals on May 30, 2016. On June 29, 2016, MTS Ukraine filed a cassation petition to the High Administrative Court of Ukraine that might be imposedissued a ruling on us.
Tablethe cassation petition consideration. The date of Contentsconsideration has not been scheduled yet.
Failure to renew our telecommunications licenses or receive renewed or new licenses with similar terms to existing licenses could significantly limit our operations, which could have a material adverse effect on our business, financial condition and results of operations.
Until March 2014, telecommunications operators carried out activities and received licenses in Crimea in compliance with Ukrainian legislation. However, following the referendum in Crimea on March 16, 2014 in favor of joining the Russian Federation and consequent developments in the region, various countries recognized Crimean secession whereas others did not, therefore, our licensing status in Crimea, as well as the ability to receive continuous cash flow was subject to uncertainty. In addition, due to technical issues that have curtailed our ability to provide telecommunication services to our customers, we suspended our operations in Crimea on August 6, 2014. In October 2014, MTS Ukraine sold base stations, network infrastructure, IT and telecom equipment and certain other assets located in Crimea through an open tender procedure. See also Note 10 to our audited consolidated financial statements.
See also "—Political and Social Risks—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations,"operations" and "—A deterioration in relations between Russia and other former Soviet republics and/or the United Statesas well as other politically related disagreements and the European Unionallegations between Russia and other countries and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs."
If frequencies currently assigned to us are reassigned to other usersrevoked 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 number of frequencies available for wireless 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. If frequencies are not allocated to us in the future in the required quantities, as well as 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, our business, financial condition, results of operations and prospects may be materially adversely affected.
According to the decision of the State Commission for Radio Frequencies No. 13-22-01 dated December 11, 2013, the terms of radio frequency bands usage by radio electronic facilities for mobile communication were supplemented with a requirement to provide the settlements of over 1,000 people with communication services within seven years (depending on the used frequency range). If we are not able to fulfill these requirements, our authorizations for the use of radio frequency spectrum might be either terminated or not prolonged in extrajudicial procedure.
A loss of allocated spectrum, which is not replaced by other adequate allocations, could also have a substantial adverse impact on our network capacity. 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.
An increase in the fees for frequency spectrum usage could have a negative effect on our financial results.
The terms of our licenses in Russia and the CIS require that we make payments for frequency spectrum usage. Any significant increase in the fees payable for the frequency channels that we use or additional frequency channels that we need in Russia or the CIS could have a negative effect on our financial results. A number of projects implemented by MTS in 2016, as well as a number of normative acts previously adopted by the Ministry of Communications resulted in expansion of the frequency range, that have to be paid for.
On January 1, 2015,December 31, 2014, a new procedure of payment for frequency spectrum usage came into force. According to the newly adopted amendments, the fees for frequency spectrum usage are to be calculated based on the total frequency band allocated to each operator in each region with such frequency spectrum usage determined with reference to the decision of the State Commission for Radio Frequencies, frequency allocation decisions or to the license conditions. To implement this principle, on November 13, 2013, Governmental Regulation No. 1017 was adopted, which amends the Regulation of the Government of the Russian Federation No. 171 dated March 16, 2011 "On
establishing of a single fee and an annual fee for the use of radio frequency spectrum of the Russian Federation and on collection of such fees."
Furthermore, the order of the Ministry of Communications No. 279 dated September 4, 2014 introduced corresponding amendments into the "Methodology of calculation of a single fee and annual fee for the use of the radio spectrum of the Russian Federation," approved by the order of the Ministry of Communications dated June 30, 2011 No. 164. Fees are directly calculated according to this methodology. Under the new order, rates and coefficients are subject to revision at least once every two years. There were no changes in rates and coefficients in 2015 and 2016. In case the rates are raised in 2017, this could result in additional costs.
Similarly, in April 2010,Commencing January 1, 2015 the Cabinet of Ministers of Ukraine significantly increased the feesfee for frequencyradio spectrum usage in Ukraine has been transformed into a rent payment. When adopting a state budget for cellular communications. Furthermore, according2016, the Verkhovna Rada introduced a number of amendments to the Tax Code of Ukraine, including the increase in rent payment for radio spectrum usage by 13.35% commencing January 1, 2016.
The laws of Ukraine "On State Budget of Ukraine for 2017" and "On amendments to the Tax Code for Budget Stability in 2017" that provide,inter alia, reconsideration of both, rent payments for radio frequency usage and fees payable for frequency usagelicensing, were adopted on December 21, 2016 and December 20, 2016, respectively. The amount of rent payments is expected to be determined based in part onincrease, which may affect the ratefinancial and operating results of inflation and reviewed annually effective January 1, 2011. Accordingly, the fees for frequency usage were increased by 8.9% in 2012 as compared to 2011, by 8% in 2013 as compared to 2012, and were doubled from April 1, 2014 as compared to 2013. Commencing January 1, 2015 fee for radio spectrum usage has been transformed into rent payment (fee amount remained unchanged).MTS Ukraine.
If we are unable to maintain our favorable brand image, we may be unable to attract new subscribers and retain existing subscribers, which may lead to loss of market share and revenues.
Developing and maintaining awareness of our brands is critical to informing and educating the public about our current and future services and is an important element in attracting new subscribers. We believe that the importance of brand recognition is increasing as our markets become more competitive. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful products and services at competitive prices. Brand promotion activities may not yield increased operating revenues, and even if they do, such operating revenues may not offset the operating expenses we incur in building our brands.
Furthermore, 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 company, our shareholders and affiliates or our services could negatively affect this brand image, which could lead to loss of market share and revenues. Our failure to successfully and efficiently promote and maintain our brands may limit our ability to attract new subscribers and retain our existing subscribers and materially adversely affect 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 have purchased interests in various telecommunications companies from Sistema and entered into agreements with subsidiaries and affiliates ofwithin the Sistema group for the provision of advertising services (Advertising Agency ("Maxima OJSC ("Maxima")Advertising" JSC), connectivity facilities and telephone numbering capacity (MGTS), IT services and hardware purchases (Sitronics Telecom Solutions CJSC, Sitronics Smart Technologies LLC, NVision Special Projects("STS" JSC, SITRONICS CAMS JSC, "SST" LLC and NVision GroupNVG JSC), banking services (MTS Bank, formerly Moscow Bank of Reconstruction and Development ("MBRD")), telecommunication services (Stream LLC), medical services (Medsi Group CJSC)("Medsi Group" JSC), tourism services (VAO "INTOURIST"), the purchase of a billing system (Sitronics OJSC)development and IT integration services (NVG JSC, "STS" JSC), maintenance of the residential and commercial real estate (City-Telecom("SITTEL" CJSC) and other services. Related party transactions with Sistema and other companies within the Sistema group may present conflicts of interest, potentially resulting in the conclusion of transactions on terms not determined by market forces. See "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions."
In the event that our minority shareholders or the minority shareholders of our subsidiaries were to successfully challenge past or future interested party transactions or do not approve interested party transactions or other matters in the future, we could be limited in our operational flexibility andare successfully challenged, our business, financial condition, results of operations and prospects could be materially adversely affected.
We own less than 100% of the equity interests in some of our subsidiaries. In addition, certain of our wholly owned subsidiaries have had other shareholders in the past. We and our subsidiaries in the past have carried out, and continue to carry out, transactions that may be considered to be "interested party transactions" under Russian law, requiring in some cases consent or approval by disinterested directors, disinterested independent directors, or disinterested shareholders or owners of voting shares depending on the nature of the transaction and parties involved. The provisions of Russian law defining which transactions must be approvedNo. 208 "On Joint-Stock Companies" dated December 26, 1995, as amended (the "Joint Stock Companies Law"), related to "interested party transactions" arehave recently been amended and may be subject to different interpretations and, astaking into account, inter alia, the lack of court practice in relation to the new amendments. As a result, it is possible that our and our subsidiaries' interpretation and application of these provisions could be subject to challenge. Any such challenges, if successful, could result in the
invalidation of transactions, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition,the event that our minority shareholders or the minority shareholders of our subsidiaries do not consent to or approve certain transactions or other matters requiring their consent or approval we could be limited in our operational flexibility and our business, financial condition, results of operations and prospects could be materially adversely affected.
Russian law requires a three-quarters majority vote of the holders of voting stock present at a shareholders' meeting to consent or approve certain transactions and other matters, including, for example, charter amendments, major transactions involving assets in excess of 50% of the assets of the company, repurchasepurchase of offered shares by the company and certain share issuances. Also 95% and unanimous vote is required to approve certain matters, for example, certain charter amendments regarding shareholders' rights. A majority of disinterested shareholders participating in the voting is required to consent to or approve an 'interested party transaction' in certain cases. In some cases,the event that our minority shareholders mayor minority shareholders of our subsidiaries do not consent to or approve interested partysuch transactions requiring their approval or other matters requiring minority shareholdertheir consent or supermajority approval. In the event that these minority shareholders were to successfully challenge past interested party transactions, or do not approve interested party transactions or other matters in the future,approval, we could be limited in our operational flexibility and our business, financial condition, results of operations and prospects could be materially adversely affected.
Our competitive position and future prospects depend on our senior managers and other key personnel and our inability to attract, retain and motivate qualified key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our ability to maintain our competitive position and to implement our business strategy is dependent to a large degree on the services of our senior management team and other key personnel. Moreover, competition in Russia and in the other countries where we operate for personnel with relevant expertise is intense due to the relatively small number of qualified individuals. As a result, we attempt to structure our compensation packages in a manner consistent with the evolving standards of the labor markets in these countries. We are not insured against the detrimental effects to our business resulting from the loss or dismissal of our key personnel. In addition, it is not common practice in Russia and the other countries where we operate to purchase key-man insurance policies, and we do not carry such policies for our senior management and other key personnel. The loss or decline in services of members of our senior management team or an inability to attract, retain and motivate qualified key personnel could have a material adverse effect on our business, financial condition and results of operations.
The entry of mobile virtual network operators into the Russian mobile communications market could increase competition and subscriber churn, resulting in a possible loss of our market share and decreased revenue.
On December 29, 2008, the Ministry of Communications and Mass Media adopted an order establishing the requirements for mobile virtual network operators ("MVNOs"). MVNOs are companies that provide mobile communications services but do not own the radio frequencies and, often, the network infrastructure required to do so. According to the order, MVNOs in Russia must be licensed, and their use of frequencies and infrastructure and rendering of services willis to be done pursuant to agreements entered into between MVNOs and existing frequency holders. There is no requirement
that existing frequency holders have to obligatory transact and enter into agreements with the MVNOs, and agreements between them will be entered into at their option.MVNOs.
The aim of the Ministry in establishing the legal framework for MVNOs to operate is to increase competition in the Russian mobile services market, which is currently dominated by us, VimpelcomVimpelCom and MegaFon. While existing frequency holders, including us, may receive revenues from MVNOs for the use of our frequencies and network infrastructure, we expect these revenues to be lower than the
revenues we would receive if providing services directly to subscribers. In addition, in the event we lose subscribers to MVNOs that lease their frequencies and infrastructure from an operator other than us, we will be deprived of the revenue streams from both the subscribers and the MVNOs. The MVNOs may also establish aggressive tariffs, which could result in increased subscriber churn and/or driving down the tariffs of all mobile operators.
In December 2011, Scartel reached an agreement with MegaFon and Rostelecom to allow them to provide LTE services through Scartel's network in exchange for permitting Scartel to use the two companies' network infrastructure. In February 2012, Scartel and MegaFon received the necessary licenses to allow MegaFon to provide such services over the Scartel LTE network.
In February 2014, the Russian Government approved a "Development of competition in telecommunications" roadmap, which provides for the preparation of a report on realization of the MVNO business model. Following the Government Commission on Communication meeting, which was held on June 6, 2014, regarding "development of "virtual operators" institute of mobile radio telephone communication in the Russian Federation," the deputy Minister on Communication noted that MNVO operators should be regulated by the market and that no additional restrictive regulation is required. At the same time, the Ministry of Communication of the Russian Federation proposed to develop and adopt an order stipulating requirements on rendering data transmission services and telematics communication services when using a business model of virtual data transmission networks. As of April 15, 2015,1, 2017, this order of the Ministry of Communications of the Russian Federation has not been adopted.
In April 2014, it was announced that Scartel launched the federal mobile operator (under the Yota brand), providing subscribers with 2G, 3G and 4G coverages. The operator provides voice and smsSMS services on Megafon'sMegaFon's network via MVNO. In November 2013, MTS together with Svyaznoy launched an MVNO operator (under the Svyaznoy Mobile brand) that provides services on the basis of our infrastructure. In September 2014, MGTS started to provide mobile services in Moscow on the basis of our infrastructure as well.infrastructure.
TheIn the fourth quarter of 2016, Rostelecom launched a MVNO based on the infrastructure of Tele2. In addition, according to press reports, the Russian bank Sberbank and the Russian social network VKontakte are also planning to launch MVNOs in 2017.
It is currently unclear how the emergence of any new MVNO operators in the market or any of the foregoing trends could increasemight affect market competition and subscriber churn, and, as a result,but this could have a material adverse effect on our business, financial condition, results of operations and prospects.
A finding by FAS that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operation.
Our businesses have grown substantially through the acquisition and formation of companies, many of which required the prior approval of, or subsequent notification to, FAS 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 FAS approval. 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 FAS were to conclude that our acquisition or formation of a new company was done in contravention of applicable legislation or finds our actions insufficient to rectify past violations of antimonopoly laws or issues new warnings and requests in the future, it could impose administrative sanctions and require the divestiture of such company or other assets, which could have a material adverse effect on our business, financial condition and results of operations.
During recent years FAS has been investigating mobile operators, including us, for suspected violations of antimonopoly laws.
In October 2010,For examples, see "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Antimonopoly Proceedings."
If FAS foundfids that we Vimpelcom and MegaFonhave violated antimonopoly laws on competition relating to our pricing for roaming services. As a result, FAS imposed an administrative fine on usor otherwise acted in the amount of RUB 21.9 million which represents 1.0% of the revenues we derived from roaming services in CIS countries in 2009. We paid the fine imposed on us by FAS on March 28, 2011.
In addition, in October 2011, FAS began an investigation of our and Vimpelcom's actions, suspecting violationcontravention of antimonopoly laws by coordinated pricing of iPhone 4 handsets. On April 26, 2012 we and Vimpelcom were found to be in violation of the Competition law through coordinating prices from September 2010 through April 2011, however, FAS also noted that these violations were voluntarily rectified, and terminated the proceedings as a result. On July 17, 2012, FAS imposed a turn-over based fine of RUB 16.9 million on us, which we complied with.
In November 2012, FAS began an investigation of the contractual relationship between operators and content providers and in December 2012 issued a warning to us and Vimpelcom requesting each of us to cease the violation of antimonopoly laws, particularly relating, to solicitation of services to the subscribers. We and Vimpelcom complied with the requirements and on February 7, 2013, FAS closed the case.
In October 2013, the FAS regional office in the Pskov Region began an investigation in relation to an alleged violation by us, Vimpelcom and Megafon of antimonopoly law by coordinating pricing of the mobile data services on the territory of Pskov Region. The investigation was terminated in December 2013 due to the absence of breach of antimonopoly law of mobile operators.
If FAS finds our actions insufficient to rectify past violations of antimonopoly laws or issues new warnings and requests in the future,inter alia, in other regions,legislation, this could have a material adverse effect on our business, financial condition, results of operations and prospects.
A finding by the AMCAntimonopoly Committee of Ukraine (the "AMC") that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operations.
In December 2011,Under Ukrainian legislation, a company which is found to have acted in contravention to antimonopoly legislation, may be subject to fines and claims from the AMC. From time to time we may become subject to investigations by AMC and subsequently, should such investigations identify any violations, subject to penalties, including fines.
Based on the complaint filed by Astelit LLC concerning illegal establishment of regional tariffs, in April 2016 the AMC opened an investigation into whether MTS Ukraine violated antimonopolyinitiated proceedings relating to violation of legislation with its pricing of international roaming services. The AMC stated that the average price of international roaming services offered by MTS Ukraine and its roaming partners was higher than the corresponding prices in the European Union, which might demonstrate that the prices charged by MTS Ukraine were not economically justified. The investigation aimed to examine whether MTS Ukraine used its dominant position in the Ukrainian telecommunications market to establish prices that would not be possible if there was significant competition on the telecommunications market. Although we believe that we did not violate antimonopoly laws, we could be liable for up to 10%protection of MTS Ukraine revenues.economic competition. The case is awaiting consideration.
In December, 2012July 2016, the AMC issued obligatory recommendationssent requests to MTS Ukraine and Kyivstarthe big three operators asking to lowerprovide it with the prices bothinformation on establishment of settlement rates for international roaming services and national mobile services.interconnect with foreign telecommunication operators.
In December 2012 MTS Ukraine submitted a report discussing the implementation of these recommendations and in January 2013, both claims of AMC were dismissed and no penalties were imposed on us. However,August 2016, the AMC may determinebegan an investigation in relation to monopoly restrictions that affect content services market.
If we are found by the AMC to have violated antimonopoly legislation in thisthese or any other matters, andwe may imposebe subject to fines, on us, which may have a material adverse effect on our business, financial condition and results of operation. In addition, we may be required to adjust the prices that we charge for international roaming services, which may adversely affect our revenues.current marketing practices. See also "—Governmental regulation of SMP operators in Ukraine could adversely affect our results of operations" and "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in Ukraine—Competition" for additional information.
If we are found to have a dominant position in the markets where we operate and are determined to have abused this position, the governmentFAS may regulateinfluence our subscriber tariffs and restrictimpose certain restrictions on our operations.
Under Russian legislation, a company controlling between 35%-50% or over 50% of a market or otherwise able to control market conditions may be found by FAS as dominant in such market. Moreover, under Russian antimonopoly regulations any three companies collectively holding a market shareIn case of over 50% or five companies collectively holding a market sharecollective dominance of over 70%, and in each case over 8% individually, can be found to have a dominant position on a certain market. However, in some caseslegal entities, a company could be also categorized by FAS as dominant even if its share of the corresponding market is less than 35%. Companies controlling over 35% or otherwise occupying a dominant position on the market are listed by FAS in a special register and may become subject to special monitoring and reporting requirements with respect to such markets. Current Russian legislation does not clearly define "market" in terms of the types of services or the geographic area. In 2016, as a result of amendments into the Federal Law No. 135 "On the Protection of Competition" the register of business entities having more than 35% of a certain commodity market or otherwise occupying a dominant position on the market in which listed us as occupying a dominant position in certain markets was repealed. At the same time FAS is still allowed to conduct market analysis in order to establish the dominant position of a business entity.
Companies recognized as natural monopolies are also considered to have a dominant position on the respective market. One of our subsidiaries, MGTS, iswas categorized by the Federal Tariff Service as a natural monopoly in the Moscow telecommunications market. As a result, MGTS' tariffs are subject to regulation by the Federal Tariff Service. Another of our subsidiaries, Comstar-regions, operating in Khanty Mansiysk Autonomous District-Yugra among others, is categorizedFAS. In addition, as a subject of natural monopoly, inMGTS is obliged to comply with the public telecommunications market, at the same time, accordingrules of non-discriminatory third party access to the Federal Tariff Service Order No. 897 dated May 30, 2014, price regulation in certain territories is not applied with respect to Comstar-regions.its infrastructure. See also "—MGTS is subject to extensive
regulation of tariffs, and these tariffs may not fully compensate us for the cost of providing required services."
We were also found by FAS to be a company with a market share exceeding 35% in the communications market in the Ivanovo Region, Kurgan Region, Magadan Region, Sakhalin Region, Nenets Autonomous District and Udmurt Republic. In the event that we are found in the future to have a dominant position in the markets where we operate and are either determined to have abused the dominant position or found to have committed concerted actions on these or any additional markets, FAS wouldthe market / to have the right to impose certain restrictions provided for under theconcluded antimonopoly laws, including a mandated reduction in our tariffs, andagreement, FAS would have the right to impose certain restrictions on our operations in such markets. See "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in the Russian Federation—Competition, Interconnect and Pricing" for additional information.
In case we are found to have dominant position ,violated antimonopoly legislation, we can also be subject to penalties and a turn-over based fine may be imposed on us in relation to certain violations of antimonopoly law.violations. The level of fine is from 1% to 15% of revenue on the market where the violation was conducted with(with 8% being the base level of the fine.fine), but not more than 2% of gross revenues.
Additionally, MTS Ukraine, was found to be a company with a dominantSMP position in the telecommunications market and is subject to certain governmentregulator (NCCIR) imposed restrictions, including limitations on the interconnect rates it can charge other operators. See "—Governmental regulation of SMP operators in Ukraine could adversely affect our results of operations" and "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in Ukraine—Competition" for additional information.
If we or any of our subsidiaries were to be found by FAS (or the AMC with respect to our operations in Ukraine)competition authority to be economic subjectsbusiness entities occupying a dominant market position, FAS and the Federal Tariff Service (or the AMC, as the case may be)competition authority would have the power to impose certain restrictions on our or their businesses. In particular, the authorities may impose on us tariffs at levels that could be competitively disadvantageous fordisadvantageous. If we or any of our subsidiaries were to be found by FAS to be business entities occupying a dominant market position with a market share exceeding 70% and are determined to abuse the dominant position, the Russian Government would have the right to determine the rules of nondiscriminatory access to goods or services offered by us. Additionally, geographic restrictions on our expansion could reduce our subscriber base and prevent us from fully implementing our business strategy, which may materially adversely affect our business, financial condition, results of operations and prospects.
If we or any of our mobile operator subsidiaries operating in Russia are identified as an operator occupying a "substantial position," the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.
In addition to the regulation of dominant operators by FAS, the Federal Law on Communications provides for the special regulation of telecommunications operators occupying a "substantial position," i.e., operators which, together with their affiliates, have 25% or more of installed capacity or capacity to carry out transmission of not less than 25% of traffic in a geographically defined zone within the Russian Federation. These regulations provide for governmental regulation of the key terms of such operators' interconnect agreements, including the interconnect tariffs. In addition, such operators are required to develop standard key terms of interconnect agreements and publish them as a public offer made to all operators who intend to interconnect to the networks of those operators. Refusal of such operators to conduct an interconnect agreement is prohibited, except in the cases that contradict license terms or other regulatory acts on the unified communication network in the Russian Federation. For additional information, see "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in the Russian Federation."
At present, the foregoing regulations apply only to fixed line operators in Russia and therefore apply to our fixed line business. Draft legislation was introduced in 2008 that would extend the law to
apply to mobile operators. Although the proposed law was not adopted, the risk that similar legislation will be introduced and adopted in the future remains. If legislation which extends the foregoing regulations to apply to mobile operators is adopted, and we and any of our mobile operator subsidiaries operating in Russia are identified as operators occupying a "substantial position," regulators may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our revenues, financial condition and results of operations.
In addition, MGTS is categorized as fixed line operator occupying a substantial position in the Moscow telecommunications market and therefore its interconnect tariffs are subject to state regulation. In JanuaryFebruary 2013, Comstar-UTS was excluded from the List of "substantial operators" in Moscow and MTS was not included therein. There is however a probability that we could be categorized as fixed line operator occupying a substantial position in Moscow due to our affiliation with MGTS and because of our integration with Comstar-UTS. As a result of the state regulation of the relevant interconnection rates, substantial operators may be unable to increase these in line with economic developments or any increases of our relevant costs, resulting in a material adverse effect on our financial condition and results of operations. See also "—MGTS is subject to extensive regulation of tariffs, and these tariffs may not fully compensate us for the cost of providing required services."
MGTS is subject to extensive regulation of tariffs, and these tariffs may not fully compensate us for the cost of providing required services.
As the PSTN operator in Moscow, MGTS is considered to be a company holding a dominant position as well as a natural monopoly in the Moscow telecommunications market under Russian antimonopoly regulations. Consequently, the Federal Tariff Service regulates MGTS' tariffs for most services provided to its PSTN subscribers, including installation fees, fees for using customer lines, local call charges (flat-rate, time-based and combined payment systems), monthly subscription fees (for subscribers to the unlimited tariff plan) and local call charges (for subscribers who do not use the unlimited tariff plan). In addition the Federal Law on Communications also provides for the special regulation of telecommunications operators occupying a "substantial position," i.e. , operators which together with their affiliates have, in the Russian Federation generally or in a geographically defined specific numerical zone, 25% or more of installed capacity or capacity to carry out transmission of not less than 25% of traffic. MGTS was added to the register of telecommunications operators occupyingholding a substantial position in 2006. Accordingly,the Moscow telecommunication market, MGTS is included in the Register of natural monopolies in the telecommunications market. Consequently, tariffs for connection and transmission of trafficbasic services rendered to public switched telephone networks subscribers (fees for providing access to a local telecommunication network, monthly fees for granting subscriber line in a constant use, monthly fees for providing local telephone connection) are subject to regulation by the Federal Agency on Communications. While we believe the tariffs currently set by the Federal Tariff Service and the Federal Agency on Communications are sufficient to compensate us for the costs of providing these services, future tariffs may increase in parallel with corresponding increases in our costs and/or inflation.
Table of Contentsregulation.
Although MGTS is permitted to petition the Federal Tariff ServiceFAS for increases in tariffs based on such criteria as inflation, increased costs and the need for network investments, it is possible that future requested increases may not be granted or that the Federal Tariff ServiceFAS may not adequately take such factors into account in setting tariffs. If the permissible tariffs applicable to MGTS do not compensate MGTS for the cost of providing services, the business and results of operations could be materially adversely affected. See also "—If we or any of our mobile operator subsidiaries operating in Russia are identified as an operator occupying a "substantial position," the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations."
Changes to the rules and regulations involving roaming charges in Russia may adversely affect our financial condition and results of operations.
The Russian government has stated its intention to monitor the pricing of roaming services and severalSeveral draft laws have beenwere submitted for consideration to the State Duma, which arewere intended to change the regulation of so-called "national" (between networks) and "intra-network" (within network) roaming services in Russia by introducing a flat national roaming tariff and eliminatingeliminating/ reducing intra-network roaming tariffs for incoming and outgoing calls. It is not clear whether this legislation will be adopted.In January 2016, the State Duma rejected the initiative in its first reading. However, if similar draft laws are proposed and adopted in the new legislation is adopted,future, we believe that our revenues from the provision of roaming services would decline, considerably, which could have a material adverse effect on our financial condition and results of operations.
See also "—A finding by FAS that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operation."
Compliance with the new regulations on International Mobile Equipment Identity ("IMEI") numbers may present us with technical difficulties and may lead to the expenditure of significant resources.
A draft law that enableenables each mobile communications subscriber to register the user terminal free-of-charge on a database maintained by the operator, chiefly to prevent their unlawful use was
previously considered in Ukraine. Aimed at discouraging theft, the draft law obligated operators to suspend or block the traffic transmission of the terminal upon the application of subscriber. On February 18,In July 2015, the draft law was sent for revision.withdrawn from consideration. A similar draft law was rejected by the Russian State Duma. If ita similar initiative is adoptedproposed in the future, we may be required to develop a system to monitor IMEI numbers, and we may need to establish and maintain a database of IMEI numbers, which would necessitate the expenditure of significant technical and financial resources.
The accession of Russia into the World Trade Organization ("WTO") may lead to legislative and other changes which may adversely affect our business financial condition and results of operation.changes.
On December 16, 2011, Russia signedAugust 22, 2012, the accession protocol in order to enter intoRussian Federation became a member of the WTO which was ratified by Federal Law on July 21, 2012 and became mandatory law in Russia.WTO. This may lead to potentially significant changes in Russian legislation including, among others, regulation of foreign investments in Russian companies, competition laws, telecommunications laws, changes in the taxation system and customs regulations in Russia. In addition, the implementation of the WTO rules may lead to the increase of competition on the markets where we operate. ItAlthough during 2012-2016 Russia adopted certain changes to its legislation related to the accession to the WTO, for example, intellectual property regulation, it is unclear yet if and when theseall necessary legislative developments maychanges related to the accession will take place. However, ifIf further new legislation is implemented in Russia as a result of its accession to the WTO, and there is an increase in competition, this could have a material adverse effect on our financial condition and results of operations.
We may be required to make significant investments beyond those that are currently planned to preserve our competitive advantage in response to the rapid evolution of fixed network technology (inter alia our subsidiaries, for example MGTS).
MGTS has completed its migration from analogue public switch telephoneaccomplishes a number of projects aimed at developing communication networks and expanding availability of telecommunication services for customers. Possible deficiency of free cash during the current economic downturn might lead to freeze of investment programs for development of new products and services, upgrade of the existing network, to digital technologies. In 2011, MGTS commenced building an access networkdecrease in quantity of construction objects, cutbacks in development programs in New Moscow and Moscow region. The company finished the project on construction of broadband optical networks employing the Gigabit-capable Passive Optical Network ("GPON") technology with direct connection of subscribers to an optical network. The applied part of the GPON project progress is the creation of a digital platform of IMS core, which enabledenables MGTS to enlarge therender an enlarged range of services, by introducing High definition television ("HDTV"), video monitoring and other interactive services. However, we could encounter certain difficulties in the process of installing fiber-optic equipment in the subscribers' apartments due to the necessity of conducting adjustment works which could result in fractional subscriber churn.including services for B2G segment.
MGTS invested approximately RUB 9.232 billion in 2012, RUB 13.547 billion in 2013, RUB 11.93511.980 billion in 2014, RUB 8.861 billion in 2015 and RUB 7.119 billion in 2016 to upgrade its infrastructure. MGTS attracts contractors for construction and upgrade of its network. Due to unfavorable market conditions some of MGTS contractors may face lack of own current assets and / or external finance sources which in may in some cases lead to contractor's inability to fulfill contract obligations or even bankruptcy. This may negatively affect the terms of MGTS projects implementation and lead to higher expenses for arrangement of purchases from other market participants. If MGTS is not able to expand and upgrade its network infrastructure in a timely manner and to offer new services or if it is required to make significant investments beyond those that are currently planned, our business, financial condition, results of operations and prospects could be materially adversely affected.
Our intellectual property rights are costly and difficult to protect.
We regard our copyrights, trademarks, trade secrets and similar intellectual property, including our rights to certain domain names, as important to our continued success. We rely upon trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. Nonetheless, intellectual property rights are especially difficult to protect in the markets where we operate. In these markets, the
regulatory agencies charged with protecting intellectual property rights are inadequately funded, legislation is underdeveloped, piracy is commonplace and enforcement of court decisions is difficult.
A special court for intellectual property began operating in July 2013 as a new body in the system of Arbitrazh court for dealing with cases relating to protection of intellectual property. It is too early to say how it will influence the quality of protection of intellectual property rights in Russia.
In addition, litigationLitigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement. Any such litigation may result in substantial costs and diversion of resources, and, if decided unfavorably to us, could have a material adverse effect on our business and results of operations. We also may incur substantial acquisition or settlement costs where doing so would strengthen or expand our intellectual property rights or limit our exposure to intellectual property claims of third parties. See also "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Other litigation."
Due to adoption of the Federal Law No. 35 dated March 12, 2014, which introduced significant amendments to the fourth part of the Civil Code of the Russian Federation, the rules of intellectual property rights regulation changed. Lack of extensive law enforcement practice of the changed provisions of the Civil Code may cause difficulties in protection of our rights and legitimate interests.
Changes that are being implemented in current sales and customer care processes of MTS, creation of new information technology services, migration of fixed B2B and B2C subscribers to a single information technology solution may destabilize our information technology solutions, which could have a material adverse effect on our business and results of operations.
Changes in current sales and customer care processes, creation of new information technology services, migration of fixed B2B and B2C subscribers to a single information technology solution may increase our operational risks and expenses and inconvenience subscribers. The failure or breakdown of key components of our infrastructure in the future, including our billing system and its susceptibility to fraud, could have a material adverse effect on our business and results of operations.
If leaks of confidential information, including information relating to our subscribers, occur it may negatively impact our reputation and our brand image and lead to a loss of market share, which could materially adversely affect our business, financial condition, results of operations and prospects.
Although we make efforts to protect confidential information, breaches of security and leaks of confidential information, including information relating to our subscribers, may negatively impact our reputation and our brand image and result in a loss of market share or otherwise have a material adverse effect on our business, financial condition and results of operations. For example, in January 2003, part of our database of subscribers, containing private subscriber information, was illegally copied and stolen. In addition, in May 2003, certain subscriber databases of several operators in the North-West Region, including those of us, MegaFon, Delta Telecom and two other operators, were stolen. In each case, the stolen databases were thereafter available for sale in Russia. Despite the measures taken, we cannot completely exclude the possibility of such incidents in the future. See also "—Legal Risks and Uncertainties—Our failure to comply with new personal data protection laws and with the regulations of state authorities regarding information security in the telecommunications networks in Russia may have a material adverse effect on our business, financial condition and results of operations."
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 or our subsidiaries by reducing subscriber growth, reducing usage per subscriber, increasing the number of product liability lawsuits, increasing the difficulty in obtaining or maintaining sites for base stations and/or reducing the financing available to the wireless communications industry. Each of these potential circumstances may adversely affect our business, financial condition, results of operations and prospects.
Under the draft law on "Defending against negative electromagnetic emissions from base stations of mobile network" which was proposed in Ukraine in December 2013, a mobile phone base station was classified as a potentially hazardous object. To date the draft law is excluded from the agenda. The installation of base stations was assumed to be made taking into account an environmental impact assessment at the expense of operators and a base station's operations could be terminated if a hazardous effect on health was established. If this draft lawa similar initiative is proposed and adopted in the future it may lead to an increase in the costs of deploying base stations and increaseraise the maintenance costs of MTS Ukraine.
Risks Relating to our Financial Condition
We may be adversely affected by the current economic environment.
As a result of the credit market crisis (including uncertainties with respect to financial institutions and the global capital markets), decreased prices for major export commodities (including oil and metals) and other macro-economic challenges currently affecting many of the economies in which we operate, our subscribers' disposable incomes and our vendors' cash flows may be adversely impacted. Consequently, subscribers may modify or decrease their usage of our services or fail to pay the outstanding balances on their accounts, and vendors may significantly increase their prices, eliminate vendor financing or reduce their output.
We may also experience increases in accounts receivable and bad debt among corporate subscribers, some of whom may face liquidity problems and potential bankruptcy, as well as the potential bankruptcy of our corporate partners. The deterioration of economies in the countries of our operation may lead,inter alia, to insolvency of financial institutions, which in turn may impact our business and financial condition.
The strained political situation in Ukraine coupled with an economic downturn resulted in financial difficulties in the banking system, including notably liquidity risks. As we hold the bulk of excess hryvnia and foreign currency cash in Ukrainian banks, a banking crisis or the bankruptcy or insolvency of the banks from which we receive or with which we hold our funds could result in the loss of our deposits or affect our ability to complete banking transactions in Ukraine, which could have a material adverse effect on our business, financial condition and results of operations. For example, we incurred a charge to operating income for the fourth quarter 2014 due to losses stemming from the insolvency of DeltaBank in Ukraine. See Note 5 to our auditedDuring the year ended December 31, 2015, the Group created additional reserve for cash balances deposited in distressed Ukrainian banks which was included as a component of operating expenses in the accompanying consolidated financial statements. On March 19, 2015 another Ukrainian bank, PJSC Kiyvska Rus, was declared insolvent by the National Bankstatement of Ukraine.profit or loss. See also Note 3128 to our audited consolidated financial statements.
At the end of 2011, inflation in Belarus increased by 108.7% followed by the local currency depreciation which resulted in a decline of purchasing power. At the end of 2012 and 2013, inflation amounted to 21.8% and 16.5%, correspondingly. At the end of 2014, inflation amounted to 16.2%. See also "—Inflation could increase our costs and adversely affect our results of operations."
A decline in subscriber usage, an increase in bad debts, material changes in equipment pricing or financing terms or the potential bankruptcy of our corporate subscribers or partners may have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, a deterioration in macroeconomic conditions could require us to reassess the value of goodwill on certain of our assets, recorded as a difference between the fair value of the assets of business acquired and its purchase price. This goodwill is subject to impairment tests on an ongoing basis. The weakening macroeconomic conditions in the countries in which we operate and/or a
significant difference between the performance of an acquired company and the business case assumed at the time of acquisition could require us to write down the value of the goodwill or portion of such value. Future write downs relating to the value of the goodwill or portion of such value could have a material adverse effect on our financial condition and results of operations.
Continued turmoil in the credit markets could cause our business, financial condition, results of operations and the value of our shares and ADSs to suffer.
Sanctions introduced by the United States and the European Union with respect to the Russian Federation coupled with an economic downturn and decline in global oil prices caused significant capital outflow, ruble depreciation, rise of credit rates in the domestic market and lack of available financing. A majority of Russian companies continue to experience difficulties accessing their cash equivalents, trading investment securities, drawing on revolvers, issuing debt and raising capital generally. For the period of 2015, 2016 and 2017, the Central Bank of Russia cut the key rate from 17% to 9.75%, however its further reduction is aggravated by stressful economic situation and high inflationary risks.
A continuation or repetition of this downturn in the global financial markets as well as toughening or extension of international sanctions against Russia and resulting volatility of the trading price of our shares and ADSs may negatively impact our ability to obtain financing on commercially reasonable terms either on foreign or domestic markets and could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our inability to generate sufficient free cash flow to satisfy our debt service obligations or to refinance debt on commercially reasonable terms, could materially adversely affect our business, financial condition, results of operations and prospects.
We have a substantial amount of outstanding indebtedness, primarily consisting of the obligations we entered into in connection with our notes and bank loans. As of December 31, 2014,2016, our consolidated total debt, including capital lease obligations, was RUB 292,391284,320 million. Our interest expensefinance cost for the year ended December 31, 20142016 was RUB 16,45327,136 million, net of amounts of interest expense capitalized.
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 financial indebtedness, and the holders of our indebtedness would be able to accelerate the maturity of such indebtedness, potentially causing cross-defaults under and acceleration of our other indebtedness. The existing debt service is becoming more complicated due to our dependence on floating interest rates on the financial markets.
We may not be able to generate sufficient cash flow or access international or domestic capital markets or incur additional loans 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 for a number of reasons; for example, the terms of some of our loan agreements may require us to prepay the loan in certain circumstances, such as a deterioration in our credit rating, we are delisted or our retained earnings drop below a certain level. This, in turn, may force us to sell assets, reduce or delay capital expenditures or seek additional capital. Refinancing or additional financing may not be available on commercially reasonable terms or at all, and we may not be able to sell our assets or, if sold, the proceeds therefrom may not 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."
Ruble depreciationvolatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds, or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of ADSs.
Since March 2014,Over the rubleperiod of 2014-2016, there has significantly depreciatedbeen a significant weakening of the ruble against the U.S. dollar, and has experienced high short-term volatility. Such dynamics arewhich can be explained by external geopolitical factors, limited financial markets, decrease in oil prices, international ratings agencies' downgrades of Russia's sovereign rating, reduction in internal consumption and other factors that have directly or indirectly affected the ruble.factors.
For example, on December 31, 2010,2014, the official exchange rate published by the CBR was 30.4756.26 rubles per U.S. dollar, whereas on December 31, 2012, the official exchange rate was 30.37 rubles per one U.S. dollar, as compared to 32.19 rubles per U.S. dollar on December 31, 2011.dollar. The ruble continued to depreciate against the U.S. dollar reaching 32.7372.88 rubles per one U.S. dollar on December 31, 2013,2015, whereas on December 31, 2014,2016, it increasedamounted to 56.2660.66 rubles per one U.S. dollar.
The ruble has also depreciated against the euro. On December 31, 2012, the official exchange rate was 40.23 rubles per one euro, as compared to 41.67 rubles per one euro on December 31, 2011. As of December, 31, 2013 the exchange rate was 44.97 rubles per one euro whereas on December 31, 2014 it increased to 68.34 rubles per one euro. See also "—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble could adversely impact our revenues reported in Russian rubles as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our costs in terms of the Russian ruble and local currencies."
Currently, the Russian foreign currency market is regulated by legislation, which is aimed at liberalization of currency regulation and lowering of administrative barriers. This legislation provides a general framework and a set of rules, within which both the Russian government and the CBR are authorized to propose various regulations, which result in uncertainty for us in carrying out importation of equipment. The CBR from time to time has imposed various currency-trading restrictions in attempts to support the ruble. On November 5, 2014, the CBR limited the daily volume of operations
with foreign currency to 350 million U.S. dollars for the purpose of the ruble's stabilization. At the same time, in case threats to financial stability emerge, the CBR will have an option to carry out additional interventions on the domestic foreign exchange market. The stability of the ruble will depend on many political and economic factors. These include the ability of the government to finance the state budget without recourse to monetary emissions, to control the level of interest rates and inflation. Furthermore, changes in foreign currency regulation may affect our ability to fund payments denominated in foreign currency and result in us entering into supplementary agreements with our foreign counterparts.
A significant portion of our capital expenditure and liabilities and borrowings are either denominated in or tightly linked to the U.S. dollar. Conversely, a majority of our revenues are denominated in rubles. As a result, devaluation of the ruble against the U.S. dollar can adversely affect us by increasing our costs in rubles, both in absolute terms and relative to our revenues, and make it more difficult to comply with the financial ratios contained in our various loan agreements or fund cash payments on our indebtedness on time. It also reduces the U.S. dollar value of tax savings arising from tax incentives for capital investment and 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 also increase total expenses, which would have an adverse impact on our results.
We also 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 the ADSs. Accordingly, the value of dividends received by holders of ADSs will be subject to fluctuations in the exchange rate between the ruble and the U.S. dollar. Depreciation of the ruble against the U.S. dollar could therefore materially adversely affect our financial condition, results of operations and prospects and the value of the ADSs. See also "Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk."
Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble could adversely impact our revenues reported in Russian rubles as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our costs in terms of the Russian ruble and local currencies.
A significant portion of our expenditures and liabilities, including capital expenditures and borrowings (including our U.S. dollar denominated notes), are either denominated in, or closely linked to, the U.S. dollar and/or euro, while substantially all of our revenues are denominated in local currencies of the countries where we operate. As a result, the devaluation of local currencies against the Russian ruble can adversely affect our revenues reported in Russian rubles and increase our costs in terms of local currencies. At the same time ifIf the Russian ruble and local currencies decline against the U.S. dollar and/or euro and price increases cannot keep pace, we could have difficulty repaying or refinancing our U.S. dollar and/or euro-denominated indebtedness, including our U.S. dollar denominated notes. At the same time, the devaluation of local currencies against the Russian ruble can
adversely affect our revenues reported in Russian rubles and increase our costs in terms of local currencies. In addition, local regulatory restrictions on the purchase of hard currency in the majority of CIS countries (for example, Ukraine Uzbekistan or Turkmenistan) may delay our ability to purchase equipment and services necessary for network expansion which, in turn, may cause difficulty in expanding our subscriber base in that country.countries. Further, a portion of our cash balances is held in jurisdictions outside Russia, and as a result of exchange controls in those jurisdictions, these cash balances may not always be readily available for our use.
The official exchange rate of the Ukrainian hryvnia as of December 31, 2010 was 7.96 hryvnias per U.S. dollar, whereas as of each of December 31, 2011 and 2012 the exchange rate was 7.99 hryvnias per U.S. dollar. During this period the exchange rate was supported actively by currency interventions of the National Bank. Since then, Ukraine's continued economic crisis combined with political unrest and events in Crimea hasthe Eastern part of Ukraine led to the weakening of the hryvnia, with it rising from 7.99 hryvnias per U.S. Dollar on December 31, 2013 to a high of 15.77 hryvnias per U.S. dollar on December 31, 2014. As of
April 15, 2015, the official exchange rate of the Ukrainian hryvnia amounted 22.932014 to 24.00 and 27.19 hryvnias per one U.S. dollar on December 31, 2015 and on December 31, 2016 respectively, reflecting capital outflow in response to international ratings agencies' downgrade of Ukraine's sovereign rating and to the continuing political instability in Ukraine. In February 2015, Fitch Ratings lowered Ukraine's long-term foreign currency issuer default ratings to CC from CCC. In April 2015, Standard & Poor's lowered Ukrainian long-term sovereign credit rating in foreign currency to CC with a negative outlook. See also "—Political and Social Risks—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations."
The Belarusian ruble experienced significant volatility in 2011, withdepreciated against the official exchange rate falling from 3,000U.S. dollar reaching 11,850 Belarusian rubles per one U.S. dollar as of January 1, 2011on December 31, 2014, to 4,97018,569 Belarusian rubles per one U.S. dollar as of Juneon December 31, 2015. On July 1, 2011 and to 8,570 rubles per one U.S. dollar as2016, Belarus redenominated its currency on a scale 10,000:1. As of December 31, 2012. On May 23, 2011,2016, the official exchange rate published by the National Bank of the Republic of Belarus announced the significantamounted to 1.96 Belarusian rubles per U.S. dollar. The possible devaluation of the Belarusian ruble against major foreign currencies to stabilizein the situation on the foreign currency exchange market. As of December 31, 2014 the official exchange rate of the Belarusian ruble amounted to 11,850 Belarusian rubles per one U.S. dollar.
The economy of the Republic of Belarus is considered to be highly inflationary. The continued devaluation of the Belarusian ruble and the highly inflationary economyfuture may adversely affect our revenues from this market.
See also "—Inflation could increase our costs and adversely affect our results of operations," "Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk."
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, financial condition, results of operations and prospects.
We have to make significant capital expenditures, particularly in connection with the development, construction and maintenance of, and the purchasing of necessary software for our mobile and fixed line networks. We spent RUB 87,78391,929 million in 2012, RUB 81,575 million in 20132014 and RUB 92,59996,111 million (excluding costs of RUB 3.382 billion related to the acquisition of a 4G license in 2014Russia) in 2015 and RUB 83,551 million (excluding costs of RUB 2.598 billion for the acquisition of 4G license in Russia) in 2016 for the fulfillment of our capital spending plans. In addition, the acquisition of 3G and 4G licenses and frequency allocations and the build-out of our 3G, 4G and broadband Internet networks will require 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:
In 20142014-2016 the United States and European Union announced sanctions applying to a number of Russian and Ukrainian individuals and associated institutions which were considered to have
contributed to the situation in Ukraine and Crimea. SanctionsThe sanctions may be extended and our ability to gain external funding may be affected. See also "—Political and Social Risks—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations,"operations" and "—A deterioration in relations between Russia and other former Soviet republics and/or the United Statesas well as other politically related disagreements and the European Unionallegations between Russia and other countries and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs."
Our indebtedness and the limits imposed by covenants in our debt obligations could limit our ability to obtain additional financing and thereby constrain our ability to invest in our business and place us at a possible competitive disadvantage. Also, currently we are not able to raise equity financing through newly issued depositary receipts such as ADSs, due to Russian securities regulations providing that no more than 25% of a Russian company's shares may be circulated abroad through sponsored depositary receipt programs. Prior to December 31, 2005 and at the time of our initial public offering, this threshold was 40% and our current ADSs program is near its full capacity. 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, financial condition, results of operations and prospects.
Inflation could increase our costs and adversely affect our results of operations.
The Russian and Ukrainian economies have been characterized by high rates of inflation.inflation, which over the past few years have been mainly driven by weakening of national currencies, restrictions on foreign trade and acceleration in food prices. According to the Federal Statistics Service, inflation reached 6.6%11.4% and 6.5%12.9% in Russia in 20122014 and 2013,2015, respectively. In 2014, Russian annual inflation rate increasedInflation in Russia in 2016 amounted to 11.4%5.38%, which was significantly higher thanlower as compared to 12.9% in recent years. The inflation increase was mainly driven by depreciation of the ruble, restrictions on foreign trade and acceleration in food prices by 15.4% for 2014. Growth rate of prices for nonfood commodities amounted to 8.1%. As we tend to experience2015. Over previous periods, there has been a trend towards inflation-driven increases in certain of our costs, which are sensitive to rises in the general price level in Russia and Ukraine, our costs will rise.Russia. In addition, high inflation level in Russia shows little sign of slowing, which may lead,inter alia, to higher marketing expenditures by us in order to remain competitive. In this situation, due to competitive, pressures, we may not be able to raise the prices we charge forwhich could affect our products and services sufficiently to preserve operating margins.
In 2014,2015, growth of consumer prices in Ukraine reached 24.9%43.3% compared to 0.5%24.9% in 2013,2014, according to the "Inflation Report" of the National Bank of Ukraine. In 2016, inflation in Ukraine reached 12.4%, according to the "Inflation Report" of the National Bank of Ukraine as of March 2015. Among the keyJanuary 2017. Key reasons of significant price growthhigh inflation rate in Ukraine are weakening of the national currency, increase in prices for energy carriers and utility payments. The strained political situation, low level of gold and foreign currency reserves and general deficit of foreign currency in the country may trigger a further weakening of the hryvnia and, as a result, lead to the growth of consumer prices. In March 2015, the National Bank of Ukraine predicted that by
At the end of 2014, 2015 Ukraine's GDP will have fallen overall by 7.5%and 2016, inflation in Belarus amounted to 16.2%, with annual inflation at the level of 30.1%.12.0% and 10.6%, respectively.
Accordingly, highHigh rates of inflation in Russia, Ukraine and Ukraineother countries of our operation could increase our costs and decrease our operating margins. See also "Item 5. Operating and Financial Review and Prospects—A. Operating Results—Certain Factors Affecting our Financial Position and Results of Operations—Inflation."
The economy of the Republic of Belarus is considered to be highly inflationary. Since most of our revenues in Belarus are denominated in local currency, the devaluation has resulted in lower revenues in Russian ruble terms. Additionally, since a significant portion of our operating costs are denominated or tied to foreign currency, the devaluation and high inflation have also resulted in higher operating costs in comparison to revenues. Accordingly, the devaluation and the highly inflationary economy in Belarus may materially adversely affect our revenues and results of operations in that country. See also "—Changes in the exchange rate of local currencies in the countries where we operate against the
Russian ruble could adversely impact our revenues reported in Russian rubles as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or
euro could adversely impact our costs in terms of the Russian ruble and local currencies" and "Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk."
If Apple Sales International lodges a claim against us as a result of our failure to fulfill our iPhone handset purchase commitment, this could have a material adverse effect on our financial condition and results of operations.
In 2008, we entered into an unconditional purchase agreement with Apple Sales International to buy certain quantities of iPhone handsets at list prices at the dates of the respective purchases for the three year period. The purchase agreement terminated on September 30, 2012. Pursuant to the agreement, we were also to incur certain iPhone promotional costs. We did not fulfill our total purchase installment contemplated by the agreement. As a result of not having fulfilled our required purchase commitments under our agreement with Apple Sales International, it is possible that Apple Sales International may bring a claim against us, which could have a material adverse effect on our financial condition and results of operations. A reasonable estimate of any potential loss with respect to the remotely possible claim cannot be made.
The total amount paid for handsets purchased under the agreement for the years ended December 31, 2012, 2011, 2010, 2009 and 2008 amounted to $81.8 million, $140.8 million, $79.4 million, $3.4 million and $65.4 million, respectively.
Indentures relating to some of our notes contain, and some of our loan agreements and Sistema's loan agreements contain, restrictive covenants, which limit our ability to incur debt and to engage in various activities.
Covenants in the agreement relating to our Eurobonds due 20202023 limit our ability to create liens on our properties, merge or consolidate with another person or convey our properties and assets to another person. Additionally, the agreement containsindentures governing our U.S. dollar-denominated notes due 2020 contain covenants limiting our ability to incur debt, create liens on our properties, enter into sale and lease-back transactions, 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. Some of our loan agreements contain similar and other covenants, including, in relation to the incurrence of indebtedness, creation of liens and disposal of assets. We may also incur additional credit obligations providing for similar covenants. Failure to comply with these covenants may 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 owns 51.46%48.94% of our total charter capital directly and through its subsidiaries (53.46%(50.03% excluding treasury shares) and consolidates our results in its financial statements, is subject to various covenants in its credit facilities. These covenants 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 the indentures, Sistema undertakes that it will not, and will not permit its restricted subsidiaries (including us) to, incur indebtedness unless a certain indebtedness level/EBITDA (as defined therein) ratio is met. In addition to us, Sistema has various 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 subsidiaries (including us) from engaging in these and other activities. We expect Sistema to exercise control over us in order for Sistema, as a consolidated group, to meet its obligations under its current and future financings and other agreements, which could materially limit our ability to obtain additional financing required for the
implementation of our business strategy. The inability to implement our business strategy may have a material adverse effect on our financial condition and results of operations.
If a change in control occurs, our noteholders and other debt holders may require us to redeem notes 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, 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 interest accrued prior to the redemption date. A change in control will be deemed to have occurred in any of the following circumstances:
Some of our loan agreements contain similar change of control provisions. 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 or debt, such event could have a material adverse effect on our financial condition and results of operations.
In addition, under certain of our debt agreements, an event of default may be deemed to have occurred and/or we may be required to make a prepayment if Sistema disposes of its stake in our company and a third party takes a controlling position in our company. The occurrence of any such event of default or failure to make any required prepayment which leads to an event of default could trigger cross default/cross acceleration provisions under certain of our other debt agreements. In such event, our obligations under one or more of these agreements could become immediately due and payable, which would have a material adverse effect on our business and our shareholders' equity. If Sistema were to dispose of its stake in us, our company may be deprived of the benefits and resources that it derives from Sistema, which could harm our business.
Risks Relating to Our Countries of Operation Economic Risks
Economic instability in the countries where we operate could adversely affect our business.
Since the dissolution of the Soviet Union in 1991, the economies of Russia and other CIS countries where we operate have experienced periods of considerable instability and have been subject to abrupt downturns. Most notably, following the Russian government's default on its ruble denominated securities in August 1998, the CBR stopped its support of the ruble and a temporary moratorium was imposed on certain hard currency payments. These actions resulted in the immediate and severe devaluation of the ruble and a sharp increase in the rate of inflation, a substantial decline in the prices of Russian debt and equity securities, and an inability of Russian issuers to raise funds in the
international capital markets. These problems were aggravated by the subsequent near collapse of the Russian banking sector, with the termination of banking licenses of a number of major Russian banks. This crisis had a severe impact on the economies of Russia and the other CIS countries.
While theThe economies of Russia and the other CIS countries where we operate have experienced positive trends in recent years, there has been a slowdown incurrently experience negative trends. In 2016 the growth of gross domestic product in Russia. In 2013 the growthdecline of GDP in Russia was 1.3%0.2% in comparison with 3.4%3.7% in 20122015 according to Federal State Statistics service.
According to the Federal Statistics Service, Russian GDP grew by 0.6% in 2014 compared to 1.3% in 2013. Russian GDP growth forecasts for 2015 were also revised towards the second halfa forecast of 2014 and in January 2015, the Ministry of Economic Development, of the Russian Federation forecasted GDP declinewill increase by 3%0.6% in 2015.2017.
A financial downturn, as well as any future economic downturns or slowturns in Russia or the other CIS countries where we operate could lead to decreased demand for our services, decreased revenues and negatively affect our liquidity and ability to obtain debt financing, which would have a material adverse effect on our business, financial condition, results of operations and prospects.
The Russian banking system remains underdeveloped, the number of creditworthy banks in Russia is limited and another banking crisis could place severe liquidity constraints on our business.
Russia's banking and other financial systems are less developed or regulated as compared to other countries, and Russian legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent application. 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 at that time. Many Russian banks currently do not meet international banking standards, and the transparency of the Russian banking sector in some respects still lags far behind internationally accepted norms. Aided by inadequate supervision by the regulators, certain banks do not follow existing CBR regulations with respect to lending criteria, credit quality, loan loss reserves or diversification of exposure. Furthermore, in Russia, bank deposits made by corporate entities generally are not insured.
In recent years, there has been a rapid increase in lending by Russian banks, which many believe has been accompanied by a deterioration in the credit quality of the borrowers. In addition, a robust domestic corporate debt market is leading Russian banks (including the banks with which we conduct banking transactions) to hold increasingly 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 portfolios of Russian banks, may result in the banking sector being more susceptible to market downturns or economic slowdowns, including due to Russian corporate defaults that may occur during any such market downturn or economic slowdown. In addition, the CBR has from time to time revoked the licenses of certain Russian banks, which resulted in market rumors about additional bank closures and many depositors withdrawing their savings. Recently a number of banks and credit institutions have lost their licenses due to deficiency of capital and failure to meet the CBR requirements. IfDuring a banking crisis, were to occur, Russian companies wouldmay be subject to severe liquidity constraints due to the limited supply of domestic savings and the withdrawal of foreign funding sources that wouldmay occur during such a crisis.
The recent disruptions in the global markets have generally led to reduced liquidity and increased cost of funding in Russia. Borrowers have generally experienced a reduction in available financing both in the inter-bank and short-term funding market, as well as in the longer term capital markets and bank finance instruments. The non-availability of funding to the banking sector in the Russian Federation has also negatively affected the anticipated growth rate of the Russian Federation. In December 2008, Standard & Poor's lowered Russia's long-term sovereign credit rating to BBB and
maintained its negative outlook (as well as Fitch Ratings), citing the "rapid depletion" of Russia's financial reserves. In December 2009, Standard & Poor's changed its outlook on Russia's long-term sovereign credit rating to stable and the same was done by Fitch Ratings in January, 2010. During the course of 2014 and the first quarter of 2015, the credit rating of the Russian Federation has beenwas placed for review and downgraded by each of Moody's, Fitch Ratings and Standard & Poor's several times. As of April 15, 2015,1, 2017, Russia has a Ba1 sovereign credit rating with a negativestable outlook from Moody's, compared to Baa1 with a stable outlook as at January 1, 2014, BBB–BBB- long-term sovereign rating with a negativestable outlook from Fitch Ratings compared to BBB with a stable outlook as at January 1, 2014 and BB+/B foreign currency sovereign credit rating with negativea positive outlook from Standard & Poor's as compared to BBB/A-2 with stable outlook as at January 1, 2014.Poor's. See also "—Political and Social Risks—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations."
The Russian government and the CBR provide financial support only to a limited number of banks, which may result in the liquidation of other banks and financial institutions. In 2014,2014-2016, the CBR revoked the licenses of a number of Russian banks for reasons associated with implementing high-risk lending policies, loss of liquidity and non-compliance with anti-money laundering legislation. A combination of these factors may result in a significant deterioration in the financial fundamentals of Russian banks, notably liquidity, asset quality and profitability.
There is currently a limited number of sufficiently creditworthy Russian banks and few ruble-denominatedruble denominated financial instruments in which we can invest our excess ruble cash. We hold the bulk of our excess ruble and foreign currency cash in Russian banks, including subsidiaries of foreign banks. Another banking crisis or the bankruptcy or insolvency of the banks from which we receive or with which we hold our funds could result in the loss of our deposits or affect our ability to complete banking transactions in Russia, which could have a material adverse effect on our business, financial condition and results of operations.
The physical infrastructure in Russia, Ukraine and the other countries where we operate is in poor condition, which could disrupt our normal business activities and adversely impact our results.
The physical infrastructure in Russia, Ukraine and the other countries where we operate largely dates back to Soviet times and has not been adequately funded and maintained over the past two decades. Particularly affected are the rail and road networks, power generation and transmission systems, communication systems and building stock. For example, in August 2009, a major accident occurred at Russia's largest power plant, the Sayano-Shushenskaya hydroelectric power station, resulting in flooding of the engine and turbine rooms, a transformer explosion and the death of 75 people. Power generation from the station ceased completely following the incident, which led to a major power outage in the nearby residential areas and at certain industrial facilities as well as pollution of the rivers and soil as a result of an oil spill from the transformer.
In addition, the road conditions throughout our countries of operation are poor with many roads not meeting minimum quality standards, causing disruptions and delays in the transportation of goods to and within these countries. The Russian and Ukrainian governments are actively considering plans to reorganize their national rail, electricity and communications 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 the physical infrastructure in Russia, Ukraine and the other countries where we operate harms the national economies, adds costs to doing business in these countries and generally disrupts normal business activities. These difficulties can impact us directly; for example, we keep portable electrical generators to help us maintain base station operations in the event of power outages. Further deterioration of the physical infrastructure in Russia and Ukraine, as well as the other countries where we operate, could have a material adverse effect on our business, financial condition and results of operations. In addition, the increased charges
and tariffs that may result from the government reorganization may also have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries.
The economies of the countries where we operate 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, Ukraine and elsewhere in the CIS, and businesses in these countries could face severe liquidity constraints, further adversely affecting their economies. Additionally, because Russia and Turkmenistan produce and export large amounts of oil and gas, the Russian and Turkmen economies are especially vulnerable to the price of oil and gas on the world market and a decline in
the price of oil and gas could slow or disrupt the Russian and Turkmen economies. 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 the imposition of tariffs and/or antidumping measures by the United States, the European Union or by other principal export markets.
The disruptions recently experienced in the international and domestic capital markets have led to reduced liquidity and increased credit risk premiums for certain market participants and have resulted in a reduction of available financing. Companies located in emerging markets, including us, may be particularly susceptible to these disruptions and reductions in the availability of credit or increases in financing costs. To the extent that the current market downturn continues or worsens, it may lead to constraints on our liquidity and ability to obtain debt financing, which may have a material adverse effect on our business, financial conditions and results of operations.
Political and governmental instability in Russia and other countries of our operations could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs.
Since 1991,The political and economic situation in Russia has sought to transform from a one-party state with a centrally planned economy to a democracy with a market economy. As a result ofbeen negatively affected by the sweeping nature ofglobal financial crisis, the reforms,economic sanctions imposed by the United States and the failure of some of them,EU and 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. Furthermore, recent parliamentary elections held in December 2011 and presidential elections held in March 2012 led to some political demonstrations in a few Russian cities. New protests may occur in the future.on-going volatile economic conditions. Other countries where we operate may pose similar challenges. For example, mass protests and armed conflicts in Ukraine from November 2013 as well as the referendum in Crimea in favor of joining the Russian Federation and consequent developments in the region contribute to political tension and uncertainty in Ukraine, see also "—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations." Current and future changes in the Russian and other CIS governments, major policy shifts or lack of consensus between various branches of the government and powerful economic groups could disrupt or reverse economic and regulatory reforms. Any disruption or reversal of reform policies could lead to political or governmental instability or the occurrence of conflicts among powerful economic groups, which could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our shares and ADSs. A deterioration of the socio-political situation in Russia could also trigger an event of default under some of our loan agreements.
Potential conflict between central and regional authorities could create an uncertain operating environment hindering our long-term planning ability.
The Russian Federation is a federation of 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 could result in the enactment of conflicting legislation at various levels and may lead to political instability. In particular, conflicting laws have been enacted in the areas of privatization, land 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 may hinder our long-term planning efforts and create 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, which can halt normal economic activity and disrupt the economies of neighboring regions. For example, violence and attacks relating to the Chechen conflict have spread to other parts of Russia and several terrorist attacks have been carried out in other parts of Russia, including 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. TheseAny of these factors could materially adversely affect our business and the value of our shares and ADSs.
In Ukraine, tensions between certain regional authoritiespolitical instability and the central government were 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 conference of the representatives of the regional authorities in eastern Ukraine decided to conduct a referendum on creating an autonomous region, separate from Ukraine. Later the regional authorities ultimately backed down from this intention, and tensions in Ukraine subsided. The tensions in eastern Ukraine may have negative effect on business operations.
See also took place in April 2014 due to political instability. See "—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations."
A deterioration in relations between Russia and other former Soviet republics and/or the United Statesas well as other politically related disagreements and the European Unionallegations between Russia and other countries and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs.
Relations between Russia and certain other former Soviet republics are or have in the past been strained. For example, in August 2008, an armed conflict erupted between Russia and Georgia over the self-appointed republics South Ossetia and Abkhazia, culminating in Russia's recognition of their independence from Georgia. The political and economic relationships between Ukraine and Russia have also been strained in recent years, culminating in the current geopolitical crisis with respect to Crimea.
See also "—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations,"operations" and "—Risks Relating to our Financial Condition—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble could adversely impact our revenues reported in Russian rubles as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our costs in terms of the Russian ruble and local currencies."
The conflicts between Russia and other former Soviet republics have,In connection with the ongoing events in some instances, also strained Russia's relationship withUkraine, the United States and the European Union which,have imposed sanctions on certain Russian and Ukrainian persons and entities. No individual or entity within our group has been designated with sanctions introduced either by the United States or the European Union. However, additional designations may be made, or additional categories of sanctions may be created, at times, has negatively impacted Russia's financial markets. For example, during 2014, a numberany time, and we can give no assurance that any member of Russian, Ukrainian and Crimean governmental officials andour group, or individuals (including representativesholding positions in our group, will not be affected by future sanctions designations. Non-compliance with any potential sanctions could result in, among other things, the inability of the Russian Parliament), several Russian businessmen and a Russian bank were designated as "Specially Designated Persons" byrelevant group entities to contract with the U.S. Departmentand/or E.U. governments or their agencies, civil or criminal liability of the Treasury, Office of Foreign Assets Control ("OFAC") pursuant to three executive orders signed by the President of the United States. The first and second executive orders (Nos. 13660 and 13661) targeted former Ukrainian officials and current Russian Federation officials, as well as persons who operate in the arms sanctioned entities and/or related sectors inpersonnel under U.S. and/or E.U. law, the Russian Federation. The third executive order (No. 13662) significantly expandedimposition of significant fines, and potential reputational damage.
Further tensions between Russia and other countries and any escalation of related tensions, the imposition of further sanctions, or continued uncertainty regarding the scope of the prior two executive orders by providing OFAC the authority to block the property of designated persons who operate in certain sectors of Russia's economy, including financial services, energy, metals and mining, engineering, defense and related sectors, although no such personsthereof, could have been designated as a Specially Designated Person pursuant to this third, and much more expansive, order. OFAC further introduced new "sectoral sanctions" against certain Russian economic sectors as potential targets for sanctions in executive order No. 13662. The companies targeted by these sectoral sanctions operate within the financial services and energy sectors ofnegative effect on the Russian economy, the financial condition of our partners and are included by OFACsuppliers, our ability to conduct trade and financial transactions, our ability to obtain financing on commercially reasonable terms, and the Sectoral Sanctions Identifications ("SSI") List. These sectoral sanctions prohibit U.S. persons, or other persons within the United States, from transacting in, providing financing for, or otherwise dealing in debt of longer than 90 days maturitylevel and equity for the sanctioned banks and debt of longer than 90 days maturity for the sanctioned energy companies, in each case issued after the datevolatility of the relevant OFAC directive, including entities owned 50 per cent or more by these entities. Hence, the restrictions applicable to entities that are on the SSI List differ from the consequencestrading price of being included in the "Specially Designated Persons" Listour shares and their property and assets are not subject to blocking by U.S. persons. In addition to the sectoral sanctions, OFAC added further individuals and certain entities, including a Russian shipbuilding company and state defense firms, to the "Specially Designated Persons" List in July 2014 and five more state defense firms in September 2014 and also expanded its SSI List. In relation to state owned technology company and the banks included in the SSI List, in September 2014, OFAC lowered the debt maturity threshold to 30 days. Furthermore, OFAC prohibited the exportation of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore or shale projects to five Russian energy companies. In December 2014, the U.S. President signed into law a bill passed by the U.S. Congress which will extensively widen the breadth of U.S. sanctions against Russian entities and persons.
The Council of the European Union has introduced its own list of persons that are subject to EU sanctions, as well as sanctions that target certain sectors of the Russian economy. In July 2014, the EU enacted Council Regulation (EU) No. 833/2014, that was amended in September 2014, that limits access to the EU capital markets for Russian state-owned financial institutions, imposes an embargo on trade in arms, establishes an export ban for dual use goods for military end users, and curtail Russian access to sensitive technologies particularly in the field of the oil sector.
The governments of the U.S. and certain European Union member states, as well as certain EU officials have indicated that they may consider additional sanctions should the armed conflict in Ukraine continue or escalate. On February 16, 2015, the EU expanded the list of sanctioned persons by including, among others, several Russian state deputies and government officials.
Table of ContentsADSs.
The Ukrainian Cabinet of Ministers initiated adoption of the Law "On Sanctions" by the Ukrainian ParliamentVerkhovna Rada of Ukraine which came into force on September 12, 2014. The law provides for special economic and other restrictive measures (sanctions) against foreign states, foreign legal entities
and individuals involved in activities threatening the national security, sovereignty and territorial integrity of Ukraine and the rights and freedoms of its citizens. The law stipulates 25 types of sanctions which include, among others:
A draft law expanding the list of sanctions, stipulated by the Law "On sanctions" was introduced on July 13, 2015. It includes,inter alia, seizure of the objects of the Russian proprietary rights as well as objects of private property of its residents in case of social necessity for the state's benefit. In addition, onthe Presidential Decree No. 549/2015 dated September 11, 2014,16, 2015 approved the Cabinetdecision of Ministersthe National Security and Defense Council of Ukraine issued the decree "Proposals onas of September 2, 2015 "On application of personal special economic and other restrictive measures.measures (sanctions)" Thewhereby the list of individuals and legal entities who may fallto which sanctions were applied for a one-year term was specified. Based on the Presidential Decree No. 467 dated October 17, 2016 sanctions against individuals and legal entities effective from September 16, 2015 were prolonged for one more year; the previous sanction list was extended to cover more individuals and legal entities, including, among others, the major beneficial owner of MTS Ukraine (individual). Although we believe that under current legislation, the introduction of these personal sanctions by public authorities of Ukraine does not imply they apply to the companies directly or indirectly controlled by such individual or to any of his affiliated parties, including MTS Ukraine that has not been specified. A number of issues (on terms ofsubject to any similar sanctions imposition, onby Ukrainian authorities, however taking into account uncertainties in the notification procedure, and others) are left to the discretionfuture law enforcement practice, it cannot be ruled out that introduction of the Council of National Security and Defense of Ukraine. On January 25, 2015, the Council of National Security and Defense adopted a decisionaforementioned personal sanctions will have an adverse effect on an undisclosed list of sanctions. The decision of the Council of National Security and Defense regarding the imposition of sanctions is subject to the approval by the Parliament or the President (depending on the nature of the sanctions). It is currently unclear how the measures might refer to MTS Ukraine but this may substantially adversely affect our business, financial conditionposition and results of operations.MTS Group in Ukraine.
Pursuant to the Law of Ukraine "On the legal status of martial law" dated June 8, 2015, military command together with military administrations are permitted to temporarily limit certain rights, freedoms and legal interests of individuals and legal entities within specific territories where martial law is introduced. On June 28, 2015, amendments to the Law of Ukraine "On licensing of certain types of economic activity" came into force expanding the terms of license cancellation, including adoption of an "act on documentary proof of control over licensee actions by other states, carrying out armed aggression against Ukraine or whose actions create preconditions either for military conflict or use of military force against Ukraine."
Furthermore, a number of draft laws were introduced in Ukraine during 2015 and 2016 in connection with sanctions, such as, for example, the draft law "On amendments to the Law of Ukraine "On the protection of economic competition" aimed to improve the procedures of control over concentration of economic entities provides for special economic and other restrictive measures (sanctions) to a concentration's participant according to the Law of Ukraine "On Sanctions" and the draft law "On amendments to Article 9 of the Law of Ukraine "On State Registration of Legal Entities, Individual Entrepreneurs and Public Organizations" provides for an obligation of an economic entity to publish information relating to its beneficial owner in the Unified state register (in case the beneficial owner is a resident of a country, carrying out armed aggression against Ukraine). In addition, the draft law "On amendments to some legislative acts relating to labeling of products (services) produced by suppliers tied with an aggressor country" stipulates that the suppliers of goods (services) might be obliged to mark the advertising of products (services) with the information on their ties with
an aggressor country. The draft laws have not been considered by functional committee of the Verkhovna Rada and the Parliament of Ukraine yet.
In November 2016, NBU adopted a resolution that is aimed to,inter alia, impose restrictions on operations with persons/ institutions targeted by sanctions.
Furthermore, in March 2017 NBU introduced sanctions aimed at Ukrainian subsidiaries of a number of Russian banks in order to prohibit financials operations, including payment of dividends, in favor of the parent banks.
There is still significant uncertainty regarding how these measures might affect MTS Ukraine and the Group, extent or timing of any further political or economic sanctions, or the ultimate impact of the Ukrainian crisisthese sanctions on Russia's relationship with Ukraine, the United States or the European Union. Anyour operations. Potentially these measures and any further measures and sanctions may have a negative effect on the Russian economy, the financial condition of our partners and suppliers, our ability to conduct trade and financial transactions, our ability to obtain financing on commercially reasonable terms, and the level and volatility of the trading price of our shares and ADSs. Any of the foregoing circumstances could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our shares and ADSs.
See also "—Legal Risks and Uncertainties—The inability of MTS-Turkmenistan to sustain its operations in Turkmenistan on commercially acceptable terms or at all may adversely affect our business, financial condition and results of operations,"operations" and "—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations" and "—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations."
Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations.
Economic crisis, deterioration of key aspects of the economy and the lack of investment into the social infrastructure, has, amongst other things, led to the instability of the political situation in Ukraine where we have significant operations. Furthermore, the refusal of the Ukrainian Government to enter into an association agreement with the European Union in November 2013, incited mass protests in Kiev and other regions of the country. These protests caused, amongst other things, a
downgrade of Ukraine's international ratings and significant depreciation of the national currency, see "—Risks Relating to our Financial Condition—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble could adversely impact our revenues reported in Russian rubles as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our costs in terms of the Russian ruble and local currencies."
On March 16, 2014, a referendum in favor of joining the Russian Federation was held in Crimea with the consequent declaration of independence from Ukraine and accession to the Russian Federation by the parliament of Crimea.
The armed conflict in Eastern Ukraine that has taken place since April 2014 has destabilized the region and caused uncertainty in our operation in the region of the armed conflict. It has also led to damage of our network equipment in the region followed by related losses. Should the economic and political situation in Eastern Ukraine become further destabilized, should local operators enter the market or other external factors affect the region, this may adversely affect our business, financial condition, corporate image and results of operations as well as cause regulatory uncertainties.
These events have resulted in heightened tensions between Ukraine and the Russian Federation and have strained relationships of the Russian Federation with the United States and the European Union, which may adversely impact our business. Furthermore, should tensions between the Russian Federation and Ukraine continue or increase, or should the economic and political situation in Ukraine become further destabilized, our business interests in Ukraine and other impacted regions may be
adversely affected or targeted. The continued impact of these events and any continuing or escalating military action, public protests, unrest, political instability or further sanctions could have a further adverse effect on our business in Ukraine, our financial condition and reputation.
See also "—A deterioration in relations between Russia and other former Soviet republics and/or the United Statesas well as other politically related disagreements and the European Unionallegations between Russia and other countries and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs."
Crime and corruption could disrupt our ability to conduct our business and thus materially adversely affect our operations.
The political and economic changes in recent years in the countries where we operate have resulted in significant dislocations of authority. The local and international press have reported the existence of significant organized criminal activity, particularly in large metropolitan centers. Property crime in large cities has increased substantially. In addition, the local and international press have reported high levels of corruption, including the bribing of officials 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, some members of the media in the countries we operate in regularly publish disparaging 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 could result in negative publicity, disrupt our ability to conduct our business and could thus materially adversely affect our business, financial condition, results of operations and prospects.
Social instability could increase support for renewed centralized authority, nationalism or violence and thus materially adversely affect our operations.
A decrease in the price of oil, as well as increased unemployment rates, 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. Labor and social unrest may have
political, social and economic consequences, such as increased support for a renewal of centralized authority; increased nationalism, including restrictions on foreign involvement in the economies of the countries where we have operations; and increased violence. An occurrence of any of the foregoing events could restrict our operations and lead to the loss of revenues, materially adversely affecting our operations. See also "—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations."
Weaknesses relating to the legal system and legislation in the countries where we operate create an uncertain environment for investment and business activity, which could have a material adverse effect on the value of our shares and ADSs.
Each of the countries we operate in is still developing the legal framework required to support athe market economy. The following risk factors relating to these legal systems create uncertaintyuncertainties 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:
The recent nature of much of the legislation in the CIS countries, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of these legal systems in ways that may not always coincide with market developments place the enforceability and underlying constitutionality of laws in doubt and result in ambiguities, inconsistencies and anomalies. In addition, legislation in these countries 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 contracts, or to defend ourselves against claims by others. Moreover, it is possible that regulators, judicial authorities or third parties may challenge our internal procedures and bylaws, as well as our compliance with applicable laws, decrees and regulations.
The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations.
If we are unable to protect our business entities in the countries in which we operate from the withdrawal or suspension or regulatory scrutiny, this may adversely affect our business, financial condition and results of operations. For example, in June 2012, the authorities of the Republic of Uzbekistan began audits of the financial and operating activities of MTS' wholly-owned subsidiary Uzdunrobita. Further various claims for violation of tax, antimonopoly and industry legislation were made against Uzdunrobita, which resulted in significant amounts of fines and penalties, and revocation of all licenses.licenses and suspension of services. Total amount of damages was calculated and determined on the basis of all the
aforementioned claims against Uzdunrobita and amounted to $587approximately RUB 18,375 million (RUB 18,375 million) payable in equal installments over eight months.
Uzdunrobita then paid two scheduled installments in November and December 2012 totaling $147.5 million (RUBapproximately RUB 4,583.4 million).million. On January 14, 2013, further to its partial payment of the third installment due in January 2013 totaling $15.9approximately RUB 481 million (RUB 481 million) and constituting the remaining amount of cash held in its bank accounts, Uzdunrobita filed a petition for voluntary bankruptcy to the Tashkent Economic Court on the grounds of its inability to meet further obligations.
On April 22, 2013, the Tashkent Economic Court declared Uzdunrobita bankrupt and initiated a liquidation period.process. Uzdunrobita was later liquidated.
In 2012, we filed a claim against the Republic of Uzbekistan in the International Center for Settlement of Investment Disputes ("ICSID"), part of the World Bank Group, in Washington, D.C.
On July 31, 2014, we and the Republic of Uzbekistan signed a settlement agreement (the "Settlement Agreement") which motivated usand MTS agreed to reenter the Uzbekistan market through a joint ventureenterprise with MTS holding a 50.01% in the charter capital of the joint venture,enterprise, while the remaining 49.99% belongs to a state-owned unitary enterprise established and managed by the State Committee for Communications, Development of Information Systems and Telecommunications Technologies of the Republic of Uzbekistan. The Settlement Agreement is governed by English law and provides for resolution of any disputes arising out of the settlement agreementSettlement Agreement in the International Court of Arbitration under International Chamber of Commerce in Paris (ICC).
On September 24, 2014, in accordance with the Settlement Agreement, the authorities of the Republic of Uzbekistan granted the joint venture withenterprise 2G, 3G and LTE licenses, provided necessary frequencies and numbering capacity, fostered entrance into lease agreements for communication channels and issued all permissions required to the joint ventureenterprise so it could operate and offer full telecommunications services throughout Uzbekistan. The joint ventureenterprise has also received guaranties for investment protection and return of investments in accordance with the laws of the Republic of Uzbekistan.
On November 2014, ICSID has discontinued international arbitration proceedings between MTS and the Republic of Uzbekistan following the submission of a joint application by both parties.
On December 1, 2014, the joint venture,enterprise, named UMS, launched sales of SIM cards through its proprietary network of 20 stores and through another 230 independent locations throughout Uzbekistan and started provision of 2G/3G telecommunication services on the entire territory of Uzbekistan.
On August 5, 2016, we sold our 50.01% stake in UMS to the State Unitary Enterprise Centre of Radio Communication, Radio Broadcasting and Television of the Ministry of Development of Information Technologies and Communications of the Republic of Uzbekistan. The loss on disposal of investment in Uzbekistan was recorded in the financial report for the third quarter of 2016. See Note 26 to our audited consolidated financial statements.
See also "—Political and Social Risks—A deterioration in relations between Russia and other former Soviet republics and/or the United Statesas well as other politically related disagreements and the European Unionallegations between Russia and other countries and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs" and "—Political instability in Ukraine could have a material adverse effect on our operations in Ukraine and on our business, financial condition and results of operations."
The inability of MTS-Turkmenistan to sustain its operations in Turkmenistan on commercially acceptable terms or at all may adversely affect our business, financial condition and results of operations.
In December 2010, the Group suspended its operations in Turkmenistan following notification by the Ministry of Communications of Turkmenistan of a decision to suspend licenses held by BCTI, the Group's wholly-owned subsidiary in Turkmenistan, for a period of one month starting from December 21, 2010. On January 21, 2011, the period of license suspension expired, however, permission to resume operations was not granted.
The Group operated in Turkmenistan under a trilateral agreement signed in November 2005 by BCTI, MTS and the Ministry of Communications of Turkmenistan valid for a period of five years with
a possibility to extend its term. In accordance with certain provisions of this agreement, BCTI shared net profits derived from its operations in the country with the Ministry of Communications of Turkmenistan.
Following the decision to suspend BCTI's licenses, Turkmenistan government authorities took further steps, including unilateral termination of interconnect agreements between BCTI and state-owned telecom operators, to prevent the Group from providing services to its customers.
We initiated a number of proceedings against Turkmenistan government authorities and state-owned telecom operators to defend our legal rights. At this time, we were also negotiating to settle the disputes on an amicable basis. On May 24, 2012 we concluded an agreement with the state-owned telecom operator Turkmentelekom relating to our terms of operations in Turkmenistan which resulted from negotiations between the Turkmenistan government and ministries. The agreement has a five year term and can be extended for next five years provided certain terms and conditions are satisfied. Under this agreement we are obliged to pay Turkmentelekom a monthly amount calculated as 30% of our net profit in Turkmenistan based on accounting rules of Turkmenistan. We also received GSM and 3G licenses for a term
On July 25, 2012, we, our subsidiary BCTI, the republic of Turkmenistan, the Ministry of Communications of Turkmenistan, the state-owned company Turkmentelecom and mobile operator Altyn Asyr signed a settlement agreement (including the dismissal of all international lawsuits) concerning the suspension of our operations in Turkmenistan in December 2010.
In August 2012, we restarted our mobile communication network in Turkmenistan and resumed providing services forto subscribers who had not canceled their contracts. Since October 1, 2012 we resumed our operations in Turkmenistan entirely and started entering into contracts with new subscribers.
Russian and Ukrainian companies can be forced into liquidation on the basis of formal non-compliance with certain legal requirements.
Certain provisions of Russian law may allow government authorities to seek a court order for the liquidation of a Russian legal entity on the basis of its formal non-compliance with certain requirements during formation, reorganization or during its operation.
For example, under Russian corporate law, if the net assets of a Russian joint stock company calculated on the basis of Russian accounting standards are lower than its charter capital as at the end of its third or any subsequent financial year, the company must either decrease its charter capital or be placed in liquidation. If the company fails to comply with these requirements, governmental or local authorities can seek the involuntary liquidation of such company in court, and the company's creditors will have the right to accelerate their claims or demand early performance of the company's obligations as well as demand compensation of any damages.
The existence of negative assets may not accurately reflect the actual ability to pay debts as they fall due. Many Russian companies have negative net assets due to very low historical asset values reflected on their Russian accounting standards balance sheets; however, their solvency,i.e., their ability to pay debts as they fall due, is not otherwise adversely affected by such negative net assets. Some Russian courts, in deciding whether or not to order the liquidation of a company for having negative net assets, have looked beyond the fact that the company failed to fully comply with all applicable legal requirements and have taken into account other factors, such as the financial standing of the company and its ability to meet its tax obligations, as well as the economic and social consequences of its
liquidation. Nonetheless, creditors have the right to accelerate claims, and file damages claims, and governmental or local authorities may seek the liquidation of a company with negative net assets.
Courts have, on rare occasions, ordered the involuntary liquidation of a company for having net assets less than the minimum charter capital required by law, even if the company had continued to fulfill its obligations and had net assets in excess of the minimum charter capital at the time of liquidation.
The amount of net assets in accordance with the local accounting standards of some of our subsidiaries is negative.less than the minimum charter capital required by law. Although these subsidiaries continue to meet all of their obligations to creditors, there is a minimal risk of their liquidation while the net assets remain below the minimum legal requirements.
There have also been cases in the past in which formal deficiencies in the establishment process of a Russian legal entity or non-compliance with provisions of Russian law have been used as a basis to seek the liquidation of a legal entity. Weaknesses in the Russian legal system create an uncertain legal environment, which makes the decisions of a Russian court or a governmental authority difficult, if not impossible, to predict. If involuntary liquidation were to occur, such liquidation could lead to significant negative consequences for our group. Ukrainian law also contains provisions similar to Russian law, whereby a company's failure to comply with certain legal requirements concerning its formation, net assets or operation may be grounds for its liquidation.
Insufficient adherence to the independence and competitiveness of the judicial process, the difficulty of enforcing court decisions and governmental discretion in enforcing claims could prevent us or holders of our securities from obtaining effective redress in a court proceeding.
The judicial bodies in the countries where we operate are not always completely independent or immune from economic and political influences, and are often understaffed and underfunded. Judges and courts are often inexperienced in the area of business, corporate and industry (telecommunications) law. Judicial precedents generally have no binding effect on subsequent decisions, and not all court decisions are readily available to the public or organized in a manner that facilitates understanding. The judicial systems in these countries can also be slow or unjustifiably swift. Enforcement of court orders can, in practice, be very difficult to achieve. All of these factors make judicial decisions in these countries difficult to predict and effective redress uncertain. Additionally, court claims are often used in furtherance of political and commercial 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. Furthermore, recognition and enforcement of arbitral awards in countries where we operate is subject to compliance with corresponding rules of civil procedure and applicable laws, and courts in the countries where we operate may interpret applicable regulations in a manner which would result in denial of such recognition and enforcement.
These uncertainties also extend to property rights. For example, during Russia and Ukraine's transformation from centrally planned economies to market economies, legislation has been enacted in both countries to protect private property against uncompensated expropriation and nationalization. However, there is a risk that due to the lack of experience in enforcing these provisions and due to political factors, these protections would not be enforced in the event of an attempted expropriation or nationalization. Expropriation or nationalization of any of our entities, their assets or portions thereof, potentially without adequate compensation, would have a material adverse effect on our business, financial condition, results of operations and prospects.
Selective or arbitrary government action could have a material adverse effect on our business, financial condition, results of operations and prospects.
Governmental authorities in the countries where we operate have a high degree of discretion and, at times, act selectively or arbitrarily, without hearing or prior notice, and sometimes in a manner that is inconsistent 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 and claims, 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 invalidate such issuances and registrations or to void transactions. Moreover, the government also has the power in certain circumstances, by regulation or government acts, to interfere with the performance of, nullify or terminate contracts. Standard & Poor's has expressed concerns that "Russian companies and their investors can be subjected to government pressure through selective implementation of regulations and legislation that is either politically motivated or triggered by competing business groups." In this environment, our competitors may receive preferential treatment from the government, potentially giving them a competitive advantage over us.
In Turkmenistan, we commenced operations in June 2005 through our wholly owned subsidiary, BCTI, and operated under a trilateral agreement by and among the Ministry of Communication of Turkmenistan, BCTI and us. However, when this agreement expired on December 21, 2010, the Ministry of Communication of Turkmenistan refused to prolong the agreement. After several international lawsuits and negotiations regarding adjustments of disputes we restarted our network in Turkmenistan on August 30, 2012 and resumed our operations on October 1, 2012. Similar actions in other countries where we operate could have a material adverse effect on results of our operations. See also "—The inability of MTS-Turkmenistan to sustain its operations in Turkmenistan on commercially acceptable terms or at all may adversely affect our business, financial condition and results of operations,"operations" and "—The inability of our subsidiaries in the countries in which we are present to
maintain control over their operations and assets may adversely affect our business, financial condition and results of operations."
In addition, the Russian tax authorities have aggressively brought tax evasion claims relating to Russian companies' use of tax-optimization schemes, and press reports have speculated that these enforcement actions have been selective. Selective or arbitrary government action, if directed at us, could have a material adverse effect on our business, financial condition, results of operations and prospects.
Failure to comply with existing laws and regulations or to obtain all approvals, authorizations and permits required to transmit television channels or operate telecommunications equipment, or the findings of government inspections or increased governmental regulation of our operations, could result in a disruption in our business and substantial additional compliance costs and sanctions.
Our operations and properties are subject to regulation by various government entities and agencies in connection with obtaining and renewing various licenses, approvals, authorizations and permits, as well as with ongoing compliance with existing laws, regulations and standards. Regulatory authorities exercise considerable discretion in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licenses, approvals, authorizations and permits and in monitoring licensees' compliance with the terms thereof. Russian authorities have the right to, and frequently do, conduct periodic inspections of our operations and properties throughout the year. Any such future inspections may conclude that we or our subsidiaries have violated laws, decrees or regulations, and we may be unable to refute such conclusions or remedy the violations. See also "—The regulatory environment for telecommunications in Russia, Ukraine and other countries
where we operate or may operate in the future is uncertain and subject to political influence or manipulation, which may result in negative and arbitrary regulatory and other decisions against us on the basis of other than legal considerations and in preferential treatment for our competitors."
Primarily due to delays in the issuance of permits, approvals and authorizations by regulatory authorities, it is frequently not possible to procure all of the permits for each of our base stations or other aspects of our network before we put the base stations into commercial operation or to amend or maintain all of the permits when we make changes to the location or technical specifications of our base stations. At times, there can be a significant number of base stations or other communications facilities and other aspects of our networks for which we do not have final permits to operate and there can be delays in obtaining the final permits, approvals and authorizations for particular base stations or other communications facilities and other aspects of our networks. Furthermore, we are constantly in the process of registration and re-registration of ownership over certain infrastructure facilities, for example, MGTS carries out measures aimed at registration of ownership rights to the cable line structures (CLS). At the same time, MGTS is not insured against the risks of challenging the ownership rights by third parties. MGTS performs legal registration of its ownership rights to minimize the risk. In case of receiving reasonable claims, MGTS reconciles cable line objects to distinguish the ownership rights. MGTS is ready to assert its rights to CLS in court when necessary.
In addition, we may be unable to transmit certain television channels if entities that provide television content to us do not possess the requisite licenses. In case such providers of television content do not obtain the required licenses, or have their existing licenses suspended or terminated, our selection of potential television channels for transmission could be significantly limited. The Federal Law No. 257 "On Amending Federal Law "On Mass Media" and Federal Law "On Communications" dated July 13, 2015 introduced a number of amendments to the national mandatory free television channels list. Requirements on sequence of channels, sound and image quality and signal reception points of national mandatory free television channels were adopted in September 2015. The inability of operators to comply with such requirements may lead to suspension or termination of a license. Furthermore, we could be subject to fines and other penalties, including forced suspension of our cable
network operators' activity for up to 90 days. In some cases of our service provision (for example, those employing GPON technology) power failures in subscribers' households may lead to non-compliance with rules regulating local telephony communication services. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.
Our failure to comply with existing laws and regulations of the countries where we operate or to obtain all approvals, authorizations and permits required to operate telecommunications equipment, or the findings of government inspections including the State Labor Inspection Service may also result in the imposition of fines or penalties or more severe sanctions including the suspension, amendment or termination of our licenses, approvals, authorizations and permits, or in requirements that we cease certain of our business activities, or in criminal and administrative penalties applicable to our officers. Moreover, an agreement or transaction entered into in violation of law may be invalidated and/or unwound by a court decision. Any such decisions, requirements or sanctions, or any increase in governmental regulation of our operations, could result in a disruption of our business and substantial additional compliance costs and could materially adversely affect our business, financial condition, results of operations and prospects. In addition, we may assume risks of potential claims from subscribers and regulating authorities regarding former activities of the acquired or merged businesses.
Generally, communication networks are vulnerable to physical or software break-ins, viruses, unauthorized interferences and similar events. Should such events occur with respect to our network elements, we may become subject for additional inspection by the regulatory authorities. Although we obtain all necessary permissions and certificates for the operation of our equipment and provide measures to protect confidential information, our failure to fully comply with all legislation requirements could result in the imposition of fines or penalties, additional government regulations, substantial additional compliance costs, disruption of our business including its suspension or termination, and other adverse effects.
There were In 2014, NCCIR conducted two administrative investigations initiatedunplanned inspections with respect to MTS Ukraine. The inspections resulted in the issuance of orders, one of which was disputed by NCCIR against MTS Ukraine in 2014. Though both were closed with non-pecuniary fines, any breachcourt proceedings. The Court of Appeals Instance made a decision in favor of MTS Ukraine and cancelled the Ukrainian Law "On Telecommunications" inNCCIR order, however, NCCIR repeatedly appealed the future may negatively influence our business. Article No. 55case. In August 2016, NCCIR repeatedly filed a cassation petition to the Supreme Court of Ukraine. The Supreme Court rejected the Ukrainian law "On Telecommunications" states that a license may be terminated,inter alia, in case there is an act on repeated breachclaim of the license terms.NCCIR by its decision dated October 6, 2016.
In addition, in 2015 the Prosecutor General's Office of Ukraine started criminal proceedings on the fact of "unauthorized intervention" in the operation of MTS Ukraine telecommunication network in Crimea on 15 and 16 March, 2014. The outcome of the investigation is currently unclear. Possible legal risks or risks concerning our license
terms and conditions arising from the proceedings might adversely affect our business, financial condition and results of operations.
The level of development of corporate and securities laws and regulations in Russia could limit our ability to attract future investment.
The regulation and supervision of the securities market, financial intermediaries and issuers are less developed in Russia than, for example, in the United States and Western Europe. Securities laws, including those relating to corporate governance, insider trading, disclosure and reporting requirements, are relatively new, while other laws concerning anti-fraud and directors' and officers' liabilities remain underdeveloped. The Russian securities market is regulated by the CBR and FAS where the latter oversees anti-monopoly matters and advertisement relating to securities.
In addition, Russian corporate and securities rules and regulations can change rapidly, which may materially adversely affect our ability to conduct capital markets 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 us. As a result, we may be subject to fines and/or other enforcement measures despite our best efforts at compliance, which could have a material adverse effect on our business, financial condition and results of operations.
Furthermore on July 1, 2016, provisions of the Federal Law No. 210 stipulating the new procedure for corporate actions became effective which,inter alia, provides for a possibility of remote participation at a general meetings of security holders (e-voting) for those shareholders who hold their shares either directly on a share register or through a depositary. This new procedures may lead to delays in voting process and inconsistencies and may entail additional risks due to their novelty to the Russian market.
There is little minority shareholder protection in Russia.
Minority shareholder protection under Russian law principally derives from (a) supermajority shareholder approval requirements for certain corporate actions, (b) the ability of a shareholder to demand that the company purchase the shares held by that shareholder if that shareholder voted against or did not participate in voting on certain types of actions, and (c) shareholders' right to challenge decisions of the company's management bodies in certain circumstances. Companies are also required by Russian law to obtain the approval of disinterested shareholders for certain transactions with interested parties. In practice, enforcement of these protections has been poor. Shareholders of some companies have also suffered as a result of fraudulent bankruptcies initiated by hostile creditors.
The supermajority shareholder approval requirement is met by a vote of 75% of all voting shares that are present at a shareholders' meeting. Thus, controlling shareholders owning slightly less than 75% of outstanding shares of a company may have a 75% or more voting power if certain minority shareholders are not present at the meeting. In situations where controlling shareholders effectively have 75% or more of the voting power at a shareholders' meeting, they are in a position to approve amendments to the charter of the company or significant transactions including asset transfers, which could be prejudicial to the interests of minority shareholders. It is possible that our controlling shareholder in the future may not operate us and our subsidiaries for the benefit of minority shareholders, and this could have a material adverse effect on the value of our shares and ADSs.
While the Federal Law on Joint Stock Companies of December 26, 1995, (the "Joint Stock Companies Law") provides that shareholders owning not less than 1% of the company's stock may bring an action for damages caused to a company by its CEO, member of the Board of Directors or isits Management Board and certain other officials acting on behalf of the company, minority shareholders may have difficulties with proving such damages with the court and as a consequence their claims may be denied their claims by the court. In 2009, new legislation was adopted which contemplates class action litigation. However, sinceAlthough there have been several disputes in the legislation is relatively new,past few years, Russian courts are not experienced in resolving such disputes and do not have a clear and consistent approach in regards to class action litigation. Accordingly, your ability to pursue legal redress against us may be limited, reducing the protections available to you as a holder of our shares and ADSs.
According to Russian legislation, shareholders/participants of Russian companies have an opportunity to demand either liquidation of a company in a judicial proceeding or exclusion of other shareholder/ participant (except for public joint stock companies) from the company.
According to the amendments to the Civil Code of the Russian Federation which came into effect on September 1, 2014, shareholders and participants of Russian companies have,inter alia, the following rights which can be executed via judicial proceedings:
In this regard, considering the lack of practice in applying these regulations, we cannot rule out the possibility of filing of such claims against us. Should such claims be brought, this may have a negative impact on our business, financial condition and results of operations.
Shareholder liability under Russian legislation could cause us to become liable for theboth obligations of our subsidiaries.subsidiaries and losses of the legal entities in which we have a practical possibility of determining actions.
The Civil Code of the Russian Federation, the Joint Stock Companies Law and the Federal Law "On Limited Liability Companies" generally provide that shareholders in a Russian joint stock company or members of a limited liability company are not liable for the obligations of the company and bear only the risk of loss of their investment. This may not be the case, however, when one entity is capable of determining decisions made by another entity. The entity capable of determining such decisions is deemed an "effective parent." The entity whose decisions are capable of being so determined is deemed an "effective subsidiary." The effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:
However, joint and several responsibility of the effective parent is excluded in case of voting of the effective parent on the approval of the transaction at a general shareholders' meeting of the effective subsidiary, as well as the approval of the transaction by the executive body of the effective parent, if the need for such approval is envisaged in the charter of the effective subsidiary and (or) the effective parent.
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 inactionfailure to act of an effective parent. This is the case no matter how the effective parent's ability 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 subsidiaries.subsidiaries and losses of the legal entities in which we have a practical possibility of determining actions if we caused such losses. This liability could have a material adverse effect on our business, results of operations and financial condition.
Shareholder rights provisions under Russian law could impose additional obligations and costs on us, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Russian law provides that shareholders that vote against or did not participate in voting on certain matters have the right to sell their shares to the company at market value in accordance with Russian law. The decisions that trigger this right to sell shares include:
For example, from 2004 through December 31, 2014,2016, we merged over 5660 of our wholly owned subsidiaries into MTS. Following the approval of the first of the series of mergers we repurchased shares from investors who voted against or abstained from voting on the merger in the amount of 11.1 billion rubles ($446.3 million as of the date of repurchase). Also, on March 10, 2011, we completed a share buyback as part of the reorganization of MTS involving a merger with Comstar, Dagtelecom and Evrotel. Specifically, a total of 8,000 MTS ordinary shares representing 0.0004% of our issued share capital were repurchased for RUB 1.96 million ($67,000 as of the date of repurchase). In addition, a total of 22,483,791 Comstar ordinary shares representing 5.3809% of issued share capital were repurchased for RUB 4.8 billion ($161.3 million as of the date of repurchase). Also asAs a part of our reorganization during 2013 a total of 90,881 MTS ordinary shares representing 0.004% of our issued share capital were repurchased for RUB 19.7 million (approximately $650,000 as of March 31, 2013) and during 2014 a total of 9,935 MTS ordinary shares representing 0.0005% of our issued share capital were repurchased for RUB 2.1 million (approximately $57,000 asmillion. In the course of August 13, 2014).reorganization in 2015 we repurchased 29,666 MTS ordinary shares representing 0.0014% of our issued share capital for RUB 5.9 million. In 2016, we, acting through our 100% owned subsidiary, Stream Digital, LLC, purchased 3,060,409 MTS ordinary shares for a total consideration of RUB 700,833,661. In the beginning of 2017, we further purchased 32,061,256 MTS ordinary shares for RUB 9,297,764,240.
Our obligation to purchase shares in these circumstances, which is limited to 10% of the company's net assets calculated in accordance with Russian accounting standards at the time the matter at issue is voted upon, could have a material adverse effect on our business, financial condition, results of operations and prospects. Under Russian law, if we are unable to sell the repurchased shares at a price equal to or exceeding the market price within one year after the date of repurchase, we have to reduce our charter capital accordingly.
The Strategic Foreign Investment Law imposes certain restrictions on us and our existing and potential foreign shareholders, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
On May 7, 2008, the Federal Law "On the Procedure for Foreign Investment in Commercial Organizations of Strategic Importance for the Defense and Security of the State," or the Strategic Foreign Investment Law, came into force in Russia. This law sets forth certain restrictions relating to foreign investments in Russian companies of "strategic importance." Among others, companies with a dominant position in the Russian telecommunications market are considered to be strategically important and foreign investments in such companies are subject to regulations and restrictions to these companies set out by the Strategic Foreign Investment Law. For purposes of the Strategic Foreign Investment Law, a mobile telecommunications provider is deemed to be dominant if its market share in the Russian market exceeds 25%, as may be determined by FAS. In addition, a company may be considered to be strategically important due to our offering of services involving the use of cryptographic technologies.
On April 8, 2009, MTS and two of our subsidiaries, Dagtelecom LLC (Dagtelecom LLC has since been merged into MTS) and Sibintertelecom CJSC, were added to the register of companies occupying a dominant position on the market with a market share exceeding 25% for the purpose of the Strategic Foreign Investment Law.
Starting from the effective date of the Strategic Foreign Investment Law, a foreign investor seeking to obtain direct or indirect control over a strategically important company is required to have the
respective transaction pre-approved by an authorizeda special governmental body, the Federal antimonopoly servicecommission on control of the Russian Federation.
foreign investments. On December 6, 2014, the amendments to the Strategic Foreign Investment Law came into effect. The law stipulates that foreign investors are obliged to obtain prior approval of transactions envisaging the acquisition of right of ownership, possession or use of property classified as the fixed production assets of a strategic company and the value of which represents 25% or more of the balance sheet value of the assets of such company as of the last reporting date, according to accounts. In
addition, foreign investors are required to notify this authorized governmental body about any transactions undertaken by them resulting in the acquisition of 5% or more of the charter capital of strategically important companies. Within 180 days from the effective date of the Strategic Foreign Investment Law, foreign investors having 5% or more of the charter capital of strategically important companies were required to notify the authorized governmental body about their current shareholding in such companies. Commencing December 6, 2014, a foreign investor is also obliged to notify the authorized governmental body about the fact of conducting above- mentionedthe pre-approved transactions.
As we are classified as a strategically important company, our current and future foreign investors are subject to the notification requirements described above and our current and potential investors may be limited in their ability to acquire a controlling stake in, or otherwise gain control over, us. Such increase in governmental control or limitation on foreign investment could impair the value of your investment and could hinder our access to additional capital.
Regulatory changes in Russia, including the reduction of settlement rate, regulation of other inter-carrier and subscriber tariffs the mobile number portability principle and others, as well as regulatory changes at the international level may have a material adverse effect on our financial condition and results of operations.
Following an amendment to the Federal Law on Communications, which became effective July 1, 2006, fixed line operators began charging their subscribers for calls to mobile phone users and started to transfer a percentage of the charge to mobile operators terminating such calls. The percentage transferred to mobile operators is established by the regulator and is known as the "settlement rate." The Ministry of Communications and Mass Media is considering altering the approach to inter-carrier settlements in Russia and the subsequent lowering of the settlement rate. Any reduction of the settlement rate by the regulator could have a negative impact on our average monthly service revenues per subscriber and margins. In September 2013, the Government commission on telecommunications supported the proposal of the Ministry of Communications and Mass Media to simplify the process of traffic transmission within one sub-federal region, as well as to simplify the process of traffic transmission within the voice and data networks while transmitting voice information within one sub-federal region of the Russian Federation. The exact changes to the current regulations may be significant, including the regulation of interconnect leading to operators' inability to determine the autonomous pricing of interconnect rates.
In November 2014, the Government of Russia considered a proposal on reconsideration of the interconnect regulation approach submitted by the Ministry of Communications. It is unclear yet how this proposal may be implemented, however it may potentially lead to reduction in traffic transmission revenues.revenues/ increase in traffic transmission costs. The final decision on the implementation of this proposal has not been made yet.
The changesagreement on the conditions of inter-carrier mutual settlements while delivering international communication services in CIS-countries was signed on the CIS Heads of Government Council meeting held in Dushanbe on October 30, 2015 (the "Agreement"). The enforcement of certain provisions of the Agreement may adversely affect our operation in terms of the execution of inter-carrier mutual settlements among CIS-operators. In order to be implemented, the corresponding provisions should be introduced to the Federal Law "On Communications" regardingRussian legislation. To date, the ability of a subscriber to retain the telephone number after switching from one operator of mobile communications to another (mobile number portability ("MNP") were signed by the President of the Russian Federation on December 25, 2012 and came into legal force on December 1, 2013. To enable subscribers to use MNP, a certain number of regulatory legal acts were passed. The introduction of the rules on number portability in mobile networks may lead to subscribers' churn, as well as to an increase in costs for attracting and retaining customers, which mayprovisions have a significant adverse effect on our financial
condition and results of operations. Moreover, the introduction of MNP imposed additional costs on the operators of mobile communications due to the necessity of implementing several complex and resource-intensive actions involving organizational and technical infrastructure, the requirement to improve the software of telecommunication facilities, and change certain business processes.
There are various difficulties that we face in implementing MNP principle including difficulties in applying established customer practices. The implementation of the MNP principle may therefore lead to the interference of antimonopoly authorities and legal actions. For example, MegaFon filed a claim against us after winning a contract on rendering services to the members of the Council of the Federation, which was partially satisfied by FAS.
From March 1, 2014, if an operator fails to pass a subscriber's number to another operator it is obliged to render the services free of charge. The duration of any free of charge services will start from the planned date of passing the number until the effective date of the transfer. This initiative came into force on March 1, 2014 and placed additional responsibility on the operators whilst exposing operators to the risk that certain subscribers may seek to improperly take advantage of this system by engineering delays in the MNP process. Starting from April 8, 2014, the operators are obliged to pass a subscriber's number to another operator no later than the eighth day from the individual subscriber's application date and on the twenty ninth day in case the subscriber is a legal entity, unless otherwise indicated in the subscriber's application.
On February 3, 2014, a plan of measures for "Development of competition in electronic communications" was approved by the Government Regulation No. 130-R. According to the plan, the Ministry of Communications of the Russian Federation and the Federal Tariff Service will have to submit to the Government of the Russian Federation a report on assessment of possibility to port subscribers' numbers within fixed line networks ("LNP"- local number portability) as well as within data transmission networks. At the end of January 2015, the press reported that the Ministry of Economic Development submitted to the Ministry of Communications, the Federal Tariff Service, the FAS and the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing a proposal to implement the service of retaining the telephone number after switching from one fixed line operator to another, however the concept of LNP is not yet developed. In March 2015, the press reported that FAS upheld the initiative and suggested to develop pilot projects on launching the service when the Ministry of Communications opposed the proposal. The changes, should they be introduced, may lead to additional costs and intensify competition. In addition, in case the regulator imposes requirements on granting the infrastructure obligatory for fixed line operators while implementing the service, this may affect our business.been implemented yet.
In December 2013 and in July 2014, the State Commission for Radio frequencies introduced a number of modifications to the conditions of using the frequency band for 3G and 4G. These changes resulted in implementation of the principle of technological neutrality for frequency bands 900 MHz (UMTS and LTE) and 1800 MHz (LTE). The Government Regulation No. 480 dated May 24, 2014, requiring that tenders shall be held mainly in the form of auctions, came into force on June 6, 2014. These changes may strengthen competition in the market as well as add costs for development of the network infrastructure.
The new versiondraft law "On Security of the Federal Law onCritical Information Information Technologies and Information SecurityInfrastructure" may classify our information systems as critically important,critical information infrastructure of the Russian Federation, which would involve the need to comply with additional information security requirements and could lead to considerable modernization costs. There is also a possible necessity of replacing foreign information security products with locally developed substitutes.
Moreover, a draft law regulating the equipment used in telecommunications network was introduced for consideration by the State Duma of the Russian Federation. This draft law would require us to use telecommunications equipment produced by Russian companies (i.e. those which are tax residents of the Russian Federation). The software in such equipment should have open source code. The draft law permits the use of foreign equipment in case there is no similar equipment produced by Russian companies. It is not yet clear how the restrictions can be applied since there are no Russian producers of much of this equipment. If this draft law is adopted, we could encounter severe difficulties in our operations.
On December 9, 2014, Government Regulation No. 1342 adopted the rules of rendering the telephone communications services, that include several amendments. These include an obligation for operators to inform the subscribers of any changes in tariff plans via sms, the limited ability of operators to charge subscribers for switching to another tariff plan as well as the possibility of subscribers to demand back the advance payments made without termination of contract. Adoption of the rules could materially adversely affect our revenues.
According to press reports, a proposal to ban direct connection of regional and local networks to foreign networks is being considered. Allon carrying international traffic is to be carriedfrom the country's territory through the networks of nationwide operators.operators is being considered. The list of nationwide operators has not been specified yet. In case such initiative is implemented and MTS is not included in the list of nationwide operators, this may lead to an increase in our traffic transmission costs, inability to develop the infrastructure outside the Russian Federation and/or inability to exchange traffic with our subsidiaries located outside the Russian territory. Furthermore, this may lead to greater subscriber churn.costs.
According to Government Regulation No. 1240 dated November 24, 2014, starting from January 1, 2015, federal public bodies were vested with a right to make decisions on using data transmission network of government bodies, which is a part of infrastructure ensuring information and technological interaction with the information systems used for rendering state and municipal electronic services for the purposes of exercising public functions. To date, the single operator of infrastructure of electronic state services is Rostelecom. Adoption of the Regulation may adversely affect our revenues with regard to the B2G market segment due to competitive disadvantage.
On October 14,December 9, 2014, Government Regulation No. 1342 adopted the Russian president signedrules of rendering the telephone communications services, that include several amendments. These include an obligation for operators to inform the subscribers of any changes in tariff plans via SMS, the limited ability of operators to charge subscribers for switching to another tariff plan as well as the possibility of subscribers to demand back the advance payments made without termination of contract. Adoption of the rules could materially adversely affect our revenues.
With the entry into force of the Treaty on the Eurasian Economic Union (EEU) on January 1, 2015, a supra-national antimonopoly body empowered to control compliance with general competition rules on cross-border markets and to apply antitrust measures was established. Should violations with respect to companies operating on cross-border markets be identified, this might lead both, to imposition of fines in accordance with the legislation of the EEU and adoption of the decisions for compulsory execution.
The amendments introduced to Article 5 of the Federal Law No. 115 "On Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism" dated August 7, 2001, entered into force on March 1, 2015. The list of organizations carrying out cash/other property operations, to whom the law incorporatingrequirements are applied, was expanded according to those amendments. In addition to telecommunication operators entitled to independently render mobile radio telecommunication services, the telecommunication operators occupying "substantial position" in public switched telephone networks entitled to independently provide data transmission services and render services on the basis of contracts with individual subscribers, have been also included in the list. A telecommunication operator which meets the specified criteria is obliged to provide the Federal Financial Monitoring Service with the information on cash/other property operations (that is subject to compulsory control or that seems suspicious while implementing the rules of internal control), as well as to take measures for freezing (blocking) of cash/other property (in case there is an information on its involvement in extremist activities or terrorism). Lack of law enforcement practice may cause difficulties in interpreting the above-mentioned amendments and lead to additional burden for telecommunication operators.
In June 2015, the Government of Russia introduced the draft amendments to the Federal Law "On Communications" and Federal Law "On Mass Media" providing for use of telecommunication network facilities for the prompt informing of population in case of emergencies. According to the draft law, operators are obliged to transmit warning signals to telecommunication services users in order to provide them with the information of the utmost urgency relating to immediately arising/arisen life or health threats.
In addition, in June 2015, mass media reported that the Ministry of Communications prepared the draft order pursuant to which telecommunication operators may be obliged to accumulate and store information concerning the personnel actions on communication facilities management (for a 3-year period) and provide it to the Federal Security Service at its request. The intelligence agencies may thus get an access to the data relating to foreign contractors of operators. The compliance with the requirements (in case the order is adopted) may lead to additional costs for the implementation of legislative norms. On Mass Media dated December 27, 1991.April 4, 2016, the Ministry of Communications of the Russian Federation adopted the order No. 135 "On the approval of requirements for communication networks operation with respect to the use of services provided by third parties." The amendment whichorder comes into force on January 1, 2016, introduces limitationsJuly 26, 2017. According to the requirements, a telecommunication operator is obliged (on a quarter basis) to provide the Federal Security Service with the data on foreign companies and foreign citizens that are engaged to provide works or services related to exploitation and management of its communication network. In addition, a telecommunication operator is obliged to store information concerning all actions on communication facilities executed by servicing staff or third parties engaged in exploitation and management of communication networks both from workplaces and with the use of a remote access. Consultations are underway with the Ministry of Communications of the Russian Federation to determine the exact list of communication facilities and actions, information on which has to be stored. The amount of forthcoming costs is to be determined based on the abilitiesconsultations results.
The Federal Law No. 374 "On the introduction of foreign entitiesamendments to own, control or run Russian media business. Since MTS is a company with both Russian and foreign shareholders and our web site is registered as mass media resource, this might cause additional operational expenses for re-registrationcertain legislative acts of the web resource. If weRussian Federation with respect to setting up of additional counter-terrorism measures and public security enforcement" was adopted on July 6, 2016. Pursuant to the law, operators are unableobliged to store information on the facts of receiving, transferring, delivery and/or processing of voice information and text messages, as well as images, sounds, video- and other messages of telecommunication services users (for a 3-year period) and the contents of such communications, including voice data, text messages, pictures, sounds, video or other communications (for up to 6 months). The Government of the Russian Federation approves rules, terms and volume of information to be stored. The norm of the law relating to the storage of messages contents enters into force on July 1, 2018. Material additional costs might be needed to comply with these requirements. The Government draft regulation "On rules, terms and volume of voice information, text messages, images, sounds, video- and other messages of telecommunication services users to be stored" was prepared and published for public consultation by the law requirements,Ministry of Communications on December 23, 2016. As of April 1, 2017, this may lead to suspension of our web site license.draft regulation is undergoing a review and consultation by the state bodies.
Currently the Russian Civil Code is undergoing the process of substantial revisions with new provisions being introduced relating to a number of spheres including property, and a number of others. At present, the potential interpretation of these amendments by state authorities (including the courts), along with their impact on our activities are unknown.
Russian companies are obliged to pay various and significant taxes including income tax, VAT, real estate tax, excise tax, payroll tax and others. Along with tax liabilities there are different obligatory non-tax payments. These include payments into Universal Service Fund, which currently amounts to 1.2% of our annual revenue on telecommunications services. Furthermore, potential regulatory changes that may be enacted in the future, such as the introduction of new rules regulating MVNOs, new rules concerning our pricing policy and others, could weaken our competitive position in the mobile telecommunications market. Changes in tax laws and non-tax regulations may lead to the growth of our tax burden and may, as a result, materially adversely affect our financial condition and results of operations.
The failure of our subsidiaries that are subject to regulations as natural monopolies to comply with the requirements of the Federal Law No. 223 "On Procurement Process," inter alia, in case of collective tendering can lead to penalties on our subsidiaries.
One of our subsidiaries, MGTS, is categorized by the Federal Tariff Service as a natural monopoly in the Moscow telecommunications market. Another our subsidiary, Comstar-regions, operating in Khanty-Mansiysk Autonomous District is also categorized as a natural monopoly in the public telecommunications market of this Region. According to the Federal Law No.223No. 223 "On Procurement Process" which came into legal force on July, 18, 2011 with recent amendments dated December 28, 2013,Process," natural monopolies are obliged to conduct the procurement process in accordance with the principles of transparency and non-discrimination and unjustified limitation of competition. If our subsidiaries that are under additional regulations as natural monopolies are found failing to comply with the law on procurement process,inter alia in case of collective tendering with us, our subsidiaries can be subject to penalties. See also "—Risks Relating to Our Business—If we are found to have a dominant position in the markets where we operate and are determined to have abused this position, the FAS may influence our subscriber tariffs and impose certain restrictions on our operations."
Our failure to comply with new personal data protection laws and with the regulations of state authorities regarding information security in the telecommunications networks in Russia may have a material adverse effect on our business, financial condition and results of operations.
The activity of a telecommunication operator in the field of information security in the Russian Federation is represented by a variety of regulatory legal acts, such as, Federal Law onLaws "On Communications," "On Information, Information Technology and Information Security," "On Personal Data, and certain regulations enacted thereunder require our information storage, processing and protection practices to be in compliance with the statutory standards, effective" "On Trade Secret," "On Electronic Signature," as of July 1, 2011. Additionally, various amendments to the current regulatory regime have been proposed by the State Duma, the Councilwell as sub-decrees of the Federation, the Ministry of Communications and Mass Media, the Federal Service for Supervision in the Area of Communications and Mass Media,Government, the Federal Service for Technical and Export Control, and the Federal Security Service, in order to increase regulatory oversight over data protection.the Ministry of Communications, Roskomnadzor and others.
As a result of these and other changes in personal data protection regulations, we are faced withface significant technical, financial and managerial undertakings. For example, we are required to treat subscribers' personal data with the level of protection afforded to state secrets, obtain state certification of our installed information protection facilities from the Federal Service for Technical and Export Control and the Federal Security Service.Service, obtain licenses for carrying out activity in the field of technical and cryptographic security of personal data from the Federal Service for Technical and Export Control and the Federal Security Service (in case the activity is carried out not only for our own needs). We are also now directly liable for the actions of third parties to whom we forward personal data for processing. Moreover, we must now make public our data protection policies, which currently constitute a trade secret, and which may increase the risk of data protection violations if revealed. Furthermore, the modernization of our information protection systems and the optimization and reengineering of our personal data processing systems will require us to incur significant expenses. At the same time, the new regulations established by the Russian government on November 1, 2012 introduced onerous data protection requirements around data processing within the informational systems (for example, to ensure that our system and application software of foreign origin do not have any undeclared capabilities). In addition, in 2016 the requirements relating to licensed types of activities and licensing terms were expanded. In case a license for providing monitoring services of information security facilities and informatization systems, granted by the Federal Service for Technical and Export Control, is not provided or its issue is delayed a company might be unable to provide third parties with the relevant commercial services.
If the resources required to develop and implement data protection systems meeting the new standards are greater than expected, or we fail to comply with the data protection laws despite our best efforts to do so, our business, financial condition and results of operations could be materially adversely affected.
Recent noveltiesDevelopments concerning regulation on personal data such as, for example, ban on processing of Russian citizens' personal data in databases located outside Russia and obligation to provide information concerning all Russian citizens' personal data to "Roskomnadzor" may pose additional compliance risks for telecommunications operators.
According to the Federal Law No. 242- dated July 21, 2014,242 ("Federal Law No. 242"), operators are obliged to record, systemize, accumulate, store, clarify (update, modify) and retrieve Russian citizens' personal data using databases located only within Russia (subject to a limited number of exceptions), as well as to provide Roskomnadzor with the information on location of databases containing all citizens' personal data.
The adopted lawFederal Law No. 242 may cause restrictions on the provision of information services as well as impose penalties on operators for failure to comply with the legal requirements (some of which may be subject to broad interpretation) for a number of reasons including the following reasons:following:
Information transfer assumes that volume
The date of the entry into force of the Federal Law No. 242 was shifted fromentered into force on September 1, 2016 to September 1, 2015, which reduces time for operators to comply with the law requirements. Failure2015. Our failure to comply with the legal requirements may lead to the imposition of penalties.
Changes in Ukrainian telecommunications legislation have caused uncertainty in relation to the regulation of the Ukrainian telecommunications industry and may adversely affect our business, financial condition and results of operations.
The Ukrainian Law on Telecommunications came into force on December 23, 2003 (certain articles became effective in 2004 and 2005). The NCRC as the central regulatory body in the sphere of communications was established in August 2004.
On November 23, 2011, the NCRC was dissolved and the Ukrainian government created the NCCIR. As a result of the NCRC dissolution, the State Inspection of Communications has similarly been dissolved and there are currently no provisions in the legislation that would provide for a similar regulatory body or for its authority. The authority granted to the NCCIR is largely similar to the authority that was afforded to the NCRC.
In addition, the Ukrainian Law on Telecommunications may require, among other things, companies declared to have dominant position or SMP on the telecommunications market to develop public telecommunications services if directed to do so by the regulatory authorities. On June 24, 2010, MTS Ukraine (among other mobile operators) was found to have a dominant position on the interconnect market by the AMC. In 2012, there have been changes in legislation affecting telecommunications providers including: the Rules on Telecommunication Services making the operators responsible for the actions of content-providers, a law on state lotteries prohibiting all lotteries in Ukraine excluding those of state status and a law on telecommunications prohibiting serving new subscribers unless they provide a passport as identity confirmation.
In November 2012, NCCIR issued the statementsdecision regarding the rules governing the provision of MNP service, which enables the subscribers to retain their telephone number after switching from one operator of mobile communications to another. MNP law came into legal force on July 5, 2013 with the beginning of switching to other operators from December 20, 2013. On December 30, 2013 a resolution that postponed the beginning of service provision to July 2014 came into legal force, however, implementation of MNP service was cancelled later on by a court decision. CurrentlyOn July 31, 2015, NCCIR is seekingapproved the procedure for market participants' adviceMNP service rendering and introduced amendments to the basic requirements of agreements for the provision of telecommunication services. The decision entered into force on introductionSeptember 8, 2015, after which NCCIR appointed the Ukrainian State Center of MNP service. The working group of stakeholders was organized in order to develop the service rules. The date of the service introduction has not been specified yet.Radio
According toFrequencies ("USCRF") as an administrator of the LawCentralized database of Ukraine No. 1166 "On preventionthe ported numbers. The terms of financial disaster and creationMNP service launch will be set by the special decision of preconditions for the economic growth in Ukraine," the fee for use of radio frequency resource was doubled. The increase in fee for the use of radio frequency resource and similar legislativeNCCIR which has not been passed yet.
Legislative changes regulating telecommunications industry may materially adversely affect our business, financial condition and results of operations. See "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in Ukraine—Legislation."
The Russian taxation system is underdeveloped and any imposition of significant additional tax liabilities could have a material adverse effect on our business, financial condition or results of operations.
The discussion below provides general information regarding Russian taxes and is not intended to be inclusive of all issues. Investors should seek advice from their own tax advisors as to these tax matters before investing in our shares and ADSs. See also "Item 10. Additional Information—E. Taxation."
In general, taxes payable by Russian companies are substantial and numerous. These taxes include, among others, corporate income tax, value added tax, property taxes, excise duties, payroll-related taxes and other taxes.
Russian tax laws, regulations and court practice are subject to frequent change, varying interpretation and inconsistent and selective enforcement. In some instances, although it may be viewed as contrary to Russian constitutional law, the Russian tax authorities have applied certain new tax laws retroactively, issued tax claims for periods for which the statute of limitations had expired and reviewed the same tax period multiple times.
On October 12, 2006, the Plenum of the High Arbitrazh Court of the Russian Federation issued Resolution No. 53 formulating the concept of "unjustified tax benefit," which is described in the Resolution by reference to circumstances, such as absence of business purpose or transactions where the form does not match the substance, and which could lead to the disallowance of tax benefits resulting from the transaction or the recharacterization of the transaction. There has been very little further guidance on the interpretation of this concept by the tax authorities or courts, but it is likely that the tax authorities will actively seek to apply this concept when challenging tax positions taken by taxpayers in Russian courts. While the intention of this Resolution might have been to combat abuse of tax laws, in practice, there is no assurance that the tax authorities will not seek to apply this concept in a broader sense.
Generally, tax returns in Russia remain open and subject to tax audit by the tax authorities for a period of three calendar years immediately preceding the year in which the decision to conduct a tax audit is taken. The fact that a year has been reviewed by the tax authorities does not prevent further review of that year, or any tax return applicable to that year, during the eligible three-year period by a superior tax authority or, in certain limited instances, by a tax authority which conducted an initial review.
On July 14, 2005, the Constitutional Court of the Russian Federation issued a decision that allows the statute of limitations for tax penalties to be extended beyond the three-year term set forth in the tax laws if a court determines that the taxpayer has obstructed or hindered a tax audit. Additionally, according to amendments to the Tax Code of the Russian Federation, effective January 1, 2007, the three-year statute of limitations may be extended if the actions of the taxpayer created insurmountable obstacles for the tax audit. Because none of the relevant terms is defined, tax authorities may have broad discretion to argue that a taxpayer has "obstructed" or "hindered" or "created insurmountable obstacles" in respect of a tax audit and to ultimately seek review and possibly apply penalties beyond the three-year terms. According to Presidium of High Arbitrazh Court Resolution No. 4134/11 of
September 27, 2011, the statute of limitations for tax penalties is calculated starting from the day immediately following the expiration of the tax period when the violation was committed.
On March 17, 2009, the Constitutional Court of the Russian Federation issued a decision preventing the Russian tax authorities from carrying out a subsequent tax audit of a tax period if, following the initial audit of such tax period, a court decision was made concerning a tax dispute between the relevant taxpayer and the relevant tax authority arising out of such tax period, and such decision has not been revised or discharged. The Constitutional Court of the Russian Federation then issued Decision No. 138-O-P on January 28, 2010, which confirmed the above approach. Subsequently, the Presidium of High Arbitrazh Court held in several cases that under certain circumstances (in particular, when the case has not been considered in substance) a superior tax body is still entitled to conduct a tax audit with respect to re-opened tax periods and taxes already reviewed during the initial tax audit; however, the circumstances under which the audit is conducted should differ from the initial ones (No. 14585/09 of March 16, 2010, No. 17099/09 of May 25, 2010, No. 7278/10 of October 20, 2010).
There is no guarantee that the tax authorities will not review our compliance with applicable tax law beyond the three-year limitation period. Any such review could, if it concluded that we had significant unpaid taxes relating to such periods, have a material adverse effect on our business, financial condition, results of operations and prospects.
As of January 1, 2012, changes to the Tax Code of the Russian Federation enable Russian taxpayers which are part of a group to consolidate their financial results for profit tax purposes. It is yet unclear how the new legislative provisions will be applied by the tax authorities as currently only limited regulatory guidance is available on this matter. In addition to imposing certain criteria that must be met in order to create a consolidated tax paying group, the law also limits certain transactions within the group (e.g. corporate restructurings). In 2014, we concluded an agreement with tax authorities, according to which the consolidated taxpaying group of taxpayers willhad to start functioning fromsince 2016.
However, pursuant to the law adopted in November 2015, the contracts on the set up of the consolidated taxpaying group are not subject to registration during 2016 - 2017 and the contracts registered during 2014 - 2015 are considered by tax authorities as not registered. In the absence of any official interpretation, it is currently difficult to estimate the implementation of new law on the agreements already registered by tax authorities. In addition, intercompany dividends are subject to a withholding tax of 0% or 13% (depending on whether the recipient of dividends qualifies for Russian participation exemption rules), if being distributed to Russian companies, and 15% (or lower, subject to benefits provided by relevant double tax treaties), if being distributed to foreign companies. Amendments to the Tax code effective in 2014, introduced an increased withholding tax rate of 30% for dividends to be applied where particular information have not been provided to the custodian regarding the holders of securities held in a foreign nominee holder, foreign authorized holder or depositary program custody accounts. The amendments to the Russian Tax Code, which came into effect from January 1, 2015, exclude dividends from the scope of payments subject to 30% withholding tax rate. The above changes and potential difficulties they create related to varying interpretation of the Tax Code provisions concerning withholding tax rates may affect the investment prospects of the Russian companies.
In addition, it is currently unclear how draft amendments to the Tax Code of the Russian Federation planned for 2015 might affect our business, financial condition, results of operations and prospects.
The Russian tax authorities may take a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may nonetheless be subject to challenges in the future. The foregoing factors raise the risk of the imposition of arbitrary or onerous taxes on us, which could adversely affect the value of our shares and ADSs.
Current Russian tax legislation is, in general, based upon the formal manner in which transactions are documented, looking to form rather than substance. However, the Russian tax authorities are
increasingly taking a "substance and form" approach, which may cause additional tax exposures to arise in the future. Additional tax exposures could have a material adverse effect on our business, financial condition, results of operations and prospects.
It is expected that Russian tax legislation will become more sophisticated, which may result in the introduction of additional revenue raising measures. Although it is unclear how any new measures would operate, any such introduction may affect our overall tax efficiency and may result in significant additional taxes becoming payable. Additional tax exposures could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition to the usual tax burden imposed on Russian taxpayers, these conditions complicate tax planning and related business decisions. For example, tax laws are unclear with respect to deductibility of certain expenses. This uncertainty could possibly expose us to significant fines and penalties and to enforcement measures, despite our best efforts at compliance, and could result in a greater than expected tax burden.
Based on the results of their audit in August 2012, the tax authorities of Uzbekistan assessed $669 million (RUB 21,390 million) in additional taxes, penalties and fines payable by Uzdunrobita. Afterwards all tax disputes were closed, and the total amount of damages incurred by the state was calculated on the basis of all claims against Uzdunrobita which amounted to $587 million (RUB 18,375 million). After paying two scheduled installments totaling $147.5 million (RUB 4,583.4 million) and making partial payment of the third installment amounting $15.9 million (RUB 481 million) and constituting the remaining amount of cash held in its bank accounts, Uzdunrobita filed a petition for voluntary bankruptcy to the Tashkent Economic Court on the grounds of its inability to meet further obligations. We also filed a claim against the Republic of Uzbekistan in the ICSID, part of the World Bank Group, in Washington, D.C. On July 31, 2014, MTS and the Republic of Uzbekistan signed the Settlement Agreement which resulted in MTS' reentrance into Uzbekistan and rendering mobile telecommunication services in the country. See also "—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations," and "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Uzbekistan.Tax Audits and Claims."
Lack of law enforcement practice of the Russian anti-offshore policy may have adverse impact on our business, financial condition and results of operations.
In the past few years, the Russian Federation like a number of other countries in the world has been actively involved in a discussion of measures against tax evasion by the use of low tax jurisdictions as well as aggressive tax planning structures.
The new rules of controlled foreign companies (CFC) came into force on January 1, 2015. The rules oblige Russian taxpayers being controlling persons of a foreign company to submit to the tax authorities both standard notifications on participation in CFC and tax declarations. Profit generated commencing in 2015, including retained earnings, is subject to taxation in the Russian Federation. The innovations could impose additional tax on the undistributed profits of any foreign entity controlled by us (in proportion to such controlling stake) at the rate of 20%. These innovations caused amendments to the Tax Code providing for liability in case of non-disclosure or incomplete disclosure of information on CFCs and the non-payment or underpayment of relevant tax.
In addition, implementation of new concept of beneficial ownership, with regard to taxation of payment of passive income (dividends, royalty, interest, capital gain), may negatively affect possibility to apply benefits set by the double tax treaties, in case such payments pass through intermediary entities. This may potentially lead to increase of tax burden with regard to such payments.
On November 4, 2014, the President of the Russian Federation signed the Federal law No. 325 "On ratification of the Convention on Mutual Administrative Assistance in Tax Matters."
Ratification of this Convention will enable the Russian Federation to receive tax information from all participating countries which include, among others, a number of offshore jurisdictions.
Lack of law enforcement practice may cause difficulties in interpreting the above-mentioned laws by the Russian tax authorities. It is also currently unclear how the enacted laws could affect our counterparties, which may be registered in off shore jurisdictions.
In case the impact of legislative initiatives is significant for some of our counterparties it may lead to potential influence on our results of operations.
The implications of the tax system in Ukraine are uncertainis undergoing a reform and various tax laws are subject to different interpretations.
Besides the new Tax Code, which came into force on January 1, 2011, Ukraine currently has a number of laws related to various taxes imposed by both central and regional authorities. Applicable taxes include value added tax ("VAT"), 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.
Furthermore, with the entry into force of the new Tax Code of Ukraine (the "TCU"), there is uncertainty in regards to tax accounting of payments for the use of computer software. As part of its business, MTS Ukraine purchases limited end-user rights for the use of computer software. Currently, there are no clear rules for the classification of the payments made by MTS Ukraine for these purchases. Under the TCU, these payments may be treated as payments for intangible assets or as payments for fixed assets. Tax authorities of different levels have provided inconsistent tax clarifications on this matter. The tax rate applicable to these payments will vary according to their classification.
Also, rules established by the TCU for recalculation of the input tax credit for non-current assets are unclear. Uncertain transfer pricing rules and their inconsistent application by the Ukrainian tax authorities and courts may also adversely affect MTS Ukraine's operations. MTS Ukraine's transactions with its related parties as well as certain transactions with non-Ukrainian entities that are not MTS Ukraine's related parties may be affected by the application of the transfer pricing rules. No "safe harbor" margin is provided under Ukrainian legislation if the sale price deviates from the arm's length price.
On December 28, 2014, the Act on Improvement of Tax Control on Transfer Pricing was approved. From January 1, 2015, business transactions that have an impact on taxable profits with related parties non-Ukrainian entities or non-related entities of states, where the Corporate Profits Tax rate is less than 13%, are controlled if the value of all transactions with the same counterparty exceeds (from January 1, 2017) 10 million hryvnias (net of VAT).
Due to the poor quality of the applicable tax legislation and its inconsistent interpretation, it is possible that MTS Ukraine's prices could be subject to challenge and adjustment for corporate income tax or VAT purposes. Profit repatriation arrangements, such as the level of royalties for trademarks or loan interest paid by MTS Ukraine from Ukraine abroad, may also be challenged for the same reasons. If such price adjustments are implemented, MTS Ukraine's effective tax rate may increase and its financial results may be adversely affected.
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.
Tax declarations/returns, together with other legal compliance areas (e.g., 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 and, for issues of transfer pricing—for a seven-year period. However, this term may not be observed or may be extended under certain circumstances, including in the context of a criminal investigation.
The changes introduced into the new Tax Code of the Ukraine during 2012 created a duty to pay advance installments on tax on profits on a monthly basis and retained the duty to pay advance installments on dividend payments. Before 2013, tax on profits charged for the accounting period was reduced by the amount of advance installments made on dividend payments. In 2013, such reductions were not taken into account and we were obliged to pay the new monthly advance installment on the tax on profits as well as the advance installments on the dividend payments, which increased our tax expenses. However, following a new law issued on July 31, 2013 it became possible to reduce the tax on profits by the amount of advance installments on dividend payments but commencing March 1, 2014 when the 2013 and 2014 tax return iswas filed. But the form of tax return applied for 2013, and 2014 doesand
2015 did not provide for such reduction. The State Fiscal Service provided similar clarifications on the possibility to reduce the tax on profits in tax report for 2015 by the amount of advance installments made on dividend payments in previous years. In 2016, the issue relating to advance installments was partially settled, although the issues on overpayments of profit tax based on the places of former registration of several subsidiaries of MTS Ukraine remain unresolved. In the beginning of 2017, the State Fiscal Service stated that overpayments of profit tax based on the places of subsidiaries registration would be included in account settlements with the principal enterprise, however this scheme has not been legislatively consolidated. Starting from January 1, 2015, advance installment on dividend payments are paid based on the amount of dividends payable exceeding taxable profit declared for the corresponding period.
The approach to the calculation of the profits tax has changed recently. The tax is currently calculated based on financial results declared in the financial statements, i.e. according to the accounting principles. There were temporary tax differences for specific operations until January 1, 2015, i.e. the revenues reflected in the financial statements for 2015 were also reflected in tax accountings until January 1, 2015, which could lead to double taxation. MTS Ukraine is working with the relevant state authorities to avoid double taxation. The amendments introduced to the legislation on January 1, 2017 provide that tax base may be reduced by the amount of revenue that was repeatedly taken into account after January 1, 2015. However, provisions stating that this norm could be applied from January 1, 2015 (not from the date of the law's entry into force, on January 1, 2017) have not been adopted by the Verkhovna Rada of Ukraine. In the first quarter of 2017 MTS Ukraine filed adjustment reports for 2015, 2016 years to reduce the tax on profits by the amount of revenue that was repeatedly taken into account.
On March 27, 2014, the Act on Finance Crisis Prevention was passed in Ukraine. Several provisions in the Tax Code have been changed by the act which may affect our business in Ukraine, in particular, doubling of the fees for frequency usage.
On December 28, 2014, the Act on tax reform was passed, that changes TCU by introducing the new VAT base and the electronic VAT administration system. From January 1, 2015 the VAT base for taxable supplies cannot be lower than the purchase price for purchased goods/services and/or the cost for produced services;services (cannot be lower than the normal price from January 1, 2016); and/or the net balance value of non-current assets. From February 1, 2015 till JulyOctober 1, 2015 the electronic VAT administration system operatesoperated in a test regime: all VAT invoices arewere issued in electronic form and registered in the unified register. Failure to register a VAT invoice issued since October 1, 2015 on time is subject to 20-50% fines depending on the overdue period. FromSince July 1, 2015, the registration of VAT invoices will beis available if the supplier has sufficient input VAT and/or has a sufficient balance in its State Treasury electronic VAT account accumulated with cash from supplier's bank account. In addition, starting from January 1, 2016 10-100% fines for errors on VAT invoices were introduced.
While we believe that we are currently materially 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.
Vaguely drafted Russian transfer pricing rules, and lack of reliable pricing information may impact our business and results of operations.
Russian transfer pricing legislation became effective in the Russian Federation on January 1, 1999. This legislation allowed the tax authorities to make transfer pricing adjustments and impose additional tax liabilities with respect to all "controlled" transactions, provided that the transaction price differed from the market price by more than 20%. "Controlled" transactions included transactions with related parties, barter transactions, foreign trade transactions and transactions with significant price fluctuations
(i.e .,., if the price with respect to such transactions differs from the prices on similar transactions conducted within a short period of time by more than 20%). Special transfer pricing provisions were established for operations with securities and derivatives. Russian transfer pricing rules were vaguely drafted, generally leaving wide scope for interpretation by Russian tax authorities and courts. There has been very little guidance (although some court practice is available) as to how these rules should be applied. These transfer pricing rules apply with respect to transactions that occurred before January 1, 2012.
New transfer pricing rules became effective on January 1, 2012. The implementation of these new rules should help to align domestic rules with OECD principles. The new rules are expected to considerably toughen the previously effective law by, among other things, effectively shifting the burden of proving market prices from the tax authorities to the taxpayer and obliging the taxpayer to keep in certain cases specific documentation. In addition, the amendments:
If the Russian tax authorities were to impose significant additional tax liabilities through the introduction of transfer pricing adjustments, they could have a material adverse impact on our business, financial condition and results of operations. Adoption of the new transfer pricing rules may increase the risk of transfer pricing adjustments being made by the tax authorities. In addition to the usual tax risks and tax burden imposed on Russian taxpayers, the uncertainties of the new transfer pricing rules complicate tax planning and related business decisions. It will also require us to ensure compliance with the new transfer pricing documentation requirements proposed in such rules. Uncertainty of the new rules may also require us to expend significant additional time and material resources for implementation of our internal compliance procedures. Tax authorities could impose additional tax liability as well as 20% penalties on the underpaid tax in case the prices or profitability are outside the market range and if the required transfer pricing documentation has not been prepared, which could have a material adverse effect on our results of operations and financial condition.
The regulatory environment for telecommunications in Russia, Ukraine and other countries where we operate or may operate in the future is uncertain and subject to political influence or manipulation, which may result in negative and arbitrary regulatory and other decisions against us on the basis of other than legal considerations and in preferential treatment for our competitors.
We operate in an uncertain regulatory environment. The legal framework with respect to the provision of telecommunications services in Russia and Ukraine and the other countries where we operate or may operate in the future is not well developed, and a number of conflicting laws, decrees and regulations apply to the telecommunications sector.
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 used to affect regulatory, tax and other decisions against us on the basis of other than legal considerations. For example, Russian government authorities investigated Vimpelcom in late 2003 on grounds that 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 competitors may receive preferential treatment from the government, potentially giving them a substantial advantage over us.
An adverse change in the infrastructure regulation in Russia could result in additional costs on us.
Starting fromFrom January 1, 2013, telecommunications operators are required to enter into agreements with owners of roads whose public access areas host telecommunication equipment. These agreements have to contain certain provisions prescribed by the Russian Ministry for Transportation and the Russian Ministry for Economic Development and Trade. To date, no list of such provisions has been adopted. There is a risk of imbalance in the commercial interests of the operators and road owners in case such list is adopted.
Consequently, any adverse changes in legislation relating to the regulation of interaction between the owners of roads and telecommunications companies could have a material adverse effect on our business, financial condition, results of operations and prospects.
Telecom operators will be obliged to sign agreements with both, owners of the roads and with owners of land located within road areas where telecommunication equipment is installed. On September 5, 2014, the Ministry of Transport adopted Order No. 240 "On approval of the procedure for determination of fees for public easements in respect of land plots within the boundaries of road rights-of-way (except for private roads) for laying, moving, conversion and operations of utility lines." The Order establishes annual payment in the amount of 0.12% of the cadastral cost of the land plot.
After the Ministry of Transport of the Russian Federation in coordination with the Ministry of Economic Development adopts the Order setting out key terms of agreements between telecommunications operators and owners of the roads, telecommunications operators will be obliged to enter into these agreements. Federal public bodies are currently considering a draft of the Order.
Risks Relating to the Shares and ADSs and the Trading Market
Government regulations may limit the ability of investors to deposit shares into our ADS facility.
The ability of investors to deposit shares into our ADS facility may be affected by current or future governmental regulations. For example, under Russian securities regulations, no more than 25% of a Russian company's shares may be circulated abroad through sponsored depositary receipt programs. Prior to December 31, 2005, and at the time of our initial public offering, this threshold was 40%. Although we believe that the new lower threshold does not apply to our ADSs, in the future, we may be required to reduce the size of our ADS program or amend the depositary agreement for the ADSs.
Because our ADS program is regularly at or near capacity, purchasers of our shares may not be able to deposit these shares into our ADS facility, and ADS holders who withdraw the underlying
shares from the facility may not be able to re-deposit their shares in the future. As a result, effective arbitrage between our ADSs and our shares may not always be possible. Our shares are listed and tradetraded on the Moscow Interbank Currency Exchange. Due to the limited public free float of our common stock, the public market for our shares is significantly less active and liquid than for our ADSs. The cumulative effect of these factors is that our shares may from time to time, and for extended periods of time, trade at a significant discount to our ADSs.
Recent Russian legislation changedFailure to comply with requirements on the approach towards disclosure of certain information about ownership of the ADSs, including in some cases beneficial ownership of theon ADSs and a failure to provide such disclosureADS holders may restrict your ability to vote.
Pursuant to recently enacted legislation,the Russian securities laws, depositaries, and as a result, ADS holders, are not able to vote in connection with the shares underlying ADSs on behalf of the ADS holders unless they provide certain information to the issuer. At a minimum, this information includes the identity of the holder of the ADSs, registration details including a state registration number (for legal entities), and the number of shares attributable to each ADS holder.
Nevertheless, the legislation stipulates that the issuer, CBR, Russian courts and pretrial investigation agencies may request such lists of depositary receipt holders from the holder of depositary program depo account. The holder of depositary program depo account shall take all reasonable measures in order to provide such information. In case of non-compliance with the above requirements, the CBR may suspend, or impose limitations on, transactions with securities held in the relevant accounts of Russian custodians for a period of up to six months. As a result, the shares underlying the ADSs may be blocked and it may be impossible to deposit or withdraw the shares into or from the depositary program. Overall, there is lack of practice and official interpretation in relation to the new rules related to shares underlying ADSs as well asIn addition, uncertainties with respect to exercise of certain rights attaching to shares underlying ADS holders in view of the new rules which could complicate the exercise of right to, and the ability to derive benefits from, the shares represented by ADSs.
The market price of our ADSs has been and may continue to be volatile.
The market price of our ADSs experienced, and may continue to experience, significant volatility. For information on the closing price of our ADSs on the New York Stock Exchange, see "Item 9. Offer and Listing Details—A.4. Market Price Information."
Numerous factors, including many over which we have no control, may have a significant impact on the market price of our ADSs, including, among other things:
For example, market price of our ADSs experienced significant volatility during 2014 due to an economic downturn coupled with legal proceedings relating to our beneficial owner, as disclosed in more detail by Sistema.
In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our ADSs, regardless of our operating performance.
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.
ADS holders will have no direct voting rights with respect to the shares represented by the ADSs. They will beare 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. Therefore, there are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with them. For example, the Joint Stock Companies Law and our charter require us to notify shareholders no less than 30 days prior to the date of any meeting and at least 7050 days prior to the date of an extraordinary meeting to elect our Board of Directors. Our ordinary 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.
ADS holders 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 youADS holders the notice of such meeting, voting instruction forms and a statement as to the manner in which instructions may be given by ADS holders. To exercise their voting rights, ADS holders must then instruct the depositary how to vote the shares represented by the ADSs they hold. Because of this additional procedural step involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of the shares and we cannot assure ADS holders that they will receive voting materials in time to enable them to return voting instructions to the depositary in a timely manner. ADSs for which the depositary does not receive timely voting instructions will not be voted.
Given the above, we cannot provide any assurance that holders and beneficial owners of ADSs will (i) receive notice of shareholder meetings to enable the timely return of voting instructions to the depositary, (ii) receive notice to enable the timely cancellation of ADSs in respect of shareholder actions or (iii) be given the benefit of dissenting or minority shareholders' rights in respect of an event or action in which the holder or beneficial owner has voted against, abstained from voting or not given voting instructions.
See also "—Recent Russian legislation changedFailure to comply with requirements on the approach towards disclosure of certain information about ownership of the ADSs, including in some cases beneficial ownership of theon ADSs and a failure to provide such disclosureADS holders may restrict your ability to vote."
ADS holders may be unable to repatriate distributions made on the shares and ADSs.
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. The ability to convert rubles into U.S. dollars is subject to the availability of U.S. dollars in Russia's currency markets. Although there is an existing, albeit limited by size, market within Russia for the conversion of rubles into U.S. dollars, 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 a limited market for the conversion of rubles into foreign currencies outside of Russia and limited market in which to hedge ruble and ruble-denominated investments.
ADS holders may be subject to Russian regulatory restrictions.
Prior to the amendments to the Russian securities laws introduced in 2011, a depositary bank could be considered the owner of the shares underlying the ADS, and as such could be subject to the mandatory public tender offer rules, anti-monopoly clearance rules, governmental consents or reporting requirements in respect of acquisition of shares and other limitations contemplated by Russian law. The amendments to the Russian securities laws introduced in 2011 provide that a depositary bank is not an owner of underlying shares, and as such, these requirements should apply to ADS holders.
ADS holders may be unable to benefit from the United States—Russia income tax treaty.
Under Russian law, dividends paid to a non-resident holder of the shares generally will be subject to Russian withholding tax at a rate of 15%. The tax burden may be reduced to 5% or 10% under the United States—Russia income tax treaty for eligible U.S. holders; a 5% rate may potentially apply for U.S. holders who are legal entities owning 10% or more of the company's voting shares, and a 10% rate applies to dividends paid to eligible U.S. holders in other cases, including dividend payments to individuals and legal entities owning less than 10% of the company's voting shares. However, according to the recent amendments to the Tax Code, U.S. holders will only be able to utilize the 5% reduced rate through tax reimbursement procedures, as the tax agent is required to use the baseline tax rate established by the code or the applicable tax treaty, whichever is appropriate. See also "Item 10. Additional Information—E. Taxation—United States—Russia Income Tax Treaty Procedures."
The Russian tax rules in relation to ADS holders (that would affect U.S. holders) are characterized by significant uncertainties and limited interpretive guidance. Recent amendments to the tax rules have clarified the status of the ADS holders as beneficial owners of the income from the underlying shares by establishing that the custodian holding the depo account with the shares underlying the ADSs acting as the tax agent and determines amounts of the withholding tax based on the information about the ADS holders and their tax residency status as provided by the program depositary. However, the application of the baseline tax rate for ADS holders and any double tax treaty relief is available only if the tax treaty residence of the holder is provided to the custodian along with the other information prescribed by the Tax code. In relation to ADS holders such information is to be provided by the ADS holders to the depositary, who relays it to the custodian, who acts as the tax agent and withholds the taxes when making transferring the dividends to the depositary. It is currently unclear how the depositary will collect the necessary information from ADS holders. Thus, while a U.S. holder may technically be entitled to benefit from the provisions of the United States—Russia income tax treaty, in practice such relief may be difficult or impossible to obtain. See also "Item 10. Additional Information—E. Taxation" for additional information.
Capital gain from the sale of shares and ADSs may be subject to Russian income tax.
Income received by a foreign company from the sale, exchange or other disposal (assuming that such income is not related to a permanent establishment of a foreign company in Russia) of shares (participation interest) in an organization in which over 50% of the assets consist of immovable property located in Russia, as well as financial instruments derived from such shares, is treated as income derived from a source in the Russian Federation and is subject to withholding tax at a rate of 20%. However, gains arising from the disposition of the securities which are traded on an organized stock exchange are not treated as Russian-source income, and should not be subject to taxation in Russia.
The amount of such income is typically determined as the sales price of shares (participation interest). However, if documentary support for the acquisition cost of the shares (participation interest) is available, the tax may instead be assessed on the basis of the difference between the sales price and the acquisition cost (including other related costs) if documentary evidence of such costs is submitted
to the tax agent. The Russian Tax Code also establishes special rules for calculating the tax base for the purposes of transactions with securities. However, an exemption applies if immovable property located in Russia constitutes more than 50% of a company's assets and the securities are traded on a foreign stock exchange. The determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an on-going basis and the relevant Russian legislation and regulations in this respect are not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia does not currently and will not constitute more than 50% of our assets as at the date of the sale of ADSs by non-residents.
Where the ADSs are sold by legal entities or organizations to persons other than a Russian company or a foreign company or an organization with a registered permanent establishment in Russia, even if the resulting capital gain is considered taxable in Russia, there is currently no mechanism under which the purchaser will be able to withhold the tax and remit it to the Russian budget.
Under the United States—Russia income tax treaty, capital gains from the sale of shares and/or ADSs by eligible U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (the term "fixed assets" is used in the Russian version of the treaty) were to consist of immovable property located in Russia.
The taxation of income of non-resident individuals depends on whether this income is received from Russian or non-Russian sources. Russian tax law does not give a definition of how the "source of income" should be determined with respect to the sale of securities, other than that income from the sale of securities which takes place "in Russia" should be considered as Russian source income. As there is no further definition of what should be considered to be a sale "in Russia," the Russian tax authorities have a certain amount of freedom to conclude what transactions take place in or outside Russia, including looking at the place of the transaction, the place of the issuer of the shares, the location of the registrar recording the transfer of legal title to the relevant securities or other similar criteria.
Non-residents who are individuals are taxable on Russian-source income. Provided that gains arising from the disposition of the foregoing types of securities and derivatives outside of Russia by U.S. holders who are individuals not resident in Russia for tax purposes will not be considered Russian source income, then such income should not be taxable in Russia. However, gains arising from the disposition of the same securities and derivatives "in Russia" by U.S. holders who are individuals not resident in Russia for tax purposes may be subject to tax either at the source in Russia or based on an annual tax return, which they may be required to submit with the Russian tax authorities. See also "Item 10. Additional Information—E. Taxation."
The lack of a developed practice relating to share registration system in Russia and other countries where we operate may result in improper record ownership of our shares, including the shares underlying the ADSs, and other problems connected with the rights attributed to the relevant shares such as dividend payments.
Ownership of Russian joint stock company shares (or, if the shares are held through a nominee or custodian, then the holding of such nominee or custodian) is determined by entries in a share register and is evidenced by extracts from that register. Currently, the central registration system in Russia is under development. Starting fromSince October 1, 2014, share registers of all joint stock companies shall beare maintained by independent licensed registrars. Regulations have beenwere issued regarding the licensing conditions for such registrars, as well as the procedures to be followed by both companies maintaining their own registers and licensed registrars when performing the functions of registrar, however companies are no longer able to maintain the registers themselves. It is also not clear what criteria should be appliedNevertheless, in defining the independencepractice registrars tend to have relatively low levels of such a licensed registrar.capitalization and insufficient insurance coverage.
On December 7, 2011 amendments to the relevant legislation were adopted, substantially reforming the registration system by introducing the CSD. In the course of this reform of the share
keeping system, numerous different depositaries with accounts in the registers of companies are expected to bewere replaced by a single central depositary, whose primary function would beis the custody of shares in all major companies. These changes became effective on January 1, 2012 and are currentlystill being implemented. On November 6, 2012, FSFM officially appointed the National Settlement Depositary as the central depositary. Since the central depositary opened its account in MTSMTS' register in March 2013, all the other custodians are restricted from opening their accounts in the register. Currently the central depositary is the only custodian with an account in MTS' register and other custodians hold custodial accounts with the central depositary.
In addition, certain amendments to the Civil Code of the Russian Federation entered into force on October 1, 2013 regarding the transfer and restitution of securities that are aimed at protection of rights of security holders and on September 1, 2014 regarding the regulation of legal entities and their corporate governance. ItHowever, a centralized share registration system is however unclear how these new provisions willcurrently undergoing a reform in Russia, therefore transactions in respect of a company's shares could be applied.improperly or inaccurately recorded, and share registration could be lost through fraud, negligence, official and unofficial governmental actions or oversight by registrars incapable of compensating shareholders for their misconduct. This creates risks of loss not normally associated with investments in other securities markets.
In addition, on July 6, 2012The National Securities and Stock Market Commission of Ukraine, by its decision No. 391 "On procedure of payment of dividends by a central depositary was introduced in Ukraine. Such central depositary is to hold the shares of alljoint stock company" dated April 12, 2016 stated that joint stock companies in Ukraine. The methods ofmight carry out dividend payments was also changed: accordingeither through the depository system of Ukraine or directly to shareholders. The specific method of the dividend payment is determined by a relevant decision of the general shareholders meeting with respect to the new rulesentire issue of securities of the joint-stock company transfers dividends to the CSD through the operating account at the special processing center in order to enable the central depositary make the onward transfer to the parties eligible to receive dividends. The changes came into force on October 12, 2013 and could affect the timing of dividend payouts.
joint stock company. The Regulation No. 591 of the National Bank of Ukraine "On amendments to Certain Legislative Acts of the National Bank of Ukraine" that entered into force on September 23, 2014 andwas prolonged by the corresponding regulations of the NBU (the latest regulation expired on December 2, 2014June 8, 2016). The regulations set the restriction on a number of operations in foreign currency, including repatriation of dividends to the foreign investor. On December 1, 2014,
According to the National BankNBU Board Resolutions No. 342, 386, 410 "On Resolving the Situation in the Money and Foreign Exchange Markets of UkraineUkraine" adopted ain 2016, key currency restrictions have been re-extended until introduction of new regulation (Resolution No. 758)resolutions of the NBU. The dividends may be repatriated with effect from December 3, 2014, which extendedcertain limitations. The Resolution of the applicationNBU dated November 22, 2016 continued gradual mitigation of certaintemporary restrictions on the currency control restrictions, including the above-mentioned repatriation of dividends (exceptmarket, by expanding opportunities for the dividends on securities traded on stock exchange)clients of resident banks to March 3, 2015. The restriction terms were later prolonged till June 3, 2015, which may adversely affect our cash flow and results of operations.purchase foreign currency in the interbank market.
See also "—Recent Russian legislation changedFailure to comply with requirements on the approach towards disclosure of certain information about ownership of the ADSs, including in some cases beneficial ownership of theon ADSs and a failure to provide such disclosureADS holders may restrict your ability to vote."
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 U.S. securities laws. In addition, it may be difficult for you to enforce, in original actions brought in courts in jurisdictions outside the United States, liabilities predicated upon U.S. securities laws.
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 our shares and 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.
We have not independently verified information we have sourced from third parties.
We have sourced certain information contained in this document from third parties, including private companies and Russian government agencies, and we have relied on the accuracy of this information without independent verification. The official data published by Russian federal, regional and local governments may be substantially less complete or researched than those of more developed countries. Official statistics may also be produced on different bases than those used in Western countries. Any discussion of matters relating to Russia in this document must, therefore, be subject to uncertainty due to concerns about the completeness or reliability of available official and public information. In addition, the veracity of some official data released by the Russian government may be questionable. In 1998, the Director of the Russian State Committee on Statistics and a number of his subordinates were arrested and subsequently sentenced by a court in 2004 in connection with their misuse of economic data.
Because no standard definition of an average monthly service revenue per user ("ARPU"), average monthly usage per user ("MOU") or churn exists in the telecommunications industry, comparisons between certain operating data of different companies may be difficult to draw.
The methodology for calculating subscriber numbers, ARPU, MOU and churn varies substantially in the telecommunications industry, resulting in variances in reported numbers from that which would result from the use of a uniform methodology. Therefore, comparisons of certain operating data between different telecommunications companies may be difficult to draw.
The adoption of new IFRSs may affect our reported financial results and financial position.
Accounting standards under IFRS may change over time. The cost of implementation and compliance with new standards are hard to predict, however they may be significant for the company. Implementation of and compliance with new accounting standards by the Group could have a material adverse effect on the Group's business, results of operations, financial condition and prospects.
See also Note 2 to our audited consolidated financial statements.
Item 4. Information on Our Company
A. History and Development
Mobile TeleSystems CJSC ("MTS CJSC") our predecessor, was formed in 1993. The founding shareholders included MGTS and three other Russian telecommunications 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%. Sistema currently owns 51.46%48.94% of our share capital (53.46%(50.03% excluding treasury shares). See "Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders."
Our legal name is Mobile TeleSystems OJSC,Public Joint Stock Company (MTS PJSC) and we are incorporated under the laws of the Russian Federation. Our head office is located at 5 Vorontsovskaya Street, Bldg. 2, Moscow 109147, Russian Federation, and the telephone number of our investor relations department is +7 495 223-2025. The address of our incorporation is 4 Marksistskaya Street, Moscow 109147, Russian Federation. We
maintain a website at 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 authorized agent for service of process for any suit or proceeding arising out of or relating to our shares, ADSs or the deposit agreement.
MTS PJSC is the new legal name of Mobile TeleSystems Open Joint Stock Company (MTS OJSC) registered on July 1, 2015 in order to comply with the regulations of Chapter 4 of the Civil Code of Russian Federation (as amended). MTS OJSC was created on March 1, 2000, through the merger of MTS CJSC and RTC CJSC, a wholly owned subsidiary. 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 ADSs on the New York Stock Exchange (the "NYSE") under the symbol "MBT." Each ADS represents two underlying shares of our common stock. Prior to May 3, 2010, each ADS represented five shares of our common stock.
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. 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. In 2003 through a number of purchases we acquired a 100% stake in MTS Ukraine for RUB 11,872 million. Since JulyStarting from 2007 until 2015, we have operated under the MTS brand in Ukraine. In 2015, as part of our strategic partnership with Vodafone, we introduced Vodafone brand in Ukraine.
In August 2004, we acquired a 74% stake in Uzdunrobita, the largest wireless operator in Uzbekistan, for $126.4 million (RUB 3,693 million) in cash. We acquired the remaining 26% stake in June 2007 pursuant to a put option agreement for $250.0 million (RUB 6,481 million) in cash. In May 2006, we started operations under the MTS brand in Uzbekistan. In July 2012, we suspended providing services in Uzbekistan per the order from the State Agency for Communications and Information ("SACI") of Uzbekistan on the temporary suspension of the operating license of Uzdunrobita for a period of 10 business days which was subsequently extended to three months. On August 13, 2012, the Tashkent Economic Court granted the petition of the SACI to withdraw all operating licenses of Uzdunrobita. Simultaneously various Uzbek government agencies claimed multiple violations by Uzdunrobita, which having passed through numerous court hearings resulted in heavy penalties which Uzdunrobita has been unable to satisfy. Uzdunrobita has submitted its application initiating self-bankruptcy procedures to relevant Uzbek court. On April 22, 2013, the Tashkent Economic Court declared Uzdunrobita bankrupt and initiated six month liquidation procedures, which we understand to be still in place following several extensions.procedures. As a result, we lost control over the subsidiary and deconsolidated Uzdunrobita. In July 2014 the disputes between us and Republic of Uzbekistan were resolved. The parties signed the Settlement Agreement and according to its terms all mutual claims were eliminated. Furthermore, a new mobile operator, UMS, was established by governmental authorities of Republic of Uzbekistan. On September 24, 2014, an ownership interest of 50.01% in UMS was transferred to us as an incentive for reentrance into the country by the State Unitary Enterprise "Center of radio communications, radio broadcasting and television," the second shareholder of an operator, on behalf of the Republic of Uzbekistan. We started operations in Uzbekistan in December 2014. On August 5, 2016, we sold our 50.01% stake in UMS to the State Unitary Enterprise "Center of radio communications, radio broadcasting and television."
Please see "Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations" regarding recent suspension of our services in Uzbekistan and "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Uzbekistan."
In two separate purchases in June and November 2005, we acquired 100% of BCTI, the leading wireless operator in Turkmenistan, for $46.7 million (RUB 1,343 million) in cash. Since October 2006,
we have operated under the MTS brand in Turkmenistan. On December 21, 2010, the Ministry of Communication of Turkmenistan suspended our primary operating license and we ceased providing mobile telecommunications services in Turkmenistan. In August 2012, we restarted our mobile communication operations in Turkmenistan via MTS-Turkmenistan and resumed providing services for subscribers who did not cancel their contracts. Since October 1, 2012, we resumed our operations in Turkmenistan entirely and started entering into contracts with new subscribers. See "Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—The inability of MTS-Turkmenistan to sustain its operations in Turkmenistan on commercially acceptable terms or at all may adversely affect our business, financial condition and results of operations."
In September 2007, we acquired an 80% stake in International Cell Holding Ltd., a 100% indirect owner of K-Telecom, the leading wireless operator in Armenia, for €260.0 million (RUB 9,142 million), and entered into a call and put option agreement initially valid until 2012 (and later extended until 2016) for the remaining 20%. K-Telecom operates in the GSM-900/1800 standard, covering the entire territory of Armenia. It historically operated under the VivaCell brand, and was re-branded as VivaCell-MTS in September 2008.
In October 2009, we acquired a 50.91% stake in Comstar, a leading fixed line operator in Russia, from Sistema, and subsequently increased our ownership interest to 61.97% (or 64.03% excluding treasury shares) in December 2009 and to 70.97% (or 73.33% excluding treasury shares) in September 2010 through a voluntary tender offer. On December 23, 2010, the extraordinary general meetings of shareholders of Comstar and MTS approved a merger, of Comstar and MTS, which was completed on April 1, 2011. As a result, Comstar ceased to exist as a separate legal entity and MTS became the legal successor of Comstar in respect of all its rights and obligations.
Prior to April 1, 2011, Comstar operated in both the Moscow and other fixed line communications markets, offering voice telephony, broadband Internet and pay-TV, operator interconnect and other services to its subscribers. After April 1, 2011,As of now we continued, and still continue to provide these services. Among ourOne of Comstar subsidiaries iswas MGTS, Moscow's incumbent fixed line operator with "last mile" access (the final phase of delivering connectivity from a communications provider to a customer) to approximately 96% of the households in Moscow.
In 2011, we completed the re-branding of Comstar with our main MTS brand. MGTS a former subsidiary of Comstar, continues to provide services under its own brand.
In 2009, we started to develop our sales and distribution network both organically and through the acquisition of several national and regional retail chains. We organized our retail operations under a wholly owned subsidiary, Russian Telephone Company ("RTC"). RTC handles all functions relating to our retail operations, including the management of points-of-sale, the purchase and sale of handsets and accessories and subscriber enrollment at our retail outlets.
In 2010, 2011Between 2009 and 20122014 we acquired controlling stakes in various regional fixed line operators as we are determined to develop broadband Internet through regional expansion.
In April 2013, MTS, through its wholly-owned subsidiary,we acquired a 25.095% stake in MTS Bank for 5.09 billion rubles ($163.5 million as of April 3, 2013) through an additional share issuance by the bank. The transaction was concluded in accordance with the termsAs of an indicative offer between MTS, MTS Bank and Sistema. MTS and MTS Bank have also concluded a profit-sharing agreement pursuant to which MTS and MTS Bank would realize 70% and 30% of the proceeds from the MTS Dengi (MTS Money) project, respectively. The MTS Dengi project was launched by MTS and MTS Bank in 2013 and is aimed at providing customers throughout Russia with a variety of payment tools, including credit cards, near-field communications-enabled SIM cards and PoS (point-of-sale) credit. In December 2014, we increased31, 2016 our interest in MTS Bank from 26.3% to 27.0% through participation in an additional share issue of MTS Bank.
Table of Contentscomprised 26.6%.
In December 2014, we acquired controlling stakes in Penza-GSM, SMARTS-IvanovoSMARTS- Ivanovo and SMARTS-Ufa, operating in Penza, Ivanovo and the Bashkortostan Republic, respectively. The acquired
companies hold rights to use 900 and 1800 MHz radio frequencies within the regions mentioned. The acquisition enhances our spectrum resources in the above mentioned regions. The purchase price comprised of cash consideration and a deferred payment, payable in 18 months after the acquisition date.
In April 2014, we acquired a 10.82% stake in OZON, Holdings Limiteda leading Russian e-commerce company, through the purchase of OZON Holdings Limited's additional share issuance for RUB 2,702 million ($75 million). The cooperationmillion. Cooperation with OZON makescreates new distribution channels available to us.us through its extensive online retail platforms.
In December 2015, we have completed the acquisition of NVision Group and its subsidiaries for RUB 11.2 billion. Through this transaction, we have obtained proprietary rights over our billing systems which will allow us to reduce the time-to-market for new products and better manage billing and IT-related expenses. NVision Group is also one of the largest system integrators and complex IT solutions providers in Russia.
In September 2016, we acquired controlling stake in Smarts-Yoshkar-Ola, a company, operating in the Republic of Mari El and holding rights to use 1800 MHz radio frequencies. The acquisition enhances our spectrum resources in the Republic of Mari El.
We spent in total RUB 92,59986,149 million in 20142016 for network development in Russia and the other countries where we operate, which included RUB 74,24355,538 million in cash expenditures on property, plant and equipment, and RUB 18,35630,611 million for the purchase of intangible assets.assets (thereof RUB 2,598 million for acquisition of 4G licenses in Russia). We expect to spend approximately RUB 8580.0 billion (excluding potential capital expenditures for acquisition of 4G or 3G licenses) in 20152017 for the on-going roll out of Long-Term Evolution ("LTE") networks throughout Russia, and enhancements to 3G networks, continued deployment of our Gigabit Passive Optical Network ("GPON") in Moscow and Moscow Region, maintenance capital expenditures, replacement of outdated equipment of MGTS, as well as preparation for 3G roll-out in Ukraine, maintenance capital expenditures in Armeniaintroduction and development of network monitoring and controlling systems, further build out of 3G networks in Ukraine, maintenance capital expendures in Turkmenistan and capital expenditures for resuming activity in Uzbekistan.Armenia. We plan to finance our capital expenditures primarily through operating cash flows, and to the extent necessary, through additional external financing. The actual amount of our capital expenditures for 20152017 may vary depending on subscriber growth, demand and network development, as well as currency volatility, vendor terms and the availability of external financing. The capital expenditure estimate for 20152017 excludes expenditures that may be made in connection with acquisitions or new licenses.acquisitions. A breakdown of our capital expenditures in 20142016 by country is set forth below. For the first quarter of 2015 and continuing into the second quarter, our principal capital expenditures have related and will continue to relate to the build-out of our network and GPON project which we have financed through operating cash flows.
We spent RUB 1,9375 million, nilnill and 2,755 million and RUB 2,755 million in 2012, 20132016, 2015 and 2014, respectively, for acquisitions of subsidiaries, net of cash acquired.acquired from third parties. In addition, in 2015, we spent RUB 9,446 million, net of cash acquired, for acquisition of subsidiaries under common control.
Russia
We spent RUB 86,16276,383 million in 20142016 for network development in Russia, including RUB 69,34548,160 million in cash expenditures on property, plant and equipment, and RUB 16,81728,223 million for the purchase of intangible assets.assets (RUB 2,598 million thereof for acquisition of 4G licenses).
Ukraine
We spent RUB 4,2107,483 million in 20142016 for network development in Ukraine, including RUB 3,1765,559 million in cash expenditures on property, plant and equipment, and RUB 1,034 million for the purchase of intangible assets.
Turkmenistan
We spent RUB 1,084 million in 2014 for network development in Turkmenistan, including RUB 997 million in cash expenditures on property, plant and equipment, and RUB 871,924 million for the purchase of intangible assets.
ArmeniaTurkmenistan
We spent RUB 1,142448 million in 20142016 for network development in Armenia,Turkmenistan, including RUB 724421 million in cash expenditures on property, plant and equipment, and RUB 41827 million for the purchase of intangible assets.
Armenia
We spent RUB 960 million in 2016 for network development in Armenia, including RUB 559 million in cash expenditures on property, plant and equipment, and RUB 401 million for the purchase of intangible assets.
Uzbekistan
In 2014 our capital expenditures in Uzbekistan were not significant and totaled to RUB 0.6 million.
Belarus
MTS BelarusWe spent RUB 3,534874 million in 20142016 for network development in Uzbekistan, including RUB 2,319838 million in cash expenditures on property, plant and equipment, and RUB 1,21536 million for the purchase of intangible assets. The subsidiary in Uzbekistan was sold in August 2016.
Belarus
MTS Belarus spent RUB 3,182 million in 2016 for network development, including RUB 2,679 million in cash expenditures on property, plant and equipment, and RUB 503 million for the purchase of intangible assets. We do not include the capital expenditures of MTS Belarus in our capital expenditures described above as its results are not consolidated in our financial statements.
B. Business Overview
We are a leading telecommunications provider in Russia and the CIS, providing a wide range of mobile and fixed line voice and data telecommunications services, including data transfer, broadband, pay-TV and various value-added services, as well as selling equipment and accessories. According to AC&M Consulting, we are the largest provider of mobile cellular communications services in Russia and the second largest in Ukraine in terms of mobile subscribers. According to our own estimates, we are also the largest provider of mobile cellular communication services in Armenia in terms of mobile subscribers.
As of December 31, 2014,2016, we had a mobile subscriber base of approximately 98.8104.6 million (approximately 74.680.0 million in Russia, 20.220.9 million in Ukraine, 2.1 million in Armenia and 1.7 million in Turkmenistan and 0.2 million in Uzbekistan,Turkmenistan), which is an increase of 4%3% compared to December 31, 2013.2015. As of December 31, 2015, we had a mobile subscriber base of approximately 101.4 million (approximately 77.3 million in Russia, 20.4 million in Ukraine, 2.1 million in Armenia and 1.6 million in Turkmenistan, which is an increase of 3% compared to 98.7 million as of December 31, 2014.
We are also the largest operator in the Moscow residential broadband market in terms of subscribers, with a 29%32% market share as of December 31, 2014,2016, based on TMT consulting data. Our revenues for the year ended December 31, 2014,2016, were RUB 410,758435,692 million, an increase of 3.1%2.1% from the year ended December 31, 2013.2015. Our revenues for the year ended December 31, 2015, were RUB 426,639 million, an increase of 3.9% from RUB 410,678 million for the year ended December 31, 2014. Our net income for the year ended December 31, 2014,2016, was RUB 51,82248,450 million, a decreasean increase of 35.1%2.2% from the year ended December 31, 2013.2015. Our net income for the year ended December 31, 2015, was RUB 47,404 million, a decrease of 8% from RUB 51,496 million for the year ended December 31, 2014.
Russia is our principal market, both in terms of subscribers and revenues. For the year ended December 31, 20142016 approximately 91% of our revenues came from operations in Russia; approximately 8%
6% of our revenues came from operations in Ukraine; and approximately 1%3% of our revenues came from operations in other countries, respectively.
As of December 31, 2014,2016, approximately 75%76% of our mobile subscriber base was in Russia and approximately 20% was in Ukraine. According to AC&M-Consulting, as of December 31, 2014,2016, we had a 31% and 34%36% market share of total mobile subscribers in Russia and Ukraine, respectively.
The table below sets forth our total mobile subscribers as of the end of the last five years:
Period | Subscribers(1) | Subscribers(1) | ||||||
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2010 | 103.3 | |||||||
2011 | 101.1 | (2) | ||||||
2012 | 95.8 | (3) | 95.8 | (2) | ||||
2013 | 94.7 | (4) | 94.7 | (3) | ||||
2014 | 98.8 | 98.6 | (2) | |||||
2015 | 101.4 | (2) | ||||||
2016 | 104.6 | (2) |
In 2012, we ceased to provide mobile cellular communications services in Uzbekistan as all operating licenses of our subsidiary, Uzdunrobita, were withdrawn by the State Agency for Communications and Information of Uzbekistan on August 13, 2012. We resumedrestarted our operations in Uzbekistan in December 2014. As of December 31, 2014 through new entity, UMS. In August 2016 we gained a subscriber base of 0.2 million.sold our 50.01% stake in UMS and ceased our operations in Uzbekistan. See "Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations."
In Turkmenistan, our primary operating license was suspended on December 21, 2010, and we ceased providing mobile telecommunications services in that country for two years. In 2012, our operating license was reinstated and as a result our operations in Turkmenistan were resumed. Our subscriber base amounted to approximately 1.7 million subscribers as of December 31, 2014.2016. For more information, see "Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—The inability of MTS-Turkmenistan to sustain its operations in Turkmenistan on commercially acceptable terms or at all may adversely affect our business, financial condition and results of operations."
According to AC&M-Consulting,our estimates, overall mobile cellular penetration in Russia was approximately 168.2%176% as of December 31, 2014,2016, which is a slight3% increase from 165.8%179% as at December 31, 2013. Mobile2015, which in turn was 11% increase from 168% as at December 31, 2014. According to GSMA Intelligence, mobile cellular penetration in Ukraine was approximately 132.2%136.3% as of December 31, 2016, which represents an increase, compared to 134.1% as of December 31, 2015 and 136.1% as of December 31, 2014 which is an increase from 124.3% as of December 31, 2013.respectively. According to our estimates, mobile cellular penetration in Armenia was approximately 118.0%119% as of December 31, 2014,2016, as compared to approximately 117.3%112.5% as of December 31, 2013.2015 and approximately 111.0% as of December 31, 2014. Mobile penetration in Turkmenistan was approximately
104.4% as of December 31, 2016, as compared to 100.8% as of December 31, 2015, and 104.3% as of December 31, 2014, which is a slight decrease from 105.4% as of December 31, 2013, according to our estimates.
Our consolidated mobile subscriber base increasedchanged insignificantly in the first two months of 2015.2017. Specifically, according to our estimates at March 1, 2015,2017, we had approximately 98.9104.3 million subscribers, including approximately 74.679.8 million in Russia, 20.220.8 million in Ukraine, 2.1 million in Armenia, and 1.7 million in TurkmenistanTurkmenistan.
MTS Belarus had approximately 5.22 million subscribers and 0.3a leading market share of 44.4% as at December 31, 2016, according to our estimates. As of December 31, 2015, according to our estimates, MTS Belarus had approximately 5.30 million in Uzbekistan.
subscribers and a leading market share of 45.5%. As of December 31, 2014 according to our estimates, MTS Belarus had approximately 5.31 million subscribers and a leading market share of 46.1% at December 31, 2014, according to our estimates. As of December 31, 2013 according to our estimates,
MTS Belarus had approximately 5.25 million subscribers and a leading market share of 46.7%. Belarus, a country with a population of approximately 9.5 million, had a mobile cellular penetration rate of approximately 124% as of December 31, 2014,2016, according to our estimates.
As of December 31, 2014,2016, we had mobile licenses to operate and commercial mobile operations throughout the entire territory of Russia with a population of approximately 146 million people, throughout the entire territory of Ukraine with a population of approximately 43 million people, throughout the entire territory of Turkmenistan with a population of approximately 5 million people and throughout the entire territory of Armenia with a population of approximately 3 million people and throughout the entire territory of Uzbekistan with a population of approximately 31 million people. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Failure to renew our licenses or receive renewed or new licenses with similar terms to our existing licenses could have a material adverse effect on our business and results of operations,"operations" and "—Failure to fulfill the terms of our licenses could result in their suspension or termination, which could have a material adverse effect on our business and results of operations."
In 2012, 2013 and 2014, we significantly expanded our operations in an effort to meet the challenges of our evolving markets and further the goals of our strategy set out in more detail below. Through our acquisition of a controlling stake in Comstar in October 2009, we have become a leading fixed line services provider in Russia.
We offer fixed line communications services in over 185 cities across Russia, covering a population of over 53 million people.
Our Moscow fixed line operations contemplate communications services provided through incumbent operator MGTS. Our Moscow fixed line operations included 3,403 thousand3.1 million unique residential subscribers as of December 31, 2014.2016. We are the largest operator in the Moscow residential broadband market, with a 32% market share. MGTS holds licenses and regulatory approvals to provide local telephony, DLD/ILD voice telephony, interconnect to other operators, Internet and data transmission and other services.
Our other fixed line operations in other cities include the following communications services: voice, data and Internet and pay-TV services for corporate and residential subscribers, as well as the provision of interconnect services to other communications operators and numbering capacity to their subscribers. As of December 31, 2014,2016, we had 3.73.0 million unique residential subscribers and, based on TMT consulting data, we are the largest operator in the Moscow residential broadband market, with a 29% market share.according to our estimates. Fixed line services are also provided in Ukraine and Armenia with digital telephony communications services, data transmission, Internet access and the renting of channels.
We have also continued to develop our proprietary sales and distribution network organically.
To maintain and increase our market share and brand awareness, we use a combination of print media, radio, television, direct mail and outdoor advertising, focusing on brand and image advertising, as well as promotion of particular tariff plans.
Business Strategy
Our key strategic goal is leadership in all markets of presence, delivering the best-in-the-market telecommunication experience to our subscribers, including high-speed Internet access at home and on the go, cable and satellite TV entertainment with access to best content portfolio and top quality mobile and fixed voice services. We do our best to be at the forefront of LTE development in Russia and CIS and we are focused on building the fastest and most reliable 4G wireless networks and providing the best service to our customers by bringing access to the connected world.
In order to achieve our goals to become a market leader in 2015telecommunications we are continuing to executedeveloped the new strategy in 2016, which is focused on digitalization is the progress of our "3D" strategy launched in prior year. Our new strategy envisions threeand evolved from "Data—Differentiation—Dividends" into "Data—Digital—Dividends." The decision to prioritise digitalization as our key areas of focus: Data, Differentiation, Dividends,focus is driven by worldwide movement towards the digital era. Digitalization creates new demands for market players, stimulates them to search for new approaches to interaction with clients, radically changes the ways companies act, their management methods and as
Tablecorporate culture.In this regard, we see perspectives, new points of Contents
described below, is a keyefforts which we can focus on to sustaining our leadership positions. The "3D" strategy expandsturn them into the points of growth and develops our strategic priorities and principles that we formulated in 2013.profitability.
We strongly believe that the evolution of our strategy and our approach to further development will enable us to stay at the forefront of the telecommunication industry in all markets of our presence, to provide our customers with best user experience, to be a valuable and credible business-partner, trustworthy and effective investment for our shareholders.
Implementation of the strategy 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.
We are a provider of wireless and fixed line communications services in Russia, Ukraine, Armenia, Uzbekistan, Turkmenistan and Belarus.
Subsidiaries
For a list of our major subsidiaries and our ownership percentages in these subsidiaries, see "Item 4. Information on our Company—C. Organizational Structure."
Network Infrastructure—Mobile Core
As of December 31, 2016 MTS Mobile core network in Russia includes the following nodes:
17 Serving GPRS Support Node/Mobility Management Entity (SGSN/MME) and Serving/Packet Data Network—Gateway (S/P-GW) nodes are used to handle packet data services.
16 Signalling Relay Function (SRF) nodes deployed on network for handling Mobile Number Portability (MNP) services.
The following network expansion and modernization projects were executed in the course of 2016:
MSC-S/MGW and S/P-GW nodes were expanded as a result of to voice and data traffic growth;
Services Offered
Network Access
We primarily offer mobile cellular voice and data communication services to our subscribers on the basis of various tariff plans designed for different market segments. In general, most of our tariff plans combine per minute usage charges, value-added services and, in some cases, monthly network access fees. See "Item 4. Information on Our Company—B. Business Overview—Mobile Operations—Tariffs."
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, 2014,2016, we had bilateral roaming contracts with 762794 wireless operators in 227228 countries, including 1416 regional operators in Russia. We continually seek to expand our roaming capability and are currently in negotiations with additional operators.
Value-Added Services
We offer various 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:
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• Intelligent call assistant | • Real IP | • VoD (Video on Demand) | ||
• Collect call | • WEB | • MTS-Books | ||
• Black List | • E-shop | • Location-Based Service ("LBS") | ||
• International Access Service | • APN remote access point | • Mobile banking | ||
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• MMS | • MTS-Tablet | |||
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We also provide many voice and SMS-based value-added services in cooperation with various content providers.
Internet Access
We offer GPRS services, enabling our subscribers to access the Internet, WAP and MMS in all of the countries where we operate. We also provide international data transfer roaming to our subscribers, enabling them to use various GPRS/3G based services while traveling abroad.
We also offer the MTS-Connect service, which allows our subscribers to get mobile Internet access through a GPRS/EDGE/3G/LTE/HSDPA/HSPA ("High Speed Packet Access") connection, using a
computer, PC-card and USB-modem. This service is available to our subscribers in Russia and Ukraine and in more than 217 countries where we have GPRS roaming.
GPRS, EDGE services
We launched our commercial 2G network in 1994 based on GSM-900 technology. From 1999, we significantly improved our 2G network capacity based on GSM-1800GSM- 1800 technology. From 2001, we implemented wireless data communication services based on GPRS technology with download data rate up to 85.6 Kbit/s. In 2005, we modernized our GSM network to support EDGE technology and tripled data services rates. Today we continue supporting and modernizing our 2G network and we put the prime focus at the development of our 3G and LTE networks in order to provide our subscribers with
high-speed broadband wireless services. As of December 2014,31, 2016, we provided GSM, GPRS and EDGE services with nearly 34,000more than 38,000 2G sites over the geographic area with more than 94% of population of Russia.
3G Technology
In April 2007, the Russian Ministry of Communications and Mass Media announced the results of a tender for 3G licenses. We were one of three companies, along with Vimpelcom and MegaFon, whowe received a nationwide 3G/UMTS (Universal Mobile Telecommunications System) license in Russia. The license is valid throughtill May 21, 2017 and covers the entire territory of Russia.Russia with frequencies 1950-1965 MHz and 2140-2155 MHz . In accordance withFebruary 2017 the conditions set forth3G/UMTS license in Russia were prolonged by the tender documentation, we, VimpelcomFederal Service for Supervision of Communications, Information Technoligy and MegaFon were required to begin undertaking the construction of a 3G network over a period of two years from the time the license was received.Mass Media till May 21, 2022. We currently have commercial 3G networks launched in all regions of Russia with the exception of Crimea.
By the end of 2014,2016, we installed 34,22138,915 3G base stationssites throughout Russia. Together with 3G networks in Belarus, Turkmenistan and Armenia,
Starting from 2010, we operate 38,679 3G base stations. We have also obtained a permit to use the UMTS 900 standard in Moscow regions and Habarovskiy kray. As of December 31, 2014, our UMTS 900 network consisted of 1,363 base stations.
We have launchedimplement HSPA+ technology, which supports up to 21 Mbit per second data transmission speed. We haveIn addition, we launched second and third 3G carriers to improve capacity and activated Dual Carrier technology, which supports up to 42 Mbit per second data transmission speed in more than 25,00036,100 sites in Russia.
InSince 2011 we began to develop ause 3G femtocell network. Femtocells are small low-power wireless base stations in the licensed 2100 MHz spectrum. They connect to a mobile operator's network using residential DSL or cable broadband connections and can support multiple standard mobile devices. Femtocells deliver a strong signal and high-quality voice service to standard mobile devices in homes, small and large offices, outdoor public spaces, metro hotspots and rural areas. They allow for strong signal performance even in areas where MTS cellular coverage is limited or unavailable. A femtocell network also provides for high speed of data upload and download. In 2016 we launched offer of femtocells for consumers as B2C market segment. The total number of femtocells installed in Russia reached 3,1315,547 by the end of 2014.2016.
In February 2015, we obtained UMTS spectrum in 2100 MHz band in Ukraine through an open tender held by the National Commission for the State Regulation of Communications and Informatization. Upon completion of critical network upgrades, we started providing our own 3G services in major Ukrainian cities under the Vodafone brand starting from November 2015. HSPA+ (QAM64 and Dual Carrier) technology, which is available in our 3G network from the start, allows to download speeds up to 42 Mbit\s.
As of the end of 2016 we have almost 5000 UMTS-2100 base stations, offering 3G services in major Ukrainian cities and providing 3G network coverage to 54% of the population. We commenced commercial services using CDMA 450 technologyare planning to invest significant amount of funds in the expansion of 3G network coverage and capacity, as well as in accompanying network modernizations and upgrades in 2017 and later in conformity with license requirements and market demands.
Transmission network upgrades in Ukraine in November 2007. In July 2012, we launched Rev B CDMA technology services in the Kiev region2017 will include migration to 200 Gbps IP backbone, new Mobile Backhaul nodes and currently offer high-speed mobile Internet accessIP Microwave hops. Additional fiber-optic lines will be built locally to sustain growing traffic. We'll also continue replacing outdated 2G RAN and CS Core equipment, making our subscribers throughout Ukraine.network more efficient and ready for future implementation of LTE technology.
In October 2007, K-Telecom, our subsidiary in Armenia was allocated frequencies to offer 3G services throughout the entire territory of Armenia. The frequencies were allocated for a 10-year period. In 2009, we commercially launched our 3G network in Armenia. In 2010, we further expanded our 3G network to cover all towns and villages with a population of more than 2,000 people, and, as a result, 98% of inhabited areas are covered with our 3G outdoor services. In 2011, K-Telecom started to
provide telecommunications services based on HSPA+ technology in Yerevan, six northern regions and in some southern regions of the country. We plan to extendAt present HSPA+ technology with QAM64 and Dual Carrier features is available to all regionsalmost 99% of the country by the endArmenian population. In 2016 we launched 90 new 3G base stations. In 2017 we are planning to refarm of the next year. In 2012, we completed the replacementGSM 900 MHz spectrum and activation of outdated 2G radio equipment with SingleRAN technology. We are currently implementing an all-IP concept by providing IP interfaces and transmission link for all base stationUMTS-900 on selected sites which is the basic approach for future will increase 3G network coverage and capacity. We will also continue
improving indoor coverage and capacity upgrades in hot spots by implementing combined 3G\LTE networks.small cells and indoor solutions.
In Turkmenistan, we currently provide services based on 3G services with HSPA+ technology for business and private customers in Ashgabat only.all regional centers throughout the country. In 2015, we launched 49 3G services are available only to our corporate clientsbase stations. However, due to limited externallack of required Internet channel bandwidth which we lease from the state-controlled telecoms provider. HSPA+ (MIMO) and DC-HSPA services are also available in our 3G network.
In 2014, we started replacing outdated radio access network with SingleRAN technology, while providing IP interfaces and transmission links. In 2015, we plan to significantly expand ourtelecom service provider further 3G network in Turkmenistan launching 3G services in all major citiesexpansion depends on the resolution of the country.issue. In 2016 we launched 28 3G base stations.In 2017 we are planning to increase 3G network coverage provided the availability of the resources (long-distance transmission and Internet access capacity), leased from the state-controlled provider.
LTE Technology
In July 2012, the Russian Ministry of Communications and Mass Media announced the results of a tender for national-wide LTE-FDD frequencies. MTS is among the four companies, including Rostelecom, MegaFon, and VimpelcomVimpelCom which obtained LTE-FDD frequencies in 700, 800 and 2600 MHz bands.
In September 2012, we began offering LTE-based commercial services in Moscow region where we initially rolled out more than 800 LTE TDD sites. In December 2014, we had 2056 LTE TDD and the 3095 LTE FDD base stations in Moscow.region.
In 2014, we started DCS 1800 spectrum refarming to LTE and rolled out LTE-1800 network, while expanding LTE 800/2600 coverage. In February 2016 MTS won Russian Ministry of Communications and Mass Media tender for nationwide LTE-TDD license and obtained LTE-TDD frequencies in following band: 2595 - 2620 MHz for the whole territory of Russia, except Moscow region (obtained earlier). We plan to use LTE-TDD as a capacity layer to cope with increase of network utilization due to growth of data traffic. As of December 31, 2014,2016, we had 1453528,246 LTE sites in 7683 regions of Russia. In 2015,2017, we are going to further roll out LTE 800, 1800 and 2600 MHz frequency bands and implement LTE-Advanced with Carrier Aggregation and Voice over LTE services.
In Yerevan, the capital of Armenia, we commenced a commercial test of the first 4G/LTE network in December 2010. InSince 2014, we providedprovide full LTE outdoor coverage for two major cities—Gyumri and Vanadzor and expand LTE coverage in Yerevan was also considerably expanded.Yerevan. Circuit Switch Fall Back (CSFB) functionality is available to all our LTE subscribers.subscribers.In 2016 we launched 60 eNodeBs, expanding LTE network, which amounts as of the end of December 2016 to 320 sites. We've also tested the refarming of DCS-1800 MHz frequency band to LTE. We'll activate LTE-1800 services, using existing infrastructure, in conformity with local market demand.
Other Services
In addition to cellular communication services, we offer corporate clients a number of telecommunications 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 telecommunications services, as well as video conferencing.
Strategic Partnership with Vodafone
In October 2008, we announced a strategic agreement with Vodafone aimed at drawing on Vodafone's expertise in building and developing 3G networks and mobile broadband products, working with leading global equipment providers and deploying innovative client relationship management ("CRM") practices to enhance quality and further improve the efficiency of our operations. In addition, the agreement allows us exclusive access to a range of products, services and devices from Vodafone for our markets of operation in Russia, Ukraine, Turkmenistan and Armenia.
In 2015, the Group extended its strategic partnership agreement with Vodafone to introduce the Vodafone brand in Ukraine. In 2016 under the partnership, MTS Ukraine and Vodafone continued to roll out 3G networks and to develop a number of new services, which have proved extremely popular in Europe, including bundled offers, competitive long-distance international calls and worry-free roaming when abroad, in the Ukrainian market. Other areas of cooperation remain in full force.
Sales and Marketing
Target Customers
Our service model is based on the provision of services to differentiated levels of customers to meet the needs of distinctive customer segments as such segments have developed. Today, we are considered a mass-market mobile network operator with a wide range of subscribers in all customer segments. However, we are constantly expanding our brand eco-system which now also includes our fixed broadband business, satellite TV branch as well as banking and financial services division. As part of our core business strategy, we provide a wide range of products and services to thesevarious customer segments.
In 2014,2016, we continued to increase mobile broadband users base, develop mobile internet servicesfocused our efforts on developing our network quality, improving client service and strengthen our leadership in data by widening LTE coverage and establishing new quality and the highest speed of 4G internet. In terms of products, we shifted our focus from data options towards package deals integrating both voice and data (rangepromoting benefits of Smart tariffs).
Our marketing strategy in 2014 was greatly influenced by the introduction of mobile number portability (MNP) in Russia, and subsequent challenges that it presented. In order to retain customers and enhance their loyalty, we have launched a number of campaigns, such as "500 rubles on mobile internet," MTS Bonus re-launch, New Year campaign "Gifts from MTS" and a number of campaigns with special price offers. The goal of these marketing initiatives is to establish us as the best value operator and the most attractive data services provider in the Russian market.tariff plans.
Advertising and Marketing
Our advertising and public relations initiatives include:
The key themes for our advertising campaigns in 2014 were high2016 included promotion of "My MTS" mobile app providing customers with up-to-date information about their tariff and services and possibilities to manage it, "Smart" V&D (voice & data) tariff plans and offers, high-speed and quality 4G network, financial services, new technologies, devices and advantageous data-offers for active mobileinternet users, such as high-speed internet at advantageous prices.including households, which we target with our fixed broadband and satellite TV offers.
In order to build brand awareness and stimulate demand we currently use a combination of various advertising formats, including television, outdoor, newspaper, magazine and radio. Increasingly, we also advertise on-line and in mobile (with the help of traditional as well as innovative and novel projects) to market and promote our products and services to the broad audiences of current and potential customers. Additionally, our indirect advertising includes sponsorship of selected television programs, sport events, music shows and other popular events. We also coordinate the advertising policies of our dealers and partners, such as MTS Bank, to capitalize on the increased volume of joint advertising and preserve the integrity and high-quality image of the MTS brand. For example,
In line with our strategy to find new ways of effective communications especially in digital channel we developed a creative frameworkslaunched several unique promo sites, special activations with partner web-sites and visual style both for MTS Bankother format of online advertising (video bloggers, online games, tests, advertorials, product placements etc) in 2016. In addition, we focused on educating our customers by producing educational videos, communicating through social networks and MTS retail.promo sites.
To support our key directions we undertook the following initiatives in 20142016 in Russia and in selected other countries in which we operate:
Loyalty campaignsBrand and New Positioning
In 2016 we continued our positioning with the yeartagline "You Know That You Can" as well as our visual style, which symbolizes going beyond limits, boldness and authenticity through the use of dynamic craft-style visuals. However we elaborated MTS positioning by adding new business goals, which have led to development of the introductionthree communication focuses: network quality, client service and leadership. In order to convey the leadership, MTS used celebrities and public figures who achieved success and keep developing and opening new horizons.
Dance on TNT sponsorship—To support our positioning and leadership, we continued a productive cooperation with a major entertainment TV channel in Russia, TNT, and its super popular TV Show—"Dance on TNT"(campaign of MNP, we had2015 brought us two loyalty campaigns: "500 rubles for mobile internet"Effie Russia awards in categories "Media Idea" and "New Year gifts from MTS" (free mobile internet, calls and text messages) which prove that we value and take care"Engaged Community"). MTS launched a multimedia campaign based on the theme of our subscribers.the show. We also created special web-site dance.mts.ru devoted to the unique dancing content. In addition we re-launchedpartnered with a range of websites and created exclusive content (for example in partnership with entertainment web-site megogo.ru we offered users of the web-site to replace advertising with dance videos). We addressed all people interested in dance and made them believe that they can learn to dance.
Network Quality (4G and HD-Voice)
Network quality has always been one of our key priorities and an important attribute influencing net-promoter score of the company. We constantly strive to improve the quality of our network, we continue to develop the infrastructure and implement new technologies. To maintain and improve the perception of our network quality we continued communications support for our high-speed 4G LTE mobile internet as well as voice and internet coverage through advertising campaigns and localized and targeted placements to amplify the high-quality message. This year we launched three major campaigns: "4G is everywhere. 27 000 base stations—the widest 4G coverage network in Russia," "With MTS Bonusyou won't be lost! 30 000 base stations provide MTS clients with coverage all over Russia" and digital campaign "Super-fast connection." In addition, a unique TV campaign was conducted in Moscow, where MTS proved to provide the best network (according to The Federal Service for Supervision of Communications, Information Technology, and Mass Media).
Client Service
In 2016 we launched a new mobile app "My MTS" providing customers with up-to-date information about their tariff and services and possibilities to manage it. To support this product two federal TV campaigns were launched within a year.
Smart tariff plans
In 2016, we proceeded to communicate the benefits of Smart voice & data (V&D) tariff plans as a key focus in our product strategy and launched a new truly unlimited tariff plan—Smart Bezlimitische. This new tariff plan was targeted to the mass audience. In our advertising campaign we played with metaphor of huge spaces of the Russian territory and limitlessness of the tariff plan. The campaign was so effective and viral that MTS decided to continue autumn campaign with exact same product offer.
Mobile payment and financial services
The financial world is changing at a great pace. We understand the trends and pioneer various mobile financial services on the Russian market. In 2016, we further strengthened our positions on the
mobile payment arena and launched innovative mobile payment service "Koshelek MTS Dengi." This service allows users pay for products and services via their smartphone (any OS), token any bank card, transfer money etc. "Koshelek MTS Dengi" undergoes constant improvements leading to launches of innovative services in 2017.
We are very active in pushing forward innovative technologies such as NFC payments. In several cities in Russia, including Moscow, one can now pay for subway (metro) with a simple touch of their phone equipped with an MTS SIM-card.
In 2016 we also launched convergent offer "Use bank card MTS Smart Dengi and pay no monthly fee for Smart tariff plans" introducing new concept "Master Bonus" which became more applicablecard MTS Smart Dengi.
Devices
In 2016 the majority of devices-related communications campaigns were targeted at supporting the 4G-smartphones sales (of different price categories) in MTS retail. Most of these campaigns were developed and attractive for MTS Bonus users.
In 2014, the key to the subscriber base growth, MOU development and a dropimplemented in churn rate was tariff plan "Super MTS" (the most advantageous rate plan offering free calls within the network, no subscription fee required). 80% of mass-market sales is Super MTS related. We continued to support and develop Super MTS tariff plan, and attracted new users by promoting free calls among MTS subscriberscooperation with no need to top up the account, and discount on calls to subscribers of other operators.
Also, 2014 demonstrated a gradual transition from Super MTS to the range of Smart tariffs (a package of voice and data for active smartphone users at an affordable rate). We have introduced changes to the rate plan twice in order for it to stay the best product on the market. Both times, we have supported the re-launch with full-scale advertisement campaigns on TV, radio and online,major device vendors such as Samsung, Huawei, LeEco, etc. as well as with special projects that helpedGoogle.
Business to engage the core ofbusiness offers
In 2016, we retained and strengthened our target audience. For the first timeleadership in the history of the Russian advertising industry, we have filmed a full-scale advertisement campaign with the help of a smartphone only. Furthermore, we produced an anti-celebrity campaign by replacing media images with subscribers' selfies. Both, the development of the product and its vigorous promotion, have ensured an increase in awareness rate among the audience and supported the growth of Smart share in MTS portfolio. In 2015, Smart tariffs will become a key MTS product for the mass-market audience and the main focus in our advertising communication and retail.
In 2014, we continued to actively develop and promote data services in line with our overall strategy. These development efforts included the promotion of various data options, such as BIT and SuperBIT, which offer an unlimited mobile internet throughout Russia, and MTS Tablet, specifically designed and marketed for the tablet-user audience.
This year we introduced a new marketing approach for BIT to attract new users of mobile internet by offering unlimited mobile internet for a fixed daily fee instead of a monthly charge.
In 2014 we claimed for leadership at the corporate market via launching a full-scale image campaign across various communication channels, including TV, radio, online, print, airports and business centers.print. The advertisementadvertising campaign did not simply say "we're"we are the best" but showcasedfeatured our major corporate clients who talked about their experience working with MTS. Hewlett-Packard, DHL, Delovye LiniiOur clients, the leading companies representing various businesses (Aeroflot, Raiffeisenbank, TASS, Gulfstream security systems, INTOUCH Insurance), let us showcase their internal processes based on the MTS products and Home Credit Bank gave evidence toexplain how these solutions help them grow.
Another initiative was a series of video case studies with various corporate clients from different industries which were broadcasted on the use of various MTS b2b products helped them work more effectively and become more successful. The campaign showed excellent results. Manymajor business TV channels in the framework of the Business with High IQ series where MTS' clients shared their experience in implemented tailor-made telecom solutions provided by MTS.
Other products and services
availability of the MTS satellite TV through the whole Russia.
During 2014, we continued to reinforce our image as a leading retailer of mobile devices, including affordable MTS branded phones and full range of phones from all other vendors. The growth of smartphones in our subscriber base is still one of the key objectives, so we offered our customers exceptional device pricing, supported by a widely adopted practice of selling SIM-locked devices linked to our network (both MTS branded and devices from other vendors), attractive operator offers, such as mobile internet or rate plans, featuring mobile internet free of charge for a promo period, in order to effectively promote trial usage of mobile internet on smartphones and tablets. At the same time, we are actively promoting sales of tablets to increase their penetration into our customer base.
In 2014, residential MTS services were split into two streams:
Moscow is based upon GPON technology which allows us to provide the best Broadband and TV services compared to competitors. We establish the fastest broadband and the best Digital TV quality with GPON technology as Real Time Bidding.
Other regions with less modern technologies are more sensitive to competition, therefore "value-for-money" strategy is applied. Regions have various technologies and so far use city-based communication strategy with "value-for-money" approach.
We keep developing new products. The launch of communication strategy for MTS Satellite TV is in process.
In order to strengthen business and brand positions in Moscow and St. Petersburg we created special communication platforms for these regions considering the specifics of temper, mentality and values of Moscow and St. Petersburg citizens.
MTS Brand
In December 2008, we reached an agreement with Sistema Shyam TeleServices Limited ("SSTL") allowing SSTL to use the MTS brand in India. Sistema is the majority shareholder of SSTL with an ownership stake of 56.68%. Under the terms of the agreement, SSTL has had the right to use the MTS brand in India since March 2009, when we started receiving royalties of 0.16% of SSTL's revenues. The agreement is limited to SSTL using the MTS brand in India and does not contemplate our participation in SSTL's operations. The terms also stipulate that we will act as the brand guardian to ensure brand usage and marketing communications adhere to our brand guidelines.
In 2014, MTS for the third consecutive year has made it to the top 50 of the most reputable Indian brands according to Brand Equity report in Economic Times, as well as being recognized as one of the most innovative telecom brands in India and became one of the three best-identified brands in mobile internet provider category.
On October 1, 2010, we announced the launch of a refreshed logo which we believe better emphasizes the ideas of innovation and dynamism reflected in our recently introduced new slogan "a step ahead." Our logo and brand style refresh are among the goals of our brand positioning. The refreshed logo retains the same egg shape, but transforms the former logo into a 3D image of a white egg against a red background, which gives the logo a more dynamic and modern look and perception. This logo is aimed at graphically enhancing and modernizing the egg-shaped logo we have been using since 2006. In 2015, we created a new image and visual style of our brand and started a campaign to introduce it to public. We believe that our logo symbolizes our dynamic and innovative approach to
doing business and our stated mission of "creating the best client experience," and our slogan "you know you can."
In December 2010, we acquired Sistema Telecom from Sistema, which gave us control over the universal brand featuring the egg-shaped symbol against backgrounds of various colors used by us and our affiliates operating in the telecommunications sphere.
In February 2012, MBRD a subsidiary of Sistema, announced a change of its name to MTS Bank OJSC, having agreed to use MTS brand owned by us as a basis for further development. During 2012, we took an active part in MTS Bank's re- branding, as well as in product and advertising development. Two campaigns, image-oriented and product-oriented, were implemented. The image campaign, "For many years we helped you to share your dreams, now we help you to fulfill them" was organized to inform consumers that we now offer not only telecommunications services, but also bank services through MTS Bank. The product-oriented campaign was organized to promote our MTS-Dengi banking card.
A new retail format was developed for MTS Bank. It includes our corporate style and colors with a new corporate color, Turkish blue. The new format offers modern consumer-oriented approach. Particularly it influences the way the internal space of the bank offices is organized.
Global recognition
In 2014, MTS was included in the BrandZ™ Top 100 Most Valuable Global Brands 2014 ranking for the seventh consecutive year, as well as being recognized as the most valuable Russian telecom brand and made it to top 10 leading telecommunications brands in the world.
Sales and Distribution
We have historically enrolled the vast majority of our subscribers through a network of independent dealers that operate numerous points-of-sale in places with high consumer activity, such as supermarkets, shopping centers, air terminalstransportation hubs and markets. In 2009, in response to changes in the second half of 2010,independent retail market, we focused on improving our cooperation with certain of the large national and regional mobile handset retailers such as AltTelekom. We restored our cooperation and resumed working with Euroset in November 2010. In December 2012 MegaFon acquired a 50% stake in this retailer. Currently, Euroset is equally owned by our major competitors, MegaFon and Vimpelcom and remains a significant distribution channel for us. In 2013, we also entered into an agreement with Svyaznoy and our sales through its outlets increased significantly during the year. We also continuedbegan to develop our monobrandown proprietary retail chain in 2014network to more effectively control sales of SIM-cards and the vast majority of our subscribers were enrolled through it. See "Item 3. Key Information—D. Risk Factors—Risks Relatingprovide a platform to Our Business—Our failure to further developsell handsets and sustain our distribution network as well as the reduction, consolidation or acquisition of independent dealers may lead to a decrease in our subscriber growth rate, market share and revenues."
accessories. We organized our retail operations under a wholly owned subsidiary, RTC. RTC handles all functions relating to our retail operations, including the management of points-of-sale, the purchase and sale of handsets and accessories and subscriber enrollment at our retail outlets. It also requires us to secure optimal locations for our points-of-sale and monitors the effectiveness of their operations.
At the same time, in 2010, we focused on improving cooperation with a certain few of the large national and regional mobile handset retailers, such as Euroset and Svyaznoy, through which we had previously sold our products and serviced. In 2009, VimperlCom acquired a minority stake in Euroset, while in 2012, its ownership structure changed to accomodate an investment by Megafon, which equalized ownership with VimpelCom at 50/50. Throughout 2013 Euroset prioritized sales of its owners at the expense of MTS which impaired our ability to attract higher-quality subscribers and impacted profitability. Thus, MTS terminated its agreement with Euroset in May 2014.
In 2013, we entered into an agreement with Svyaznoy to distribute SIM-cards and our sales through its outlets increased significantly during the year. We also continued to develop our monobrand retail chain, and in 2014, we could boast of attracting over half of our subscribers through our own proprietary distribution network. In 2014, Svyaznoy was the second in sales volume among MTS sales channels. In November 2014, Svyaznoy experienced changes in its ownership which led to the deterioration of MTS sales and an increase in competitors' sales beginning April 2015. While volumes declined throughout 2015, as of August 2015, MTS entirely ceased sales at Svyaznoy outlets. MTS designed a range of activities including the development of proprietary distribution network and stimulation of sales growth in regional distributors channel to compensate for the losses in subscriptions and achieve sales targets. We now realize over 69% of our SIM-card sales through our own monobrand retail chain while our retail arm is an increasingly important component of our differentiation strategy and ability to offer affordable handsets and accessories to our customers. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Our failure to further develop and sustain our distribution network as well as the reduction, consolidation or acquisition of independent dealers may lead to a decrease in our subscriber growth rate, market share and revenues."
In 2015, we continued to implement our strategy in retail operations by increasing the efficiency and optimizing the structure of our proprietary sales and distribution network. We expect to continue enhancing the efficiency and structure of this sales network, including through the optimization of points-of-sale locations, with the aim of maintaining our market position.
Our proprietary distribution network consists of MTS-branded franchise points-of-sale (third-party dealers operating under the MTS brand) and MTS-branded points-of-sale owned by us. As of
December 31, 2013, we operated 4,034 points- of-sale, including 1,197 franchise points-of-sale and 2,837 points-of-sale owned by us.
In 2014, we have been focusing on optimizing the structure of our proprietary network in Russia. As of December 31, 2014, we operated 4,245 points- of-sale, including 1,326 franchise points-of-sale and 2,919 points-of-sale owned by us.
Our proprietary distribution network outside of Russia as As of December 31, 2014, consisted of 554 points-of-sale in Ukraine,2015, we operated 5,133 points- of-sale, including 5241,681 franchise points-of-sale and 303,452 points-of-sale owned by us, 97 points-of- saleus.
In 2016, we continued the development of our owned monobrand retail network by increasing a number of points-of-sale. MTS proved the significantly growth of points-of-sale as compared to main competitors. Thus, MTS is the largest retail network of the mobile operator in Armenia, 8Russian Federation. As of December 31, 2016, we operated 6,174 points- of-sale, including 1,839 franchise points-of-sale in Turkmenistan and 214,335 points-of-sale in Uzbekistan.owned by us.
For newly acquired mobile subscribers in Russia, we link commissions payable to a dealer on a monthly basis to the amount of revenues we receive during a halfsix- to one year12-month period from the date a subscriber is activated by a dealer. In addition, we have established caps, or a maximum commission amount payable to our dealers. The dealer commissions in Russia currently range between RUB 14080 and RUB 1,900 ($2.5 and $33.8)1,760 per subscription.
In Ukraine, we link dealer commissions to the tariff package sold, category of subscriber, subscriber revenue, the duration of a subscriber being active, city of subscription and status of the specific dealer.sales channel. We have different commission structures based on whether the subscriber is Prepaid Postpaid or a CDMA-only subscriber (i.e., subscribers using only mobile Internet services).Postpaid. For each new subscriber, a dealer typically receives a one-time commission payment at the time the contract is signed or monthly payments based on the revenue generated from the subscriber. The dealer commissions in Ukraine for Postpaid tariffs consist of one-time commissions of 89 RUB 143 to 107 RUB, 171 ($2.5 to $3), that depends on the region of activation and we are entitled to retain the full commission amount if the subscriber stops using our services within five months following the month of activation. In addition, we may also pay monthly commission in an amount ranging from 30% to 36% of the revenues generated by the subscriber for a period from 6 to 12 months depending on the region of activation and dealer's plan achievement. We also pay monthly dealer commissions of 223 RUB for high quality, long-term subscribers, as well as a monthly amount of between 7,808 RUB and 111,539 RUB to exclusive dealers who sell exclusively MTS Ukraine products and services. Prepaid tariff commissions for activation of a subscriber are linked to the territory where a dealer operates. The period during which we pay a dealer commission depends on our market share in that territory and may vary from 4 to 128 months, and equals to the amount of 50% of the subscriber's monthly invoice. We also pay monthly dealer commissions of RUB 357 ($6.3) for high quality, long-term subscribers, as well as a lump sum amount of between RUB 8,206 ($146) and RUB 74,923 ($1,332) to exclusive dealers who sell exclusively MTS Ukraine products and services. For CDMA subscriptions, we typically pay dealers a one-time fee of RUB 178 ($3.2) upon subscriber activation, as well as monthly payments up to 12 months based on the revenue generated by the subscriber.
We believe that our method for paying commissions provides dealers with greater incentives to add new subscribers, reduces the risk of dealer fraud and improves our cash-flow management.
Competition
The Russian wireless telecommunications market
Demand for wireless communications services in Russia has grown rapidly over the last 10 years due to rising disposable incomes, increased business activity, and declining prices due to intensified competition among wireless communications providers.providers and growth of new emerging consumers of telecom services such as IoT. As of December 31, 2014,2016, overall wireless penetration in Russia was approximately 168.2%174.3%, or approximately 240.3256 million subscribers, according to AC&M-Consulting.
The Russian market has achieved high levels of penetration in Moscow and St. Petersburg, where penetration reached approximately 214.8% and 218.2%, respectively, as of December 31, 2014, according to AC&M-Consulting. The average penetration rate in regional markets reached approximately 158.1% as of December 31, 2014, according to AC&M-Consulting.
Table of Contentsour estimates.
The following table sets forth key data on Russia's wireless telecommunications market as of the dates indicated:
| As of December 31, | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2011 | 2012 | 2013 | 2014 | As of December 31, | ||||||||||||||||||||
| (amounts in millions, except for percentages) | 2014 | 2015 | 2016 | ||||||||||||||||||||||
Subscribers(1) | 219.2 | 227.6 | 230.5 | 236.8 | 240.3 | 240.3 | 251.9 | 255.6 | ||||||||||||||||||
Subscriber penetration | 151 | % | 157 | % | 161 | % | 166 | % | 168 | % | 168% | 176% | 179% |
According to our estimates
According to AC&M-Consulting, we accounted for 37% and 34%Table of subscribers in Moscow, 28% and 28% of subscribers in St. Petersburg and 31% and 31% of total Russian subscribers as of December 31, 2013 and 2014, respectively. We believe that the decrease in our market share in Moscow, is the result of our effort to restructure our subscriber base to reduce churn by focusing on loyal subscribers rather than infrequent users of our mobile services.Contents
The primary mobile competitorsproviders in Russia include us, MegaFon and Vimpelcom,VimpelCom, each of which has effective national coverage in Russia. Competition is based on network coverage and quality, the level of customer service provided, roaming and international tariffs, local tariff prices 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 Business—We face increasing competition in the markets where we operate, which may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing policies."
The following table illustrates the number of wireless subscribers for each network operator in Russia as of December 31, 2012, 20132014, 2015 and 2014:2016:
| As of December 31, | As of December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operator | 2012 | 2013 | 2014 | 2014 | 2015 | 2016 | ||||||||||||||
| (amounts in millions) | (amounts in millions) | ||||||||||||||||||
MTS | 71.2 | 69.4 | 74.6 | 74.6 | 77.3 | 80.0 | ||||||||||||||
MegaFon | 62.6 | 68.1 | 69.7 | 69.7 | 74.8 | 75.6 | ||||||||||||||
Vimpelcom | 56.1 | 56.5 | 57.2 | 57.2 | 59.8 | 58.3 | ||||||||||||||
T2 RTK Holding (Tele2+Rostelecom) | — | 38.5 | 35.1 | 35.1 | 37.3 | 39.0 | ||||||||||||||
Others | 40.6 | 4.4 | 3.7 | 3.7 | 2.7 | 2.7 |
According to our estimates
MegaFon. MegaFon, which operates GSM 900/1800/1800, UMTS (3G) and LTE (4G) networks, is one of our primary competitors in Russia, and it is the second largest GSM wireless operator in Russia in terms of subscribers. According to AC&M-Consulting,our estimates, MegaFon had a subscriber base of approximately 69.775.6 million subscribers in Russia, which represented a 30% market share as of December 31, 2014, including 12.3 million subscribers in the Moscow license area. At December 31, 2014, according to AC&M-Consulting, MegaFon had a 31% market share in Moscow, a 36% market share in St. Petersburg and a 29% market share of total wireless subscribers in Russia.2016.
Due to the acquisition of Scartel LLC, which operates under the YOTA trade mark, in the fourth quarter of 2013, MegaFon improved its position on data services market.
Vimpelcom.VimpelCom. In addition to MegaFon, we also compete with Vimpelcom,VimpelCom, which is the third largest GSM 900/1800/UMTS (3G)/LTE (4G) wireless operator in Russia in terms of subscribers.
According to AC&M-Consulting, Vimpelcomour estimates, VimpelCom had a subscriber base of approximately 57.258.3 million in Russia at December 31, 2014, including 13.7 million subscribers in the Moscow license area.2016. At December 31, 2014, according to AC&M-Consulting, Vimpelcom2016, VimpelCom had a 34% market share in Moscow, a 19% market share in St. Petersburg and a 24%23% market share of total wireless subscribers in Russia.
T2 RTK Holding. In February 2014, Tele2 and Rostelecom setting upannounced a merger which created a new federal operator.wireless provider. The license portfolio of the new company is covering entire Russian territory,covers all Russia which allows rollingeffectively permits the roll out of federal-scale networks. Besides,Although the operator haslacks GSM 900/1800 or 2G frequencies in Moscow and Moscow region, the operator possesses sufficient frequencies to roll out 3G/3G and 4G networks in alleach federal districts as well as inregion, including Moscow. In August 2014,By the end of 2016, the number of regions penetrated by new federalcombined operator exceeded 60.65. According to AC&M-Consulting,our estimates, Tele2 had a subscriber base of approximately 35.139.6 million in Russia and 15% market share as at December 31, 2014.2016.
The most important event for operator was the launch of 3G/4G network in Moscow region in October 2015. The operator's services are now available on the territory where 97% of Moscow Region residents live. In 2016, Tele2 have actively rolled out 3G and 4G networks, launched new tariffs, options and services which enabled to provide customers with services similar to those of the market leaders.
Other Operators. The number of subscribers of other operators is about 3.72.4 million customers as of December 31, 2014.2016.
The Ukrainian wireless telecommunications marketmarket:
The history of mobile communications in Ukraine began in 1993. The first company in the mobile market of Ukraine was UMC (Ukrainian Mobile Communication), afterwards it became MTS Ukraine. In 1997, the mobile operator Kyivstar launched services under GSM 900/1800 standard. While Astelit, another GSM 900/1800 standard operator and joint venture between Turkcell İletişim Hizmetleri A.Ş. and local Ukrainian shareholders, began operations in 2005. The two largest wireless telecommunications providers in Ukraine (in terms of subscribers) are MTS Ukraine and Kyivstar who share 82%sharing 81.0% of the market, with 34%36.0% and 44%45.0%, respectively, as of December 31, 2014,2016, according to AC&M-Consulting. The competitive environment inofficial financial and operational reports of operators.
In Ukraine, changed after Vimpelcom Ltd., a Bermuda holding company, completed the acquisitionwe compete primarily with Kyivstar, which provides services to approximately 26.1 million subscribers as of VimpelcomDecember 31, 2016. Kyivstar offers wireless services using GSM 900/1800 and Kyivstar initiated earlier in 2010 pursuant to the restructuring of Vimpelcom. As a result, Vimpelcom Ltd. currently controls both Kyivstar and URS. Consequently, in October 2010, Kyivstar and URS each announced that they have started integrating their operating activities in Ukraine, including the re-branding of URS servicesUMTS technologies under the Kyivstar"Kyivstar" brand and introducing unified tariffsfixed line services by the fiber-to-the-building technology ("FTTB") under the brand "Kyivstar Home Internet." Astelit offers services in GSM 900/1800 and a common system for client relationships management.UMTS standards under the "lifecell" brand.
In 2014, all operatorsAugust 2016 MTS Ukraine has launched new Prepaid tariff plans under Vodafone brand with greater volumes than before: "Vodafone Red XS," "Vodafone Red S," "Vodafone Red M," "Vodafone Red L" that operate throughout Ukraine and vary in value of included services and monthly fees. Moreover, there is a new voice only tariff plan "Vodafone Light+." Also, there are new tariffs for Internet of Things "Vodafone IoT." They are represented by 6 tariff plans: "Vodafone IoT M," "Vodafone IoT L," "Vodafone IoT 3G S," "Vodafone IoT 3G M," "Vodafone IoT 3G L," "Vodafone IoT 3G XL." Moreover, there are new "Vodafone Red S+," "Vodafone Red M+" and "Vodafone Red L+" — special tariff plans that are proposed for subscribers, who buy smartphones under Vodafone brand.
In 2016 MTS Ukraine has launched new unique services—Vodafone TV, Vodafone Books and Vodafone Music.
In April 2016 Kyivstar has launched new Prepaid tariff plans. There are voice only tariff plans: "Talks," "Talks +" and Voice and Data tariff plans: "Online," "Online +," "Online Extra," In November 2016 Kyivstar has launched new tariff plans with obligatory daily payments"All together" for mobile network, home Internet and withTV.
In January 2016 there was a more detailed regionalization. However, MTS Ukrainerebranding of Astelit: Life:) became Lifecell. In November, 2016 Lifecell has kept for subscriberslaunched new tariff plan "3G+ Freedom." It is the principle "pay per use" for servicesfirst flat-rate tariff in Ukraine.
Despite the ongoing economic crisis as well as complex and unpredictable situation in the tariff plan "Prosto Super." Also, MTSeastern Ukraine, was the first to provide unlimited intranet calls and mobile Internet since March 5, 2014our subscriber base increased in the "Smartphone" tariff plan. Tariff policies of all operators in Ukraine in 2014 stimulated data penetration and data consumption growth. In 2014, our annual2016 by 0.43 million subscribers. Our average price per minute (APPM) remained stable, but annualincreased by 1% RUB (increased by 9% UAH) YoY in 2016. ARPU increased by 2.6% RUB (increased by 9.8% UAH) and MOU decreasedincreased by 0.7% and 9% respectively, mainly due2% YoY (using the official average monthly rate, refined approach to political and economic reasons, more conservative spending behavior by customers.
The ongoing political and economic crisis in Ukraine had an impact on certain business indicatorsthe calculation of MTS Ukraine. Thethe average annual subscriber base decreased at the end of 2014, as a result of termination of operations in Crimea in October 2014 and the challenging and unpredictable environment in the east of Ukraine. However, we continue to focus on developing and marketing, providing superior customer service and positioning ourselves as offering the optimum price/quality proposition of voice and data services. For example, in February 2015, MTS Ukraine won in a tender allocating 3G licenses the second lot for the use of 1950-1965/2140-2155 MHz frequency bands. See "See "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in Ukraine—3G/UMTS License."base).
Overall wireless penetration in Ukraine in 2014 increasedQ4 2016 decreased to 132.2%131.8%, or approximately 59.356.1 million subscribers, as compared to 124.3%132.0%, or approximately 56.4 million subscribers, in 2013,Q4 2015, according to our estimates.
The following table shows the number of subscribers of the top mobile operators in Ukraine as of the dates indicated and the coverage area of MTS Ukraine and our competitors in Ukraine:
| As of December 31, | As of December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operator | 2012 | 2013 | 2014 | 2014 | 2015 | 2016 | ||||||||||||||
| (amounts in millions) | (amounts in millions) | ||||||||||||||||||
Kyivstar | 25.1 | 25.8 | 26.2 | 26.2 | 25.4 | 26.1 | ||||||||||||||
MTS Ukraine | 20.7 | 21.5 | (1) | 20.2 | (1) | 20.2 | 20.4 | 20.9 | ||||||||||||
Astelit | 8.0 | (1) | 9.2 | (1) | 10.3 | (1) | 10.3 | 10.6 | 9.2 | |||||||||||
Other | — | — | 2.6 |
Source: Subscriber information based on AC&M-Consulting data.operators' official financial and operational reports, taking into account the number of three-month active subscribers.
In Ukraine, we compete primarily with Kyivstar, a GSM operator with approximately 26.2 million subscribers as of December 31, 2014. Kyivstar offers wireless services using GSM 900/1800 technologies under the "Kyivstar" brand and fixed line services by the fiber-to-the-building technology ("FTTB") under the brand "Kyivstar Home Internet." Astelit offers services in GSM 900/1800 standards under the "life:)" brand. In November 2014, it got new mobile network code 7, but has not used it yet.
The Armenian wireless telecommunications market
As of December 31, 2014,2016, overall wireless penetration in Armenia is estimated around 118%119%, or about 3.55 million active subscribers, according to Census results2016 published Socio-Demographic Data in Armenia (about 2.99 million population) and estimated number of subscribers of the competitors.
The following table shows theillustrates number of active subscribers as of the dates indicated and the coverage area of VivaCell-MTS and our competitors in Armenia:competitors—ArmenTel and Ucom, as of indicated dates.
As of December 31, | | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operator | December 31, 2013 | December 31, 2014 | Coverage Area | 2015 | 2016 | Coverage Area | ||||||||||
| (amounts in thousands) | | (amounts in thousands) | | ||||||||||||
VivaCell-MTS | 2,100 | 2,145 | Nationwide | 2,115.14 | 2,092.36 | Nationwide | ||||||||||
ArmenTel (Vimpelcom) | 694 | 777 | Nationwide | 843.95 | 881.18 | Nationwide | ||||||||||
Orange (France Telecom) | 624 | 632 | Nationwide | |||||||||||||
Ucom | 636.37 | 588.89 | Nationwide |
Sources: 2014 PSRC officially published reports.https://beeline.am; https://www.ucom.am; http://mts.am
As of December 31, 2014,2016, VivaCell-MTS reported total 2.152.09 million subscribers,3-month active subscriber base, reflecting annual increasedecrease of 2.2%1.08%, and about 60.4% market share.
In Armenia, we compete with ArmenTel, a fixed line and mobile operator wholly owned by Vimpelcom. ArmenTel holds a license in the GSM 900 standard for the entire territory of Armenia and a radio frequency permit for fixed line communications with CDMA equipment. Startingy-o-y. Market share from 2009, we also compete with Orange (France Telecom), which3-month active subscriber base was granted a GSM-900/1800 network license in October 2008.approximately 59%.
The Turkmenistan wireless telecommunications market
As of December 31, 2014,2016, overall wireless penetration in Turkmenistan was approximately 104,3%100.4%, or approximately 5.5 million subscribers, according to our estimates.
The following table shows the number of subscribers as of the dates indicated and the coverage area of MTS-Turkmenistan and our competitors in Turkmenistan:
As of December 31, | | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operator | December 31, 2013 | December 31, 2014 | Coverage Area | 2015 | 2016 | Coverage Area | ||||||||||
| (amounts in millions) | | (amounts in millions) | | ||||||||||||
MTS-Turkmenistan | 1.7 | 1.7 | Nationwide | 1.6 | 1.7 | Nationwide | ||||||||||
Altyn Asyr | 3.5 | 3.8 | Nationwide | 3.8 | 3.8 | Nationwide |
Source: Subscriber information based on our estimates.
MTS-Turkmenistan offers wireless services using GSM 900, GSM 1800, and UMTS 2100 technologies. As of December 31, 2014,2016, MTS-Turkmenistan had approximately 1.7 million subscribers and a 31.1%30.3% market share according to our estimates. In Turkmenistan, we compete with Altyn Asyr, a state-owned cellular operator which launched an LTE network in September, 2013 and was the only GSM/UMTS operator from December 21, 2010 till August 30, 2012.
The Uzbekistan wireless telecommunications market
The wireless telecommunications carriers market of Uzbekistan is characterized by rapidly increasing penetration rates. In 2014, overall wireless penetration in Uzbekistan decreased slightly from approximately 65.5% in 2013 to 64.8% in 2014, or approximately 20.1 million subscribers, according to our estimates and statistical data from the websites of Vimpelcom and TeliaSonera.
The following table shows the number of subscribers as of the dates indicated as well as the coverage area of UMS and our competitors in Uzbekistan:
Operator | December 31, 2013 | December 31, 2014 | Coverage Area | |||||
---|---|---|---|---|---|---|---|---|
| (amounts in thousands) | | ||||||
UMS(1) | — | 188 | Nationwide | |||||
Unitel (Vimpelcom)(2) | 10,518 | 10,593 | Nationwide | |||||
Ucell (Coscom)(3) | 8,496 | 8,574 | Nationwide | |||||
Others(4) | 631 | 740 | Nationwide |
Since December 1, 2014, UMS offers wireless services in Uzbekistan using GSM and UMTS technologies. Currently, there are 2 major GSM mobile network operators in Uzbekistan, besides UMS:
Tariffs
We customize our marketing efforts and pricing policies in each region of Russia and our other countries of operation by considering such factors as average income levels, the competitive environment and subscriber needs, all of which vary from region to region. Consistent with our marketing strategy, we have developed tariff plans to appeal to a broader market. The following table
shows the mix between Prepaid and other subscribers, such as contract and corporate customers, for Russia and Ukraine for the periods indicated:
| As of December 31, | As of December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2013 | 2014 | 2014 | 2015 | 2016 | ||||||||||||||
Russia | ||||||||||||||||||||
Prepaid | 74 | % | 70 | % | 67 | % | 67 | % | 55 | % | 49 | % | ||||||||
Contract and corporate | 26 | % | 30 | % | 33 | % | 33 | % | 45 | % | 51 | % | ||||||||
Ukraine | ||||||||||||||||||||
Prepaid | 92 | % | 91 | % | 91 | % | 91 | % | 91 | % | 91 | % | ||||||||
Other | 8 | % | 9 | % | 9 | % | 9 | % | 9 | % | 9 | % |
We are seeking to migrate our customers from advance payment plans to credit payment plans in an effort to stimulate ARPU and reduce churn. We endeavor to mitigate the risk of bad debt through the implementation of credit scoring algorithms that assess and help manage the risk of potential bad debt.
We currently have a unified system of tariff plans offered to subscribers throughout Russia. The unified system is aimed at achieving such benefits as clarity, simplicity and transparency for prospective subscribers by offering the same set of tariff categories throughout Russia. Under each tariff category, we offer different tariff plans with different connection fees, per minute call charges and a wide range of value-added services.
By advertising on a national rather than regional or local level, we have been able to streamline and reduce our advertising and marketing expenses through unified advertising campaigns throughout Russia. Furthermore, we are able to convey to consumers a more uniform perception of our brand and services.
Tariff Plans in Russia
Currently, each of our tariff plans in Russia combines per minute usage charges, value-added services in packages and different monthly network access fees (with the exception of the prepaid tariff plans) designed for different market segments. Our tariff plans are designed to be simple and appeal to particular segments of the market taking into account such factors as customer needs and consumption levels. Our tariff plans are currently divided into five categories—"Prepaid,categories — "Prepaid," "Smart," "Unlimited," "Data" and "Corporate"—with each category designed to target specific segments as follows:
have a subscription fee. After our customers subscribe to a particular prepaid plan, they have the option of switching to a different prepaid plan by sending an SMS message (USSD request) to a designated number.
Our tariffs vary from plan to plan. The description of tariffs and charges are, in each case, exclusive of VAT. As of December 31, 2014,2016, the per-minute tariff for local calls within the MTS network varied from zero per minute to RUB 1.482.54 per minute. Different rates apply to local calls to other networks and vary from RUB 0.510.72 per minute to RUB 2.803.39 per minute. Higher rates apply to domestic long distance calls and rates for international calls vary from RUB 2.120.85 per minute for calls to the CIS to RUB 59.359.32 per minute for calls to other parts of the world. Periodically, we run various promotional campaigns, either on the federal or regional level, in which we provide temporary discounts to our regular prices.
Tariff Plans in Ukraine
We offer unified tariff planstariffs throughout Ukraine and, in connection with our re-branding efforts in Ukraine during 2007 and 2008, we developed new regionalspecial conditions and segmented tariff plans that focus on the differentiation of subscribers' needs in the various market segments.segments under brands MTS Ukraine and Vodafone. Our tariffs in Ukraine are oriented towards the following three main segments: (i) Postpaid Business, (ii) Postpaid Private and (iii) and Prepaid which is further divided into voice regional tariffs and data regional tariffs and segmented tariffs.
MTS Ukraine has the following Postpaid tariff plans:
unlimited traffic for social networks; bundled minutes for calls and SMS/MMS to other networks in Ukraine and other 62 countries of the world. Also subscribers can use the same volume of the services in roaming as well as in Ukraine, when they have activated "Roam like home" service for an additional fee for 30 days. Moreover, there are new tariffs for Internet of Things "Vodafone IoT." They are represented by 6 tariff plans: "Vodafone IoT M," "Vodafone IoT L," "Vodafone IoT 3G S," "Vodafone IoT 3G M," "Vodafone IoT 3G L," "Vodafone IoT 3G XL." All tariffs offer mobile EDGE/3G Internet, CSD and SMS/MMS to other networks in Ukraine and 62 countries of the world. There is an opportunity to activate "Roam like home" service for 30 days, which gives profitable conditions in roaming for additional fee.
tariffs even for data roaming, special heavy duty SIM cards and consulting support services. We offer combined service packages with a wide range of included telecommunications services which are aimed to attract the segment of our corporate clients. We also offer discounts based on business customers' monthly usage and the amount of the invoice, and we also provide special handset subsidies under the condition where the buyers remain our customers.
MTS Ukraine has the following Prepaid tariff plans:
fixed daily payments, it is daily limited in net minutes' package and without daily limited GPRSMobile internet. To increase customer's life time value (LTV) these tariffs have the LTV principle at its core. Thus, after reaching the certain level of usage during the 30 days trial period upon either activation or migration, customers are provided with twice increased volumes of services without daily fee increase, which however implies them to change from a PPU principle to PPD (Pay-Per-Day) principal. All regions are grouped into several clusters depending on the MTS market share, population and region potential. Regional tariffs are based on the national tariff "Simply Super" but with price differentiations and volumes of free minutes within the MTS network, prices for other mobile operators, cheaper data prices and higher volumes of data included. Along with the regional tariffs, we offer an extensive list of segmented services for medium and heavy users, such as calls in MTS network or other networks, mobile internet, SMS, MMS, international calls and roaming to promote faster customer development and higher customer loyalty.
As of December 31, 2014,2016, the standard per minute tariff for calls to mobile network operators in Ukraine varied from RUB 0.891,12 per minute to RUB 4.823,35 per minute. Tariffs for calls to fixed lines in
Ukraine varied from RUB 1.791,12 per minute to RUB 4.823,35 per minute. The standard per minute tariff for calls within the MTS Ukraine network ranged from RUB nil per minute with limitations in minutes per day or month to RUB 4.282,23 per minute. International tariffs ranged from RUB 0.54nil per minute for calls to fixed lines of some countries in special servicestariffs under Vodafone brand within bundled minutes in Vodafone Red tariffs to RUB 285.42290 per minute in standard international tariffs for satellites. All tariffs for MTS Ukraine subscribers are quoted in hryvnias. The tariffs set forth above are translated from hryvnias to Russian rubles using the official exchange rate of 0.2802880.448273 hryvnias per RUB 1 as of December 31, 2014.2016.
Customer Payments and Billing
We enroll new prepaid subscribers in an advance payment program, under which the subscriber prepays a specific amount of money to use our services. As of December 31, 2014, 86%2016, 82% of our consolidated subscriber base was enrolled in the advance payment program and 14%18% used thea credit based system.
Our advance payment system monitors each subscriber account and sends an advance warning on the subscriber's mobile telephone when the balance on the subscriber's account decreases below a certain threshold.
Under the credit payment system, customers are billed monthly in arrears for their network access and usage. 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, 2014,2016, subscribers using the credit system of payment had credit limits of up to RUB 84.1568.38 million ($1.5 million) for key corporate customers in Russia. When a credit limit is reached, we block the telephone number until the balance is settled. There are no credit limits established for certain exceptional, high loyalty customers.
In 2007, we began to actively promote our credit payment system to our existing and new subscribers with the aim of migrating our subscriber base to the credit payment system from the existing advance payment system. In furtherance of this effort, during the period from 2009 to 2010, we introduced theWe provide "in full confidence" service, (instead of the "Credit" service), which allows our Prepaid customers who subscribe to this service to continue using services when the balance on the subscriber's account becomes negative. We assignAs of December 31, 2016, subscribers using the "in full confidence" service had a maximum credit limit of RUB 28.7 thousands. Customer service representatives can set individual credit limits to ourfor subscribers based on their payments and charge history (i.e., average balance usage) during the prior three months. As of December 31, 2014, subscribers using the "in full confidence" service had a maximum credit limit of RUB 28.7 thousands ($512). Customer service representatives can also set individual credit limits for subscribers. When the credit limit is reached, our billing system blocks the phone number until the balance is settled. Similar to the credit payment system, the subscribers are billed monthly in arrears for usage. The invoice, which can be delivered to the customer by e-mail, fax, regular post and Internet, should be settled within 24 days. If the invoice is not paid five to seven days prior to the due date, the system sends an additional reminder. The telephone number is blocked on the 25th25th day if the invoice is not settled.
In Russia, we offer our subscribers various ways to pay for our services, including cash or credit card, wire transfer, prepaid cards and express payment cards.
We completed implementation of theimplemented Foris billing system in Russia in 2008 and have already begun to experience increases in our overall efficiency and reductions in our expenses. In 2014, in Ukraine we performed migration of the part of our Postpaid customers to the Foris billing system which resulted in more opportunities in optimization of the process and provided services. We are planning to complete the transfer of all of our Post-paid customers in Ukraine to the Foris billing system by May 2015. In Armenia, we use the "Eskadenia" billing system.2008. The Foris billing system allows us to offer all of our subscribers a uniform and consistently high level of service. It also supports the monitoring of account usage in real time. In addition, the system provides us with the ability to offer flexible tariff plans with various usage discounts and subscriber loyalty bonuses. Furthermore, we are able to provide our corporate subscribers with more sophisticated customized billing solutions. For example, our corporate subscribers who use multiple phone numbers in different regions of Russia now receive a single invoice, whereas our previous billing system could not support such a service.
In Armenia, we use the "Eskadenia" billing system.
In Russia, we offer our subscribers various ways to pay for our services, including by cash or credit card, wire transfer, Prepaid cards and express payment cards.
In Ukraine, our Postpaid corporate and high-end subscribers receive an invoice which must be paid by a specified date. If the subscriber fails to pay, we block the phone number until the balance is settled. Our contract subscribers, who make an advance payment, are able to continue using our services once they reach a zero balance or until their accounts reach the credit limit specified in their service agreements. When the limit for such a subscriber is reached, we suspend our serviceservices until the balance is settled. We determine account terms and credit limits for each subscriber based on the subscriber's account age, payment history and tariff plan.
In Ukraine we provide services to our Prepaid customers for as long as the balance on their accounts remains above zero and/or the tariff plans allow to use free-of-charge services without having the positive balance on the account.
In Ukraine we offer our subscribers various ways to pay for our services, including by cash or card payment at the cash desk of the bank, through the recharge terminals, bank transfer from the current account (for legal entities), via internet and payment card of fixed nominal value.value
Customer Service
In order to attract and retain customers, we must ensure a high level of service at all points of customer assistance, care and billing. In each region where we operate, we have contact centers that provide customer service 24 hours a day, seven days a week. Contact centers provide different services to our clients through various channels (telephone, email, and fax)chat). Customer service representatives respond to various issues such as phone lock due to lack of payment, handset operation, roaming capabilities, service coverage and billing. A particular group of customer service representatives handles customer complaints and helps those who want to change their service terms. We use automatic systems and independent analysis for monitoring availability and customer satisfaction level of service in our contact centers regularly. We conduct outbound campaigns with the assistance of our employees in the outbound contact center and the laboratory of the customer relationship management inasmuch as we need to improve customer loyalty and promote our services.
After the completionIn 2016, a new channel for supporting our customers started — online chat on a web-site in several regions of the integration process of our fixed line business customerRussian Federation (except Moscow and St. Petersburg). "Marketing IVR" service any fixed line customer in Russia can now receive consultation and professional assistance in our contact center. Client serviceswas reformed within MTS Russian Federation for all customers. When calling the Contact Centre, customers are also organized for MGTS and MTS Bank customers at platforms of MTS contact centers. "Detsky Mir" and "MEDCI" are also served by MTS. The project MNP in MTS contact centers was organized for customers who want to take the advantage of mobile number portability using the leased line service.
We are continiously working to improve customer satisfaction by providing our clients the convenience and functionality of self-service systems (e.g., Internet-Helper, interactive voice response ("IVR") and Mobile Helper). For instance, Internet-Helper is a service that provides the customer the ability to view communication about his contract and personal information as well as the management of specific account data. In the IVR system, our customers can replenish their account at any time using their credit cards, as well asinvited to take advantage of Voice Call Back,offers of the company which correspond to their needs with respect to the consumption of data traffic and other services.
In November 2016, we started outsourcing call-center agents for the 1st line support for landline business customer, which will decrease our costs for the 1st line by 30%.
In 2016, a back-office group for claims service was centralized at one site. The number of agents has decreased by 30%. Procedures for these types of services were changed and decreased the average time of processing claims in 40%.
In 2016, we launched a new mobile application for Android and iOS. The application allows mobile customers to manage their services directly from their smartphones.
The total number of customer complaints relating to technical failures within the client notnetwork decreased by 8% year-on-year due to waitincreased efficiency relating to handling of such failures, automation systems for an answermonitoring customer complaints in the lineCRM and other measures. Currently, if there is a technical failure causing a decrease in the quality of call-center and requestservices, MTS necessarily informs customers about such failures via SMS, thereby eliminating the application of a call back. Thus, this system will call backcustomer with the same problem.
In April 2017, we plan to the client, when it is less loaded. Our customers can order all the information about tariffs andlunch new services by SMS through the IVR system. In 2014, all necessary tests of thebased on speech recognition system were successfully completed.
Currently, customer assistance is also available in 2,892 MTS-branded retail stores in Russia. We have a support hotline for our MTS-branded retail stores. The staffclients in IVR, a pilot project showed an ability to reduce the number of our stores can callcalls into the hotlinecontact center and get advice about our services. We can provide our clients withincrease the highest levelpercentage of service in ourcustomers who have their problems solved up 10%.
stores with the establishment of the claims processing center and the support line of single-brand stores. We also provide limited range of services In 2017, we plan to launch chat in our 1,315 franchise points-of-sale.mobile application, chat-bot system, which will solve customer questions without call-center agents.
In addition, we have a back-office center which is responsible for handling customer inquiries and helping to reduce the impact of technical problems and incidents on our customers. Moreover, we have established Siebel CRM, which helps us to develop an individual approach to our clients by consolidating all the information about them. In 2014, the registration of individual customer problems was introduced in CRM.This event helped us to solve problems of our customers more quickly.
In 2008, in Ukraine we launched a web portal and started to provide free access at special terminals in our sales offices for contract customers. Since 2009 wemade the customer assistance process more personalized by anticipating customer needs. We have further enhanced the quality of our customer service as a result of the complete integration of our IVRs and billing. In 2012, we made improvements to theWe have improved IVRs menu tothat enhance its utility. In 2013, weWe continued to work on the improvement and expansion of self-service channels for subscribers and we were focused on auditing and optimizing internal customer service business processes.
In 2010, in Ukraine, we launched an online "self-service" for our Prepaid customers and significantly increased the number of its users in 2011.subscribers. As part of online "self-service,""self-service" we continued developing "self- care""self-care" functions through the web and IVRs (which provide, among other things, details of the subscriber's account, tariff plan specifications, amounts charged on credit cards, management of on-line service and charge details for contract subscribers). We also developed special services, such as shortened phone numbers, for broadband users and premium customers who require assistance. We increased the number of services available to our customers in contact centers and started telephone outbound sales through an outsourced contact center.
In 2012, we significantly increased retention and cross- and up-selling activities in our contact centers, including interactive presentations by agents, the IVR system and launch of new paid services.centers. We also completed the process of simplifying and unifying customers care functions through our call centers. In 2012, we made improvements to our self-care channels, launchedhave a mobile version of the Internet Helper for smartphones.
In 2012, we restructured the customer services department in MTS Ukraine which allowed us to increase efficiency of the management of customer service business processes. We made the customer assistance process in Ukraine more personalized by anticipating customer needs. We maintain a history of subscribers' requests and personalize the IVR for each customer profile, which depends on individual ARPU, region and other parameters. Based on these parameters we calculate the customer lifetime value index, which we use to classify our subscribers, so that we can provide our priority customers with a wider range of services.
In 2013, we continued to work for improvement and expansion of our self- care channels. And we completely redesigned our IVR system and Web Chat and expanded the functionality and usability of Web Chat.
In 2013, we launched a new mobile application for Android OS. The application allows users to manage their account directly from their smartphones.
In 2016, we continued to develop operational CRM system. As a part of this process we have migrated from local network for contact center to cloud technologies. We started the process of implementing an operational CRM system and the process of renewal of ouruser friendly customer service (without strong standards) in contact center, technical platform.whereby we were awarded with a Gold Medal for Best Customer Service in the ContactCenterWorld—The Global Association for Contact Center & Customer Services. We have also changedlaunched gifts for waiting at IVR before connection with contact center representative. Start of operation under Vodafone brand caused great impact for customer service from 4th quarter of 2015 and will continue to have an even greater influence later.
In 2016, the approachmobile application for Android OS and iOS was developed, final completions of internal systems are carrying out. We performed equipment procurements within the New Contact Center project for Genesys platform implementation, which responds to subscriber differentiation. In 2013,all modern requirements in customer care. Also we finishedpaid the process of integration of our broadband subscribers into our systemconsiderable attention to the solution of customer service.questions from the first contact in the most short time. The solution of requests from the first contact grew from 76% to 82%, and more than 81% customers complaints are solved in 24 hours. The Interactive Voice Response system was updated according to needs of customers and now more than 71% of customers are solve their questions via the IVR. Internet requests servicing was provided not only in Facebook official group and web site, but also was expanded on all space of social media (Facebook, Vkontakte, Forums, Internet editions etc.).
In 2014, we continued to transform our call centers into effective channels for client relationship management. We focused on the implementation of operational CRM system and the renewal of the technical platform for our contact center.
In 2015,2017, we plan to run upgraded technical platform for contact centerfocus on the customer loyalty and start commercial use and development ofprocess automation. For that, we will launch mobile app, operational CRM system. Our main efforts will focus on reducing(Customer Relationship Management) and non-voice servicing channels within the cost of customer service.New Contact Center project. We will work on improvement of ourcontinue to simplify servicing processes, implement omnichannel customer service and reduce complaints handling period.
Network Infrastructure—Technology Strategy
Our technology strategy is formed in accordance with overall company's business strategy and intended to support the existing business operations, as well as to introduce new technologies allowing to launch new services in the future. Our technology strategy considers world technology trends in telecommunications.
The main focus of the technology strategy is Radio Access Network development by changing current standardsdeploying LTE networks in all available bands and by transferring fast growing user data traffic from 2G and 3G networks to LTE through different technological and marketing techniques. LTE deployment nowadays mainly utilizes 1800 MHz (76% of LTE rollout was LTE 1800 in 2016). We are planning to utilize all available frequency bands for LTE by 2020, including LTE 2600 TDD spectrum (Band 38 3GPP) which became available after winning the government auction in 2016.
Our technology strategy implies consistent innovative technologies introduction to reach high level of servicenetwork effectiveness: SON (Self Organizing Network) introduction in Moscow finished in 2016, SON tests for more customer sensitive,rest of Russia has started; end to end configuration management system (E2E CM) has launched for RAN, Core and Transport networks in 2016; Big Data driven projects for radio network planning has started in 2016, products will be launched in 2017.
We are looking forward to deploy IoT and 5G networks in future therefore enhancing the satisfaction of our subscriberswe started testing IoT and 5G solutions in the future.common with key infrastructure vendors in 2016 for better understanding key requirements and needs for following deployment.
Network TechnologyInfrastructure—Site Construction and Sharing
We launched our commercial 2G network in 1994, based on GSM-900 technology. From 1999 we significantly improved our 2G network capacity on the basis of GSM-1800 technology. From 2001 we implemented wireless data communication services based on GPRS technology with download data rate up to 85.6 kbit/s. In 2005 we modernized our GSM network to support EDGE technologyOctober 2014 MTS and tripled data services rates. Today we continue supporting and modernizing our 2G network, and we put the prime focus on the development of our 3G andVimpelCom has signed a contract about shared LTE networks in orderdeployment and operation. According to provide ourthis contract one shared LTE network should be deployed for servicing subscribers with high-speed broadband wireless services.of both companies.
Our 3G network, developed from 2009,During 2015 and 2016 scope of the projects has mainly reused our existing GSM infrastructureexpanded: shared networks are deployed in order to minimize 3G network roll-out time and decrease capital and operating costs. Initially we deployed UMTS-2100 technology and provided data rates up to 3.6 Mbit/s. In 2010 we implemented 3G/HSDPA technology to boost download data rates up to 14.4 Mbit/s. In 2011 we began to re-allocate available GSM spectrum and launched UMTS 900 in the UMTS-2100 restricted areas: in Moscow region and Khabarovsk region. In 2012 we improved the data services rate 3G network by up to 21 Mbit/s for the downlink using 3G/HSPA+ technology. From December, 2014 we activated second and third carriers on the 86%43 of our 3G sites to improve capacity, and launched ultra high-speed services, based on Dual Carrier (DC-HSPA+) technology, with download rates up to 42 Mbps in 73% 3G sites in85 regions of Russia.
The first commercialBy the end of 2016 MTS had 2,429 LTE FDDbase stations shared with VimpelCom in 20 regions and VimpelCom had 1602 LTE base stations shared with MTS in other 20 regions of Russia. Total amount of shared infrastructure nodes is 4,031 base stations servicing in 1800 MHz and 2600 network launched in Armenia was ours in 2010. In September 2012, we launched a commercial LTE TDD 2600 network in Moscow and in 2013 we started LTE FDD rollout in Russia in 2600 and 800 spectrum. In our LTE network we provide data services with a download data rate up to 75 Mbit/s, and up to 25 Mbit/s uplink. We implemented MIMO2x2, 4RxDiv and 64QAM technologies to maximize spectrum efficiency. Our LTE network meets requirements of 3GPP Rel.10 in line with available LTE customer equipment.MHz bands.
In 2014, we launched several LTE FDD Small Cells' pilot zonesaddition to network deployment investments and operational costs savings target architecture of the Site Sharing project includes frequency resources shared usage: by the end of 2016 networks in Moscowtwo regions of Russia run in shared 2600 band spectrum usage mode (MOCN concept). The area of MOCN implementation will be expanded in 2017 and St. Petersburg. We plan to rollout the LTE Small Cells in hotspots to improve user experience and upload traffic from macro. Also, Small Cells could be used for coverage improvement both, for indoor and outdoor.
In December 2013, we were allowed to re-allocate the existing 9002018 and 1800 MHz spectrumband will be shared as well in addition to UMTS-900 and LTE-1800 all over the Russia. Our strategy is to re-allocate available spectrum to the most efficient technology and provide competitive high-performance data services to our customers. In 2014, we started DCS 1800 spectrum refarming to LTE and roll out of LTE-1800 network, while also expanding LTE 2600/800 coverage. In second half of 2014 we performed several successful trials of Carrier Aggregation.2600 MHz band. We are planning to launch Carrier Aggregate onadd LTE TDD networks (3GPP Band 38) to a commercial LTE FDD network in 2015 and provide download data rates up to 225 Mbit/s.
In 2014, we launched an LTE-2600 Active RAN Sharing program with VimpelCom (trademark "Beeline") to jointly plan, develop and use LTE networks in Russia. Under the agreement, in 2014 - 2016, we will develop shared mobile data networks in 19 regions in Russia, while VimpelCom will construct networks in 17 regions. We expect this partnership to boost 4G/LTE expansion in Russia, creating a modern telecommunications infrastructure, which will expand 4G/LTE coverage and improve the performance of our networks. Besides it will give us investment and operational savings.Project scope starting from 2018.
Network Infrastructure and Frequency Allocation
We use switching and other network equipment supplied by Nokia Solutions and Networks, Ericsson, Huawei, Alcatel-Lucent, SumsungSamsung and other major network equipment manufacturers.
In the Moscow license area, we have been 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 and UMTS900 network. In 2011, we were allocated frequencies 2595-2620 MHz spanning 25 MHz for LTE TDD network deployment in Moscow and the Moscow region.
In St. Petersburg and the Leningrad region, we have been allocated frequencies spanning 2 × 9.6 MHz of spectrum in the GSM 900 frequency band (including 2 × 1.6 MHz in the E-GSM 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 different amounts of spectrum in the 900 MHz band for GSM 900 and UMTS networks and in the 1800 MHz band for GSM 1800 and LTE networks in almost every region of the Russian Federation.
We have been allocated frequencies 1950-1965 MHz, 2010-2015 MHz and 2140-2155 MHz in the UMTS core frequency bands spanning 2×15 MHz (for FDD mode) and 5 MHz (for TDD mode) for UMTS network deployment for the entire territory of the Russian Federation.
We have been allocated frequency bands 2540-2550 MHz and 2660-2670 MHz spanning 2 × 10 MHz and frequency bands 798. 5-806 MHz and 839.5-847 MHz spanning 2 × 7.5 MHz for LTE FDD network deployment for the entire territory of the Russian Federation. In addition, we have been allocated frequency band 2595-2620 MHz spanning 25 MHz for LTE TDD network deployment for the entire territory of the Russian Federation.
We have frequencies allocated to us for the operation of GSM 900 and GSM 1800 frequency bands in all regions of Ukraine. The radio frequencies allocated to MTS Ukraineus for the operation of GSM 900 span from 2 × 4.04.4 MHz of spectrum in CrimeaChernigov region to 2 × 5.8 MHz in the Nikolaev, Lugansk, Chernovtsy and Kirovograd regions and in Kiev. We also have been allocated frequencies spanning from 2 × 20.0 MHz in the Kiev region to 2 × 26.6 MHz in the Dnepropetrovsk region for operation of GSM 1800 base stations. In addition, we have been allocated frequencies spanning from 453.35-457.1 MHz and 463.35-467.1 MHz in the CDMA-450 core frequency and bands spanning 3 × 1.25 MHz for CDMA-450 network deployment for the entire territory of the Ukraine. In 2015, we were allocated frequencies1950-1965 MHz and 2140-2155 MHz for UMTS network deployment for the entire territory of Ukraine.
We believe that we have been allocated adequate spectrum in each of our license areas.
Network Infrastructure—Virtual Infrastructure
In 2016 VMware solution was chosen as a strategic platform for NFV (Network function virtualization) services deployment for all products in MTS Group.
The following projects have been launched in 2016:
IaaS (Infrastructure as a Service) pilot projects were executed in 2016, commercial servicing will be started in 2017.
A new multi-purpose module data-center construction has started in Nizhny Novgorod for future deployment of virtual platforms for telecommunication services and cloud services as well.
Network Infrastructure—Energy Infrastructure
The main target in Energy Infrastructure is to decrease operational costs for electric energy.
According to legislative acts of Russian Federation electric energy payment categories were introduced in 2012. This payment category can be chosen by a consumer in a case of introduction electric energy accounting system, which allows hourly monitoring of electric energy usage and reporting to energy company with accepted procedure.
Considering these conditions MTS has decided to deploy Electric Energy Accounting Automatic System (EEAAS). This trial projects of different EEAAS solutions were executed in different regions of Russia (Moscow, Nizhny Novgorod, Vologda, Saint Petersburg, Novosibirsk, Ekaterinburg and Republic of Karelia) in 2014-2015.
EEAAS deployment projects was accepted in 2016 based on the analysis of those trials and system implementation started in 2016.
Introduction of the EEAAS will allow us to:
Execution of this project results in decreasing electric energy payments: economy reached 21% in 2016 in regions where EEAAS solution has been deployed. We are planning to deploy EEAAS isolutions in all regions of Russia.
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. In Russia, we use special radio planning software supplied by Aircom International and MentumTEOCO Corporation to assess new sites so that the network design and site development are coordinated. This software can create digital cellular coverage maps of our licensed areas, taking into account the peculiarities of the urban landscape, including the reflection of radio waves from buildings and moving automobiles and supports all necessary technologies, such as 2G, 3G, LTE and LTE.Wi-Fi. To use these tools more effectively we purchase high quality 3D digital maps for more precise planning. 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 build-out.
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 the majority of these agreements being one 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. In areas where a suitable base station site is unavailable, we construct towers to accommodate base station antennas, mainly on leased plots of land. We anticipate that we will be able to continue to use our existing GSM 900 base station sites and to co-locate GSM 1800, UMTS 2100 and UMTS 900 base stations at some of the same sites. In 2014, the company2016, we continued to rollout LTE network as a priority by placingand started the large-scale development of LTE1800 network, the latter amounted to 78.1% of the newly installed LTE base stations on existing sites.
To provide high quality service to our subscribers in Russia, we launched a global network operation center ("GNOC") in Krasnodar in July 2012. The GNOC experts carry out the monitoring of network equipment in seven macro-regions of Russia around the clock. We have one more operation and maintenance centers in Moscow and Voronezh. 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.stations.
Network Monitoring Equipment
We constantly control and monitor the performance of our network, call completion rate and other major key technical performance indicators. We use 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 different 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.
WeTo provide high quality service to our subscribers in Russia, we have two network operation and maintenance centers: GNOC in Krasnodar and the locala global network operation center ("GNOC") in Voronezh.Krasnodar. The GNOC experts have the technical ability to monitor network problems and unusual situations online in 60 regional branches of MTS in Russia including the region "Moscow" around the clock. 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.
The GNOC in Krasnodar allows us to centralize such functions as monitoring and controlling of equipment, network planning and optimization, and also helps to solve incidents related to service interruptions. We expect thatThe GNOC will strengthenstrengthens our network's reliability and safety, as well as will createcreates the necessary conditions to launch and implement new technologies and network standards.
The GNOC expertsWe also have the technical ability to monitor network problems and unusual situations online in seven macro-regions of Russia including the macro-region "Moscow." The macro-region "Moscow" is being served by the GNOC from year 2014. It had been served by the local network operation center in Moscow before. The local operation and maintenance center in Voronezh which takes the form of outsourcing partnership with Nokia Solutions and Networks and is used for network monitoring in the 16 regional branches which had been included in macro-region "Center.""Center" before July 2016.
In November 2015, a Global Fixed Network Operation Center ("GFNOC") was launched in Nizhny Novgorod, thus completing the centralization process of the MTS mobile and fixed network management. The local networkGFNOC combined functions of monitoring and controlling the equipment in all 153 cities of Russia where MTS offers broadband Internet access, TV and fixed line telephony services. For the subscribers connected to these services the GFNOC acts as a single entry point for technical support. Under the GFNOC project a centralized unit was also set up which is responsible for the quality of the services provided to corporate customers with bundled packages of mobile and fixed communications.
With the Global Fixed Network Operation Center deployed, we put together all resources for management of the quality of provided mobile and fixed line voice services, data transmission via mobile and fixed networks, leased dedicated digital circuits and VPN channels and digital TV.
In 2016, we also opened satellite TV operation and maintenance center in Moscow, which is used for network monitoring in macro-region "Moscow."head-end station and satellite TV services.
Our networks in Ukraine, Turkmenistan, Armenia Uzbekistan and Belarus are monitored by our local operation and maintenance centers in each country. In addition to the monitoring of network performance, those centers analyze network quality parameters, provide troubleshooting, regular and extraordinary reporting to the management and our headquarters.
The handling of any significant network problems and outages is monitored and coordinated at our headquarters in Moscow, where we also manage the cross- functional coordination of our networks in all countries of operation.
Interconnect Arrangements and Telephone Numbering Capacity
We operate various types of communications networks, including mobile cellular, DLD/ILD and local fixed line and zonal fixed line networks.
Cellular operators must interconnect with fixed zonal, wireless, long distance and international telephone operators to obtain access to their networks and, via these operators, to the networks of other operators around the world. Cellular and fixed line operators must also obtain telephone numbering capacity to allocate to their subscribers. There are two categories of telephone numbers: "federal" 11-digit numbers (non-geographical numbering plan for cellular operators) and "local" seven-digit numbers (geographical numbering plan for fixed-line operators which can also be used as additional numbering capacity for mobile operators). In Moscow, both "federal" and "local" numbers
have been used in the 11-digit format since the beginning of 2011. We have entered into various agreements for the provision of local telephone numbering capacity with several local telecommunications operators in Moscow and in other regions of Russia and in Ukraine. We have also built our own local networks in certain cities within Russia (including Moscow) to provide local telephone numbering capacity to our subscribers. We are allocated federalFederal telephone numbering capacity is allocated by the government and we provide interconnect services to other operators on the zonal level in all regions of Russia. Our fixed line zonal and local networks in Russia are interconnected with other operators. Zonal/local interconnect typically entails payment of a one-time connection fee per point of interconnect (E1) and a usage charge based on minutes of traffic. Operators with a substantial market positionSubstantial Market Power may also charge a guarantee monthly usage fee in case traffic is less than 30 kmin per E1.
The Ministry of Communications and Mass Media has allocated special numbering codes for federal 11-digit telephone numbers on a non-geographical basis forto all the cellular operators. We believe that we havesufficient numbering capacity has been allocated sufficient numbering capacityto us for the development of our network. However, a combination of regulatory, technological and financial factors has led to the limited availability of local 7-digit telephone numbering capacity in Moscow and the Moscow region. Moscow's "495" code and the Moscow region's "496" code have already reached numbering capacity limits. As a result, the new "499" code was introduced in order to increase the Moscow numbering capacity, the "498"
"498" code was introduced to increase Moscow region numbering capacity and since 2011 "local" numbers have been used in Moscow in 11-digit format.
To meet subscribersubscriber's demand and provide for an adequate inventory of numbering capacity, we previously entered into contracts with local fixed line providers for allocation of numbering capacity to us. However, the Ministry of Communications and Mass Media subsequently took the view that numbering capacity assigned to one operator could not be rented to other operators. Accordingly, we have entered into arrangements whereby fixed line operators make their numbers available to our subscribers via agency contracts between the subscribers and us acting on behalf of such fixed line operators. Our right to use numbering capacity ranges from five years to an unlimited period of time. As a result of our merger with Comstar, we have decreased the use of local numbering capacity of other operators. As of December 31, 2014,2016, we had numbering capacity (federal and local) for approximately 27.8534.26 million subscribers in the Moscow license area.
To provide our subscribers in Russia with DLD/ILD services, we have interconnect agreements with national operators Rostelecom, MTT (an affiliate of Sistema until March 18, 2009), VimpelcomVimpelCom and other national transit operators. We have also built and operate our own DLD/ILD network, which allows us to interconnect directly to foreign operators and thereby decrease our interconnect costs. Most interconnect fees payable for connecting users of other operators' fixed line and wireless networks to our network are based on a one-time connection fee a monthly fee per point of interconnect and usage by minute which varyvaries depending on the destination called.
Russian legislation provides that fixed line operators with a substantial position in the market power cannot refuse to provide interconnect or discriminate against one operator in comparisonrelation to another, and the interconnect rates of operators with a substantial positionSubstantial Market Power are regulated by the government. See "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Regulation in the Russian Federation—Competition, Interconnect and Pricing" and "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.revenues and margins."
Interconnect and traffic transit between the networks of mobile operators in Russia occurs through direct channels connecting the switches of the different mobile operators within the same city; through the network of transit long distance operators, which connect the networks of different mobile operators in different cities;cities or through operators' proprietary long distance networks.our own DLD/ILD network. For domestic
long distance traffic transit we use our DLD/ILD network and networks of different national operators, including among others,others: MTT, Rostelecom and Vimpelcom.VimpelCom. For ILD traffic transit we primarily use our DLD/ILD network which is interconnected with more than 4740 international carriers, including, for example, France Telecom S.A. and Deutsche Telecom A.G.carriers. We also have an interconnect between the DLD/ILD MTS network and the ILD networks of our subsidiaries, MTS Ukraine and K-Telecom, in order to provide the transit offor international traffic.
In Ukraine, mobile operators are allocated numbering capacity by the NCCIR (National Commission for the State Regulation of Communications and Informatization). We believe that we havesufficient numbering capacity has been allocated sufficient numbering capacityto us in Ukraine for the development of our mobile network. We also believe that we have been allocated sufficient fixed line numbering capacity with respect to the cities in which we are developing our fixed line network.networks.
Handsets
Nearly all of our handset sales consist of tri-band GSM 900/1800/1900 and dual-band UMTS 900/2100 handsets, except for certain models in the low cost segment and touch-phones. 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. In 2013, we
launched LTE 800/800 and LTE 2600. In 2014, we launched LTE 1800 and activated current functionality in LTE devices. After network upgrade to support HSPA+ (21,6Mb/s) and DC-HSPA (43,2 Mb/s) in the territory of Russia all HSPA+ & DC-HSPADC- HSPA devices in the network increase their working speeds.
We generally do not offer handset subsidies in Russia but do offer them in Ukraine to a limited number of contract subscribers as well as modem subsidies for GSM and CDMA users. For the years ended December 31, 2012, 2013 and 2014, we provided net handset subsidies of RUB 168 million, RUB 120 million and RUB 67 million, respectively, in Ukraine.
In 2009, we substantially changed the strategy and structure of our retail operations by significantly expanding our proprietary sales and distribution network both organically and through the acquisition of national and regional retail chains. We organized these operations under RTC, our wholly owned subsidiary. From 2009, RTC, handlesour wholly-owned subsidiary, started handling all functions relating to our retail operations, including the purchase and sale of handsets and accessories and subscriber enrollment at our retail outlets. RTC has entered into arrangements with Sony, Nokia,Microsoft, Samsung, HTC, Alcatel, Fly, Philips, Huawei, ZTE and others to purchase handsets. In 2014,2015, we continued our cooperation with A-brand smartphone vendors and started our partnership with Google.vendors. We also offer an array of mobile telephone accessories. Since 2009 we have been successfully selling MTS branded phones and since 20132015 our main focus of MTS branded devices are LTE smartphones.
We offer fixed line communications services in over 185 cities across Russia, covering a population of over 53 million people.
Our Moscow fixed line operations incompass communications services provided through incumbent operator MGTS. Through MGTS, we own "last mile" access to approximately 4.13.9 million households in Moscow, excluding territory of New Moscow, representing approximately 91%95% of the overall number of households in Moscow, according to Direct INFO.our estimates. MGTS provides regulated and unregulated services, including:
Our other fixed line operations include the following communications services: voice, data and Internet and pay-TV services for corporate and residential subscribers, as well as the provision of interconnect services to other communications operators and numbering capacity to their subscribers. Based on TMT Consulting data, as of December 31, 2014,2016, we are the largest operator in the Moscow residential broadband market in terms of subscribers, with a 29%32% market share. We also operate in Ukraine and Armenia, where we provide digital telephony communications services, data transmission, Internet access and the renting of channels.Forchannels. For a list of the telecommunications licenses held by us, see "Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation and Ukraine—Licenses."
Customers and Services Offered—Moscow Fixed Line Operations
We provide fixed line communications services through our subsidiary, MGTS, which is the incumbent fixed line PSTN operator in Moscow. MGTS owns Moscow's PSTN infrastructure, including switches, a transmission network, underground ducts, and owns or holds leases to properties housing its offices and equipment.
As of December 31, 2014,2016, MGTS had approximately 4.153,8 million active lines in service, a cable network of over 93,24992,449 km, a fiber optic network of over 40,00039,374 km and 3,0932,250 payphones. Currently, MGTS has focused its efforts on the deployment of GPON, IP/MPLS technologies and an IMS core. The old SDH equipment is being removed which results in the decreased number of E1 streams, a reduction in the copper network and the respective extension of the fiber-opticfiber- optic network. MGTS also develops new services for IP TV, and MVNO as the convergent service for mobile and fixed telephony.
The total installed capacity of the telephone network reached 4.73.7 million numbers on the TDM area (Time Division Multiplexing) and 5.18 million numbers on the IMS area (IP Multimedia Subsystem) as of December 31, 2014.2016.
Residential subscribers accounted for approximately 82.0%83% of MGTS' total lines, corporates for 10.4%9% and public sector subscribers for 7.46%8%, as of December 31, 2014.2016.
MGTS holds licenses and regulatory approvals to provide, among others, the following services:
As the only licensed PSTN operator in Moscow, MGTS is considered a natural monopoly under Russian antimonopoly regulations. Consequently, substantial part of services provided by MGTS are
subject to governmental regulation. The Federal TariffAntimonopoly Service of the Russian Federation regulates MGTS' tariffs for voice telephony services provided to its PSTN subscribers, including monthly subscription fees, installation fees and local call charges. Operating revenuesRevenues from regulated services are accounted for approximately 56%49% of service operating revenues of our Moscow fixed line operations in 2014, 59%2016, 51% in 20132015 and 62%54% in 2012.2014. The percentage decline is connected with gradual growth of operating revenues from non-regulated services as a proportion of the overall operating revenues in 20142016, 2015 and 2013 as compared to 2012.2014. The Federal TariffAntimonopoly Service of the Russian Federation sets the tariffs MGTS can charge taking into account cost of services, network investment and a certain profit margin, and the current tariffs fully compensate MGTS for the cost of services provided to residential and government subscribers. According to Russian legislation, MGTS is allowed to petition the Federal TariffAntimonopoly Service of the Russian Federation for tariff increases upon certain conditions, such as inflation or increases in the cost of services. Historically, MGTS has petitioned the relevant Russian government agency for tariff increases once or twice per year. The Federal TariffAntimonopoly Service of the Russian Federation has permitted MGTS to increase its tariffs several times.
MGTS also provides a
number of unregulated services. According to Russian legislation, DLD/ILD services provided by licensed non-monopoly operators, public payphones, data transmission services, value-added services and a number of other services are not subject to tariff regulation. Among others, MGTS provides the following unregulated services:
MGTS isdoes not licensedhave license to provide DLD/ILD communications services directly to its subscribers but must route such traffic through a licensed DLD/ILD operator. As a result, DLD/ILD traffic originated by MGTS subscribers is carried either by us, with these services included in MGTS' monthly bill, or by other providers of DLD/ILD services, who bill MGTS subscribers directly or pay MGTS an agency fee for processing their bills.
The following table presents certain operating data for our Moscow fixed line operations as of and for the years ended December 31, 20132015 and 2014.2016.
Moscow fixed line operations | December 31, 2013 | December 31, 2014 | December 31, 2015 | December 31, 2016 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Installed telephone lines (000s) | 4.944 | 4.733 | ||||||||||||
Installed telephone lines on TDM (000s)(1) | 4,264 | 3,731 | ||||||||||||
Installed telephone lines on IMS (000s)(1) | 5,180 | 5,180 | ||||||||||||
Residential | ||||||||||||||
Number of subscribers (000s)(1) | 3.492 | 3.403 | ||||||||||||
Number of subscribers (000s) | 3,276 | 3,148 | ||||||||||||
CPP traffic (millions of minutes) | 1.269 | 954 | 722 | 526 | ||||||||||
ARPU (RUB) | 400 | 417 | 443 | 466 | ||||||||||
Corporate(2) | ||||||||||||||
Number of active lines (000s) | 776 | 746 | 691 | 654 | ||||||||||
Number of subscribers (000s) | 63 | 61 | 81 | 79 | ||||||||||
CPP traffic (millions of minutes) | 689 | 565 | 455 | 369 | ||||||||||
ARPU (RUB) | 15.552 | 14.553 | 11,817 | 11,559 |
MGTS' subscriber segments and the services provided to each subscriber segment are further described below.
Residential and corporate subscribers
MGTS provides basic regulated voice services to residential and corporate subscribers using its PSTN facilities and copper or optical "last mile" access. Tariffs for these services are established by the Federal Tariff Service.Antimonopoly Service of the Russian Federation.
In addition to basic voice services, MGTS provides its residential and corporate subscribers with digital telecommunications services, Internet, IP TV, MVNO mobile telephony and Internet and VPN deployment services, rental of high-speed communication channels, intelligent voice and various other services.
The following table illustrates MGTS' regulated tariff development in the period from JanuaryMarch 1, 2011,2013, to March 1, 2015:2017:
MGTS Regulated Tariffs | March 1, 2011 | March 1, 2012 | March 1, 2013 | March 1, 2014 | March 1, 2015 | March 1, 2013 | March 1, 2014 | March 1, 2015 | March 1, 2016 | March 1, 2017 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Residential(1) | ||||||||||||||||||||||||||||||||
Line rental | ||||||||||||||||||||||||||||||||
RUB per month | 175 | 190 | 205 | 205 | 205 | 205 | 205 | 205 | 205 | 205 | ||||||||||||||||||||||
Per minute tariff plan—local connection fee | ||||||||||||||||||||||||||||||||
RUB per minute | 0.40 | 0.44 | 0.48 | 0.54 | 0.54 | 0.48 | 0.54 | 0.54 | 0.60 | 0.60 | ||||||||||||||||||||||
Unlimited tariff plan—connection fee (unlimited connection) | ||||||||||||||||||||||||||||||||
RUB per month | 260 | 266 | 276 | 282 | 282 | 276 | 282 | 282 | 294 | 294 | ||||||||||||||||||||||
Combined tariff plan—fee for fixed amount of minutes(2) | ||||||||||||||||||||||||||||||||
RUB per month | 152 | 172 | 184 | 205 | 205 | 184 | 205 | 205 | 224 | 224 | ||||||||||||||||||||||
Combined tariff plan—fee for each additional minute | ||||||||||||||||||||||||||||||||
RUB per minute | 0.38 | 0.42 | 0.46 | 0.52 | 0.52 | 0.46 | 0.52 | 0.52 | 0.58 | 0.58 | ||||||||||||||||||||||
Corporate (non-governmental)(1) | ||||||||||||||||||||||||||||||||
Line rental (USD per month) | ||||||||||||||||||||||||||||||||
RUB per month | 195 | 205 | 220 | 220 | 220 | 220 | 220 | 220 | 220 | 220 | ||||||||||||||||||||||
Per minute tariff plan—local connection fee | ||||||||||||||||||||||||||||||||
RUB per minute | 0.40 | 0.44 | 0.48 | 0.54 | 0.54 | 0.48 | 0.54 | 0.54 | 0.60 | 0.60 | ||||||||||||||||||||||
Unlimited tariff plan—connection fee (unlimited connection) | ||||||||||||||||||||||||||||||||
RUB per month | 365 | 375 | 385 | 391 | 391 | 385 | 391 | 391 | 416 | 416 | ||||||||||||||||||||||
Combined tariff plan—fee for fixed amount of minutes(2) | ||||||||||||||||||||||||||||||||
RUB per month | 152 | 172 | 184 | 205 | 205 | 184 | 205 | 205 | 224 | 224 | ||||||||||||||||||||||
Combined tariff plan—fee for each additional minute | ||||||||||||||||||||||||||||||||
RUB per minute | 0.38 | 0.42 | 0.46 | 0.52 | 0.52 | 0.46 | 0.52 | 0.52 | 0.58 | 0.58 | ||||||||||||||||||||||
Corporate (governmental and state-funded organizations)(1) | ||||||||||||||||||||||||||||||||
Line rental | ||||||||||||||||||||||||||||||||
RUB per month | 180 | 200 | 215 | 215 | 215 | 215 | 215 | 215 | 215 | 215 | ||||||||||||||||||||||
Per minute tariff plan—local connection fee | ||||||||||||||||||||||||||||||||
RUB per minute | 0.40 | 0.44 | 0.48 | 0.54 | 0.54 | 0.48 | 0.54 | 0.54 | 0.60 | 0.60 | ||||||||||||||||||||||
Unlimited tariff plan—connection fee (unlimited connection) | ||||||||||||||||||||||||||||||||
RUB per month | 365 | 375 | 385 | 391 | 391 | 385 | 391 | 391 | 416 | 416 | ||||||||||||||||||||||
Combined tariff plan—fee for fixed amount of minutes(2) | ||||||||||||||||||||||||||||||||
RUB per month | 152 | 172 | 184 | 205 | 205 | 184 | 205 | 205 | 224 | 224 | ||||||||||||||||||||||
Combined tariff plan—fee for each additional minute | ||||||||||||||||||||||||||||||||
RUB per minute | 0.38 | 0.42 | 0.46 | 0.52 | 0.52 | 0.46 | 0.52 | 0.52 | 0.58 | 0.58 |
Operators
MGTS provides interconnect, traffic transmission and leased line services to other communications operators. Interconnect is carried out on the local and zonal levels in accordance with terms and conditions that are publicly disclosed. MGTS also provides additional services to operators interconnecting to MGTS' network, including access to emergency service, information and customer care numbers.
MGTS has also established an active presence in the data transmission market. Through its PDTN, MGTS can establish VPNs for other operators as well as provide other data network services. Operators can also rent space and utility systems from MGTS to house their network equipment.
Customers and Services Offered—Other Fixed Line Operations
We provide fixed line communications services to corporate, operator and residential subscribers in over 185 cities throughout Russia. Specifically, we offer local voice, DLD/ILD voice, data and Internet and pay-TV services to our subscribers. Some of the interconnect tariffs we charge other telecommunications operators for in Moscow and certain other cities are regulated by the Russian government. We believe our fixed line subscribers typically evaluate our service and product offerings based on such factors as price, technology, security, reliability and customer service.
The following table presents certain operating data for our other fixed line operations in Russia as of and for the years ended December 31, 20132015 and 2014.2016.
Other fixed line operations | December 31, 2013 | December 31, 2014 | December 31, 2015 | December 31, 2016 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Residential | ||||||||||||||
Number of subscribers (000s)(1) | 4,071 | 3,658 | 3,283 | 3,006 | ||||||||||
ARPU (RUB) | 232 | 251 | 290 | 321 | ||||||||||
Corporate(2) | ||||||||||||||
Number of subscribers (000s) | 123 | 134 | 134 | 134 | ||||||||||
ARPU (RUB) | 5,866 | 5,153 | 4,920 | 4,759 |
Corporate subscribers
We target corporate subscribers covering a range of industries, such as business centers, hotels, financial institutions, professional services firms, consumer goods companies, manufacturers and companies involved in extractive industries, among others. These subscribers vary in size, ranging from large multinational and Russian corporations with thousands of employees to small-and medium-sized enterprises with up to several hundred employees. As of December 31, 2014,2016, we had approximately 50,00044,000 voice and 68,00074,000 Internet corporate subscribers.
As further described below, we offer voice, data transmission and Internet and various value-added services to our corporate subscribers.
Voice Services. We provide a full range of other fixed line voice services to corporates in Moscow, the Moscow region and other selected regions of Russia, which include local, zonal, and DLD/ILD services using our transmission network and leased capacity between major Russian cities. We also provide integrated voice and data services, voice over frame relay and certain integrated services digital network ("ISDN") services.
Data Transmission and Internet Services. We offer high quality data transmission services to corporates, which allow for data exchange between their various branches or offices located within Russia and internationally. For data transmission services, our network is capable of transferring data at speeds of up to 10 Gbps and utilizes various technologies, such as 10 GE, GE, ATM, TDM, VPN-MPLS/VPLS, GPON, Microwave radio relay (MRR), xDSL, LTE and Wi-Fi to provide high quality solutions at a relatively low cost. We endeavor to ensure the reliability of network connections by utilizing a full reservation approach to back up all elements of the network.
In addition, we offer a wide range of Internet services to corporates, including broadband Internet access, VoIP, VPNs and data center services using the following technologies: (1) NGN (up to 10 Gbps), (2) GPON (up to 1 Gbps), (3) xDSL (up to 60100 Mbps), (4) radio Ethernet (up to 300 Mbps), (5) MRR (up to 1 Gbps), (6) Wi-Fi (up to 54150 Mbps), and (7) LTE (up to 100 Mbps). We also provide continuous flexibility to upgrade their network capacity to handle additional Internet services. For example, we often integrate data transmission and Internet services for our clients as they expand their operations and need to interconnect and exchange data with newly opened offices and/or branches.
We also provide security services, such as Anti DDoS-protection and various AntiVirus solutions.
We offer a broad range of Internet packages that vary in terms of data transfer speeds and pricing, with higher tariffs for faster uploading and downloading capabilities. Corporates with GPON broadband Internet packages generally experience data transfer speeds between 1 Mbps and 1 Gbps. In addition, we offer a premium broadband Internet service over our NGN in which subscribers enjoy data transfer speeds between 611 Mbps and 10 Gbps. The NGN provides subscribers with the benefit of the same uploading and downloading data transfer speeds, whereas Internet subscribers using an xDSL/GPON connection upload at speeds that are much slower than the one at which they can download.
We also utilize MGTS' PDTN to provide high-speed reliable Internet services and create VPNs for our corporates.
Leased Channels. We provide corporate clients with the ability to rent high speed data channels. These "leased channels" are dedicated lines of data transmission.
Value-Added Services. We provide corporates with several value-added services, including Autosekretar and integrated solutions. The Autosekretar service is based on our proprietary IN and is designed to help our corporates manage the reception and servicing of a large volume of incoming calls. The unique multi- channel telephone number assigned to customers will not change even if the customer moves to a different location in Moscow, and does not require the customer to install any equipment. In addition, this service allows all incoming calls to be transferred to other fixed or mobile telephone numbers in Russia or in other countries. The IN identifies a subscriber by phone number, phone card or password, which allows our customers to bill their subscribers for services and, if necessary, block access for subscribers who have a negative balance on their account.
In addition, we serve as general contractor for the provision of a full range of integrated solutions to subscribers wishing to establish a modern integrated communications infrastructure. Each solution is customized for subscriber-specificsubscriber- specific needs. In developing these customized networks, we are able to offer the following range of services: site survey, cost analysis and optimum project planning, assistance with government-related documentation, supply of equipment and operational, technical and maintenance support on an ongoing basis. Once the infrastructure is established or renovated, as the case may be, we typically provide digital voice communications, voice intelligent services, high-speed Internet services, videoconferencing and other data transmission services. We intend to expand our service offerings to include customer premises management and network-centric IT solutions.
Fixed mobile convergence. Based on our fixed and mobile networks, we offer fixed-to-mobile convergence services to corporate clients providing use of their mobile phone as an extension of their
private branch exchange ("PBX"). We also provide access to corporate IP-networks from a mobile phone via GPRS/EDGE/3G/4G.
Equipment Sales. We offer and sell equipment manufactured by different manufacturers.
Operators
We are the largest mobile operator in Russia in terms of subscribers, according to AC&M-Consulting. We also operate fixed-line local and zonal networks in Moscow and other cities for provision of telephony services to fixed-line subscribers and additional local numbers to mobile subscribers. In order to lower the costs of intercity and international traffic transition, we put into operation an intercity international network in December 2008.
According to Direct INFO,our estimates, together with MGTS, we had approximately 78%77% of the total active numbering capacity in Moscow as of December 31, 2014.2016. We now have approximately 251204 local fixed networksnodes in 6362 regions of Russia, including Moscow, and 4140 zonal fixed networks to provide telephony services to subscribers. Our integrated intercity/international network is interconnected to more than 4560 international operators. As of December 31, 2014,2016, we had total more than 14001,680 interconnect agreements with national and international operators for interconnection of our networks, including fixed, mobile and Intercity/International networks.
Residential subscribers
We offer voice, Internet and pay-TV services to residential subscribers.
Voice Services. We provide voice services to residential and corporate subscribers. Like corporate subscribers, residential subscribers in each of the regions that we are present in seek a full range of high quality voice services equivalent to those provided in Western Europe. In addition to "basic" voice telephony services, we provide a number of additional services, such as call forwarding, call transferring, call waiting, conference, voicemail and Caller ID, among others.
Internet Services. We offer broadband Internet services to residential subscribers throughout Russia. As of December 31, 2014,2016, we had 9% market share in the Russian Federation together with Moscow where we had a 29%32% share, based on TMT consultingConsulting data. Depending on the Internet connection speed, we charge residential subscribers a subscription fee of RUB 300-RUB 2,500 ($5.3- $44.4)1,600 per month in Moscow and a subscription fee of RUB 300-RUB 3,000 ($5.3-$53.3)1,900 in other regions of Russia. We do not charge a connection fee in Moscow and in most of the Russian regions.
Pay-TV. We operate a TV service based on IPTV service over ADSL and GPON technologies in Moscow. In addition, we offer pay-TV services based on DVB-C (digital television via cable connection), analog cable transmission and MMDS (wireless cable) technologies in most of the regions in which we are present. Since November 2013, we connect our subscribers only to the TV with digital quality. Special auxiliary equipment (set-top box) allows pay-TV subscribers to access more than 180170 channels of digital quality, including 3240 channels of HD quality from a home television. International and Russian channels are included as part of the base services package. As of December 31, 2014, we had approximately 235.6 thousand pay-TV subscribers in Moscow and approximately 2.4 million subscribers in other regions of Russia.
Our pricing structure is designed to appeal to large numbers of consumers with various interests and purchasing power, and varies significantly between regions. We charge a subscription fee of RUB 99-RUB 1341 ($1.8- $23.8)100-RUB 1,341 per month in Moscow and a subscription fee of up to RUB 100-RUB150-RUB 400 ($1.8- $7.1) in other regions of Russia, depending on the number of channels included in the package. We also offer bundled Internet and pay-TV services for RUB 450-RUB 2,500 ($8.0- $44.4)400-RUB 1,700 per month in Moscow and RUB 450-RUB 3,000 ($8.0- $53.3)450- RUB 2,100 in certain other regions of Russia, depending on the speed of the Internet connection, the number of pay-TV channels being provided and level of competition in a particular region.
Sales and Marketing
Moscow fixed line operations
AsIn light of modernization and re-equipment of network to GPON technology, MGTS shifted its main focus to the incumbent PSTN,growth of GPON-based services penetration and subscriber loyalty increase. To accomplish this task MGTS launched a number of convergent tariff packages with high-speed fixed and mobile internet, implemented the first own loyalty program and extended video surveillance services. In order to increase ARPU and retain subscribers MGTS introduced the contractual tariff, which includes Internet access and voice for 700 RUR and smartphone Samsung Galaxy J120 for 1 RUR per month. Besides the traditional telecom services MGTS has not invested significantly in sales and marketing. In 2013 MGTS continued realizationstarted the provision of its long-term modernization program on GPON, therefore, the biggest part of advertising budget was spent on convergent products promotion like Double and Triple Play (an offer bundling two and three services) with the use of GPON technology. GPON allows us to provide higher qualityhousehold services, than our competitors and to increase the number of our subscribers and revenue from Internet and pay-TV services in Moscow.highlighting this area as a separate business.
By the end of 2014, 1.12016, 1.7 million subscribers were transferred to GPON. In 2017, MGTS will continue its strategy of transformation into the multi-service operator, who provides traditional telecom and innovative Internet-based services
Other fixed line operations
Our target customers include corporate, operator and residential subscribers.
To promote our product and service offerings, we use various communication channels for advertising and marketing, including direct marketing, printed mass media, television, Internet, radio, directories, outdoor advertising, advertising in the subway, special promotions and cross promotions. Through these various advertising and marketing channels, we intend to further develop our brand recognition. Our marketing strategy is designed to create a unified brand for each of our various product and service offerings with the aim of becoming a single source for all of our subscribers' communications needs.
We also actively promote our services to existing subscribers with special bundled product offerings aimed at servicing their communication requirements and enhancing subscriber loyalty. Our advertising and marketing materials are aimed primarily at the promotion of MTS brand. All fixed-line products are offered and marketed under this brand. However, when we enter new markets and acquire existing companies, we have to use both brands in advertising — MTS brand and the acquired brand. This is done to decrease churn as customers tend to express strong loyalty towards local brands. We then gradually decrease presence of the acquired brand and this allows us to make MTS a market leader in a given region in future. Our advertising and marketing efforts are designed to convey a positive image of us to the market as a leading communications operator focused on customer satisfaction.
Competition
We compete with a number of fixed line telecommunications operators servicing Moscow, St. Petersburg and other major Russian cities. Moscow is the largest and most competitive of these markets. Our primary competitors include:
line telecommunications markets in all regions where we operate in Russia. We also compete with Rostelecom in the mobile telecommunications market.
Corporate subscribers
The following table sets forth the corporate subscriber market shares of the primary fixed line operators in Moscow as of December 31, 2014:2016:
MTS | % | |||
MGTS | % | |||
| ||||
| ||||
| % | |||
Akado | % | |||
Rostelecom | % | |||
Other | % | |||
| | | | |
Total | 100 | % | ||
| | | | |
| | | | |
| | | | |
Source: Direct INFO.our estimates.
In the corporate subscriber segment, we generally compete on the basis of network quality, individual and bundled service offerings, customer service, installation time, geographical presence and pricing.
Residential subscribers
Voice services
The following table sets forth the market shares of the primary fixed line operators for voice services in Russia as of December 31, 2014:2016:
Company | Russia | |||
---|---|---|---|---|
MTS | % | |||
Rostelecom | % | |||
Other | % | |||
Total | 100 | % | ||
| | | | |
| | | | |
| | | | |
Source: Direct INFO.TMT Consulting.
As Moscow's only PSTN operator, MGTS faces limited competition in the market for residential local telephony services in Moscow. As of December 31, 2014,2016, MGTS provided local voice telephony services for approximately 95% of all residential subscribers in Moscow, according to Direct INFO.TMT Consulting.
In the other voice services market, we generally compete based on the availability of bundled packages comprising broadband Internet access and pay-TV services, value-added services, network quality, installation time and customer service.
Internet
According to Direct INFO,TMT Consulting, as of December 31, 2014,2016, broadband Internet penetration of households was 55%56% in Russia. The following table sets forth the market shares of the primary operators in the residential broadband Internet market in Russia as of December 31, 2014:2016:
Company | Russia | |||
---|---|---|---|---|
MTS | 9 | % | ||
TTK | 5 | % | ||
| % | |||
Er-Telecom | % | |||
Rostelecom (including OJSC «National Cable Networks») | % | |||
Other | % | |||
Total | 100 | % | ||
| | | | |
| | | | |
| | | | |
Source: Direct INFO.TMT Consulting.
Pay-TV
According to Direct INFO,TMT Consulting, as of December 31, 2014,2016, pay-TV penetration was 72%73% in Russia. The following table sets forth the market shares of the primary operators in the TV market in Russia as of December 31, 2014:2016:
Company | Russia | |||
---|---|---|---|---|
MTS (excluding Sputnikovoe TV) | ||||
| % | |||
Rostelecom | % | |||
Tricolor TV | % | |||
| % | |||
| 7 | % | ||
Other | % | |||
Total | 100 | % | ||
| | | | |
| | | | |
| | | | |
Source: Direct INFO.TMT Consulting.
In the TV market, we generally compete on the basis of pricing, channel selection and content, individual and bundled service offerings, customer service and installation time.
Tariffs
We establish prices for our unregulated services and different subscriber segments based on certain common considerations, policies and goals. For example, we generally seek to establish competitive prices based on market rates for the services we offer and below market prices when our lower-than-average costs or economies of scale allow us to do so. We also offer subscribers bundled service packages with several services offered together at a discount to the cost of ordering each individual service separately and to promote additional services to our existing subscribers. In addition, we often offer promotions to our various subscriber segments waiving or discounting installation fees in order to attract new subscribers or promote new services.
With regard to corporates, we generally aim to derive the bulk of our operating revenues from monthly payments. Thus, depending on the scale and type of services ordered, we will often discount or waive installation fees.
For services offered to other communications service providers, we aim to generate most of our operating revenues from monthly payments and by offering an array of value-added services.
We develop tariffs for service offerings to residential subscribers with the aim of attracting new subscribers, as well as expanding the services used by existing subscribers in order to generate higher ARPU.
Network Infrastructure
The transport networkNetwork Infrastructure—Transmission Networks
Backbone and Internet Networks
Mobile, fixed and inter-carrier aggregated traffic increased in 2016: downlink (towards uses) data throughput reached 1.9 Tbps (1.1 Tbps in 2015), uplink (from uses) data throughput reached 752 Gbps (500 Gbps in 2015).
In 2016, we successfully trialed 400G technology with ECI Apollo on a line between Ekaterinburg and Novosibirsk (1500 km). Further deployment of this solution will allow us to increase effectiveness of a DWDM network usage without significant investments in the future. It also will allow to optimize network infrastructure, increase backbone network capacity if needed and reduce operational costs due to decreasing rent and electric energy costs.
The size of MTS fiber-optic networks increased by 41,000 km in 2016 and reached 213,000 km at all due to deployment of the following lines: Vologda-Kostroma-Yaroslavl, Kaluga-Bryansk, Moscow-Tver-Rzhev-Vyazma, Bratsk-Irkutsk, Orsk-Magnitogorsk, North-Urals Ring (through Nadym-Nyagan-Severouralsk-Nizhny Tagil), Blagoveschensk-Novobureysky (reserve line for Blagoveschensk through China territory), Nizhny Kuranah-Olyokminsk-Lensk-Mirny. As a result of our acquisitionsthese developments, MTS nowadays owns the biggest backbone fiber-optic network among all "Big Three" operators.
Additionally, in 2016 the following network upgrade and modernization projects were held:
In 2016, Backbone and Internet Network Competence Center was established in Novosibirsk, the main task of the largest operatorsCenter is to control X-ring networks, which carry data traffic from the MBH equipment to PC Core of regions.
Convergent network
According to deployment plans following projects were executed in 2016:
We are negotiating launch of the Internet long-haul backbone networksshared network deployment and links interchange projects with other operators and has signed the memorandum of understanding with respect to the potential projects. Memorandum defines a list of directions (parts of fiber-optic communication links) which are mutually interesting for both participants. Summarized length of provided communication links is approximately equal on both sides.
Management and monitoring systems virtualization is ongoing. Unified system for link facilities based on GE Small World solution in Russia. We continue to develop our long-haul backbone network through the build-outtest mode launched in 2016. The start of a fiber optic infrastructure, based on 100G technology, and acquisitionscommercial operation is planned for 2017.
As a part of other Internet backbone service providers. We currently haveevolution of IPBB (IP Backbone) network equipment modernization is ongoing. The projects assumes replacement Cisco 7600 nodes for ASR9000 nodes due to an end of a fiber optic networksupport of approximately 160,000 km, which also allows us to operate an optical transport network using dense wavelength division multiplexing technology.7600 nodes.
In addition,2017 we have our own IP MPLS network, which is capable of providing Internetare planning to implement SDH networks dismantling projects and L2/L3 VPN services, as well as deliver other media products, such as digital televisionto transfer a data traffic to MBH and internet protocol television, to regionalDWDM networks.
Satellite Network
In accordance with MTS deployment strategy we aquired backbone and intra-regional networks for reducing satellite lines rent costs following terrestrial satellite communication stations networks were deployed:
Other fixed line operationsPublic Switching Telephone networks (PSTN)
The network infrastructure we maintain in Moscow is substantially different to the infrastructures we use in the regions. In Moscow, primarily we have primarilyorganically grown, organically, while our regional development has largely been through the acquisition of companies with different business models and a focus on different services. As a result, the network infrastructures in the regions outside Moscow and the technologies used to support such infrastructures are different from the network infrastructure established in Moscow and which we currently own.
MTS Telephone network
The Moscow Now telephone network consists of 318 switching nodes (278 TDM switchesin Moscow and 40 soft switches) with totalMoscow region has a capacity of overmore than 1,000,000 subscribers.telephone numbers.
As of December 31, 2016, in Moscow and the Moscow region we have a wireless broadband network included 500 base and subscriber stations in the 5-6 GHz frequency band.
All of our PSTN switching centers (TDM and Soft switch) are connected to a digital transport network, which uses SDH technology and covers the entire territory of Moscow and most of the Moscow region.IP technology. The network ensures the functioning of our digital ATSs and their connectivity with analog anda digital equipment of PSTNs of other operators.
The digital transportSDH network includes a trunk core STM-64, with connected half-rings STM-16will be supported and STM-4. Multiplexers of access level are connectedoperated as support to trunk nodes by means of fiber-optic lines that organize streams STM-4existing clients,but we also provide the moving traffic and STM-1. There are 1,000 multiplexers.clients from SDH/TDM technology to IP.
The management of the transport network and digital ATSsPSTN is carried out remotely from network operation centers.
For the provision of Internet access, IP-telephony and other services, we have our own IP MPLS network, the core of which is constructed as IP MPLS rings with routers connected to each other by
means of 10 GE channels. In addition, separate routers are used for inter-carrier connections and are connected to the core routers by means of 10 GE interfaces.
Russian regions
As of December 31, 2014, outside of Moscow and the Moscow region,2016 we provideprovided cable Internet access to 7.9about 9.1 million households and cable TV access 8.7to 9.73 million households. Among the access equipment used are Ethernet switches, IP DSLAM and Optical Receivers. We mainly use FTTB technology for internetInternet (8,4 million households) and CATV access, which can provide speeds up to 1 Gb/s per building and about 250 channelchannels CATV (analog and digital). In 2011, we started to roll-out DVB-C technology for a cable TV service. Currently, we have digital TV service (DVB-C)(DVB-C&DVB-S2) in more than 100187 cities and localities with more than 1.22.1 million of subscribers. In 2014, we started to roll-out aan advanced hybrid TV service (DVBC+(DVBC/DVB-S2/IPTV+IP/VOD, CatchUp). In the beginningBy December 2016, we launched Hybrid TV platform with a IPTV commercial service in Moscow and Moscow Region (MGTS), DVB-C/IP Hybrid commercial service in 30 regional cities and DVB-S2/IP Hybrid commercial service all over Russia. Total number of 2015, we started Satellite TV project based onconnected hybrid TV solution.users is about 0.3 million. In 2015, we also completed "TV Everywhere" project, which provided integration between platforms of mobile and fixed cable TV in regions in terms of cross-functional tariff proposal. We plan to finalize roll-out pureof DVB-C/IP Hybrid solution with target up to 90 regional cities connected to the service and to launch first set of upgrades to the product including further extension of VoD and external interactive services together with different Internet partners (Platbox, Wikipedia etc.) in the second quarter of 2017. In 2017 we are also panning to continue natural OTT solutionpilot project for STB, connected TV, browsersfixed and mobile devices merging current services of mobile and fixed digital TV in one TV product and further development of Digital TV and Hybrid solutions with second set of commercial upgrades, 4K/HEVC launch, as well as extending set of services available on STBs by moving into application-oriented architecture of client SW using Android OS.
In Moscow and regions as an Internet traffic supplier, we mainly use MTS own IP Backbone network described in the "transport network" section.
The acquisition of Comstar provided us with an opportunity to use MTS fiber optic lines for fixed network development. Optical network construction in cities is carried out on the basis of fixed and mobile business needs. When we modernize and construct new networks, we deploy fixed and mobile equipment on the basis of "collocation" method.method
Principal suppliers
Our principal suppliers are Ericsson,are: NVision Group, our related party,subsidiary of the Group and integrator; Huawei, Iscratel, Oracle—PSTN switching equipment and SBC; Ericsson, Garmonica, Cisco Systems—equipment of Digital TV station; Irdeto, Verimatrix—CAS TV systems; Ericsson—Hybrid TV platform; Cisco Systems, , Huawei, Nokia SolutionsD-Link—FTTB core and access; Juniper Networks, for switching equipment;Huawei, ECI Telecom, Tellabs and Alcatel Lucent for a transport network equipment; Cisco Systems, Huawei and Alcatel Lucent for Internet and data network equipment; Secure Media for crypto-protection conditional access software; and Tandberg TV (Ericsson), Irdeto for broadcasting equipment.
All of our equipment is supplied directly through authorized dealers.dealers
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 more rural areas where fixed line penetration is relatively low, as well as an increase in roaming revenues and guest roaming revenues during these quarters. Quarterly trends can also be influenced by a number of factors, including new marketing campaigns and promotions, and may not be consistent from year to year.
Regulation of Telecommunications in the Russian Federation and Ukraine
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:
The 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 the enactment of the Federal Law on Communications continue to be applied to the extent they do not conflict with the Federal Law on Communications. The lack of interpretive guidance from the regulatory authorities regarding the new regulations and the uncertainty surrounding their compatibility with the regulations still in effect impedes our ability to assess effectively the full impact of the new regulations under the Federal Law on Communications on our business.
The Federal Law on Communications, 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, licenses to provide communications services in territories where frequency and numbering capacity are limited may be issued only on the basis of a tender, whereas according to the Government Decree No. 480 dated May 24, 2014, licenses to provide communication services with frequency spectrum — spectrum—only on auction basis. In addition, the Federal Law on Communications provides for the establishment of a "universal services reserve fund" which is funded by a levy imposed on all operators of public networks, including us.
Regulatory Authorities
The Russian telecommunications industry is regulated by several governmental agencies. These agencies 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 large-scale restructuring of the Russian government in March 2004 and subsequent restructuring in May 2008. The system of regulation is still evolving and further changes are expected. See also "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Countries of Operation—Political and Social Risks—Political and governmental instability in Russia and other countries of our operations could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs."
The Ministry of Communications and Mass Media 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 has the authority to issue certain regulations implementing the federal law on communications and other federal laws.
The Federal Service for Supervision of Communications, Information Technologies and Mass Media is a federal executive body that supervises and controls certain areas of communications and information technologies, including:
The Federal Communications Agency is a federal executive body that implements governmental policy, manages state property and provides public services in the area of communications, including the allocation of numbering capacity and the certification of equipment for compliance with technical requirements.
The State Radio Frequencies Commission is an inter-agency coordination body acting under the Ministry of Communications and Mass Media which is responsible for the regulation of the radio frequency spectrum, develops long-term policy for frequency allocation in the Russian Federation and decides on the allocation of frequency bands.
FASThe Federal Antimonopoly Service (FAS) is a federal executive body that supervises competition regulations and enforces the Federal Law on Protection of Competition and the Federal Law on Natural Monopolies and the regulations enacted thereunder. FAS controls certain activity of natural monopolies, including monitoring their execution of certain obligatory contracts, and can issue mandatory orders as provided for in the Federal Law on Natural Monopolies.
Other regulatory authorities. In addition, the Federal Tariff ServiceFAS regulates certain tariffs in the sphere of telecommunications, including the tariffs on the local, intra—zone and DLD calls by subscribers of public switched telephone networks and installation and subscription fees.
Other regulatory authorities. The Federal Service for the Oversight of Consumer Protection and Welfare 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 protection of consumer rights. The Federal Service for State Regisrtration,Registration, Cadastre and Cartography is responsible for registering certain telecommunications infrastructure that is considered real property in accordance with Government Decree No. 68 dated February 11, 2005. The Federal Service for Financial Monitoring (Rosfinmonitoring) is a federal executive body responsible for countering money laundering and terrorism financing. Mobile operators are to comply with Federal Law No. 115-FZ dated August 7, 2001 "On combating money laundering and terrorist financing."
Licensing of Telecommunications Services and Radio Frequency Allocation
Telecommunications licenses are issued based on the Federal Law on Communications and Government Decree No. 480 dated May 24, 2014 on Bidding Process (Auctions, Tenders) for Receipt
of Telecommunications License. Under these regulations, 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 of Communications, Information Technologies and Mass Media. Officials of the Federal Service for Supervision of Communications, Information Technologies and Mass Media 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:
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:
In addition, licenses may be terminated for various reasons by a court, including:
The license may also be terminated by the Federal Service for Supervision of Communications, Information Technologies and Mass Media in a number of cases, including liquidation of a license holder. 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 Federal Law on Communications, frequency allocations may be changed for purposes of state management, defense, security and protection of legal order in the Russian Federation with the license holder to be compensated for related losses. Further, frequency allocations may be suspended or terminated for a number of reasons, including failure to comply with the conditions on which the frequency was allocated.
The following one-time license fee is payable irrespective of the number of regions covered by the license: RUB 6,000 (equivalent to $90 as of December 31, 2014)7,500 for services involving, among other things, the use of a frequency spectrum and the lease of communication channels. 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, required 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 required that all wireless telecommunications services operators pay an annual fee set by the State Radio Frequencies Commission and approved by FAS for the use of their frequency spectrums. On January 1, 2012, a new Government Decree No. 171 dated March 16, 2011 came into force which provides that fees for the use of radio frequency spectrums consist of a one-time fee and an annual fee. The fees are determined according to the methodology approved by the Ministry of Communications and Mass Media.
Furthermore, the Federal Law on Communications provides for the establishment of a "universal services reserve fund" for the purpose of supporting communications companies operating in less developed regions of Russia through the financing, construction and maintenance of telecommunications networks in low-profit and unprofitable sectors. This reserve fund is aimed at eliminating the practice of cross-subsidies by compensating operators for certain mandatory, loss-making local services in rural and sparsely populated areas. It is funded by a levy imposed on all operators of public networks, including us, in the amount of 1.2% of revenues from telecommunications services less the amount of taxes paid by subscribers. The universal service fund concept has been used in some developed countries and in Eastern Europe.
The Federal Law on Communications empowers the Russian government to determine and annually review the list of licensing requirements applicable to various communication services being licensed. The list of licensing requirements was enacted by Government Decree No. 87 dated February 18, 2005, as amended. Licenses also generally contain a number of other detailed conditions, including a date by which service must begin, technical standards and certain other terms and conditions. We have either commenced service by the applicable deadline or received an extension of the applicable deadline for all of our licenses.
Equipment Certification
Government Decree No. 532 adopted on June 25, 2009, sets forth the types of communications equipment that is subject to mandatory certification. Communications equipment must be certified, or its compliance with the established requirements must be declared and proven in the interconnected communications network of the Russian Federation, which includes all fixed line and wireless networks open to the public. All our networks must be certified. The Federal Communications Agency 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 should 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, certain high-frequency equipment, a list of which was approved by Government Decree No. 539 dated October 12, 2004 (as amended), manufactured or used in the Russian Federation,
requires special permission from the Federal Service for Supervision of Communications, Information Technologies and Mass Media .Media. Failure to receive such certification could result in the mandatory cessation of the use of such equipment. In accordance to Government Decree No. 1252 dated November 27, 2014, the equipment can be shared by operators according to their agreement and certificate of the Federal Service for Supervision of Communications, Information Technologies and Mass Media. In accordance with the Federal Law No. 204 dated June 23, 2016, the radio frequency spectrum can be shared by operators according to their agreement. In the case of shared-use of the radio frequency spectrum for the provision of telecommunications services each operator should have proper telecommunications services license.
Competition, Interconnect and Pricing
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. The Federal Law on Communications and Presidential Decree No. 221, enacted on February 28, 1995, as amended, on Measures for Streamlining State Regulation of Prices (Tariffs) allow for regulation of tariffs and other commercial activities of telecommunications companies that are "natural monopolies." Government Decree No. 637, dated October 24, 2005 (as amended by the Government Decree No. 941, dated September 4, 2015) authorized the Federal Tariff ServiceFAS to set the following tariffs for the natural monopolies in the communications market, including:
In addition, the Federal Law on Natural Monopolies No. 147 dated August 17, 1995 establishes the legal basis for federal regulation of natural monopolies, including those in the communications market, and provides for governmental control over tariffs and certain activities of the natural monopolies. The Federal Law on Natural Monopolies outlines the types of transactions for which a regulated entity must obtain prior FAS approval and establishes the general principle that regulated entities may not refuse to provide regulated services to certain types of consumers. Regulated entities are also subject to continuous reporting requirements, including submitting plans for capital investments.
The Federal Tariff ServiceFAS maintains a Register of Natural Monopolies whose tariffs are controlled and regulated by the state. A telecommunications operator may be included in this register upon a decision by the Federal Tariff ServiceFAS based on the Service's analysis of the operator's activities and the market conditions.
Our subsidiary, MGTS, was added to the Register of Natural Monopolies in 2000. In addition, our subsidiary Comstar-regions was added to the Register of Natural Monopolies in 2009. As a result, MGTS2000 and, Comstar-regions aretherefore, is subject to the requirements of the Federal Law on Natural Monopolies including,inter alia, the following:
It should also be noted that our subsidiary Comstar-Regions was added to the Register of Natural Monopolies in 2009, but on November 24, 2015 it was excluded therefrom and on December 5, 2015, it merged into MTS.
In addition, FAS is authorized by lawcompanies which are found to maintain a register of companies holding a market share in excess of 35%. Companies included in this register may becomehave dominant position on relevant markets maybe subject to certain FAS restrictions in conducting their business, including in relation to pricing, acquisitions, geographical expansion, and associations and agreements with competitors. We are categorized by FAS as a company with acompetitors.On January 5, 2016, the new version of the Federal law No. 135-FZ "On protection of the competition" came into force and the regulations in relation to the register of companies holding market share exceedingexcess 35% in Ivanovo region, Magadan region, Kurgan region, Sakhalin region, Udmurt Republic and Nenets Autonomous region.were repealed. Nowadays, dominant position should be determined regarding each case without a register. See also "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we are found to have a dominant position in the markets where we operate and are determined to have abused this position, the governmentFAS may regulateinfluence our subscriber tariffs and restrictimpose certain restrictions on our operations."
The Federal Law on Communications also provides for the special regulation of telecommunications operators occupying a "substantial position,"i.e., operators which together with their affiliates have, in the Russian Federation generally or in a geographically defined specific numerical zone, 25% or more of installed capacity or capacity to carry out transmission of not less than 25% of traffic. Comstar-UTS and MGTS werewas added to the register of telecommunications operators occupying a substantial position in 2005 and, 2006, respectively. After the exclusion of Comstar-UTS from the register in February 18, 2013 MGTStherefore, is subject to the requirements of the Federal Law on Communications relating to operators occupying a substantial position in the public switched telephone networks including,inter alia, the following:
The Federal Law on Communications and implementation rules adopted by Government Decrees No. 161 dated March 28, 2005, and No. 627 dated October 19, 2005, also provides for government regulation of interconnect tariffs established by operators occupying a substantial position. In addition, such operators, including MGTS, are required to develop standard interconnect contracts and publish them as a public offer for all operators who intend to use such interconnect services.
Notwithstanding the above, fixed line operators not considered to occupy a substantial position and not included in the Register of Natural Monopolies, as well as mobile operators, are free to set their
own tariffs. Also see "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we or any of our mobile operator subsidiaries operating in Russia are identified as an operator occupying a "substantial position," the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations."
Calling Party Pays
In March 2006, the Federal Law on Communications was amended to incorporate a "calling party pays" scheme effective as of July 1, 2006. Prior to the implementation of the "calling party pays" principle, subscribers of fixed line operators could initiate calls to mobile phone users free of charge. Under the current system, fixed line operators charge their subscribers for such calls and transfer a percentage of the charge to mobile operators terminating such calls. The percentage transferred to mobile operators is regulated by the Federal Service for Supervision of Communications, Information Technologies and Mass Media and is known as the settlement rate. Any reduction of the settlement rate by the regulator could have a negative impact on our average monthly service revenues per subscriber and margins.
New Communications Services rules and Mobile Number Portability
On December 15, 2014, Government Decree No. 1342 concerning fixed and mobile services rules was adopted. This act,inter alia, has changed rules and conditions of MNP process (retaining telephone number after switching from one mobile operator to another) of certain types of legal entities and state customers. The period of switching numbers for mentioned subscribers was decreased and the procedure was simplified.
Introduction of renewed procedure on MNP in respect of particular legal entities and state customers is expected to affectaffects the mobile services market in Russia and leadleads to intensification of competition.
Implementation of new regulations in respect of mobileAnti-terror law
The Federal Law No. 374 dated July 6, 2016, amended some legislative acts and fixed voice services would imposeestablished additional responsibilitiesmeasures to counter terrorism and to maintain public safety.
In accordance with the abovementioned amendments to the Federal Law on Communications (coming into force on July, 2018) the telecommunications operators will have to store and to provide to the authorities upon request the information on the operatorsfacts of mobilereceiving, transmitting, delivering and fixed(or) processing of voice information, text messages, images, sounds, video, or other communications due to change in certain business processes.by their subscribers, as well as relevant messages themselves.
The implementation of these amendments may have a material effect on telecommunications operators' financials and performance (see also "Item 3. Key Information—D. Risk Factors").
Regulatory Authorities
Administration of State Service onof Special Communications and Information Protection of Ukraine. This body is responsible mainly for establishing and overseeing technical policies and standards in the sphere of telecommunications. Previously these functions were carried out by the State Communications Administration.
The NCCIR. The functions of the NCCIR were formerly carried out by the NCRC (National Commission for Communications Regulation of Ukraine). Established by a Decree of the President of Ukraine in August 2004, the NCRC was vested with the powers of the central regulatory body in the sphere of telecommunications on January 1, 2005 pursuant to the Telecommunications Law described
below. It consisted of seven members and a chairperson. The NCRC commenced its activity in April 2005 when the chairperson and its members were appointed as required by the Telecommunications Law.
The NCRC has been responsible for issuing licenses for telecommunications services and use of radio frequencies commencing January 1, 2005, as well as various other responsibilities of the SCA from that date. According to the amendments to the Telecommunications Law introduced in July 2011, the NCRC was replaced in August 2011 with the NCCIR, which now consists of six members and a chairperson.NCCIR. The NCCIR is currently responsible for issuing licenses for telecommunications services and use of radio frequencies, and other functions of former NCRC.
The Ukraininan State Center forof Radio Frequencies of Ukraine (the "SCRF""UCRF"). While licenses for radio frequencies for wireless communications are issued by the NCCIR, SCRFUCRF is the authority responsible for all technical issues related to the use of radio frequency resources and, in such proxy, is also
involved in the issuance of radio frequency licenses. In particular, the SCRFUCRF determines frequency availability and technical aspects of frequency allocation, as well as provides the NCCIR with an expert opinion in relation to each application for radio frequency. The SCRF also monitored use of the frequencies and continued monitoring compliance with the license terms and carried out physically inspections of operators and providers of telecommunications services until the establishment of the State Inspection of Communications, as described below. The SCRFUCRF also independently issues individual permissions for the use of radio- electronicradio-electronic and radio-emitting equipment, its development, import, sale and purchase, and maintains a data base of IMEI codes of mobile telephones.
The State Inspection of Communications (the "SIC"), established by the new Telecommunications Law, was a division of the NCRC. The SIC was responsible for the general supervision of the telecommunications market and the use of radio frequency resources. The SIC also monitored compliance with license terms, physically inspected operators and providers of telecommunications services and, together with the SCRF, reviewed cases relating to administrative violations in the areas of telecommunications and radio frequencies. In July 2011, the SIC was abolished, and inspectors tasked with supervision were re- assigned to the NCCIR.
The Antimonopoly Committee of Ukraine (AMC)(the "AMC") is 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.
Legislation
The principal legislation regulating the telecommunications industry consists of the Law on Telecommunications dated November 18, 2003, (the "Telecommunications Law"), and the Radio Frequencies Law dated June 1, 2000, (the "Radio Frequencies Law").
The Telecommunications Law provides for, among other things, equal rights for private entrepreneurs and legal 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 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 and users of telecommunications services and radio frequencies.
The Telecommunications Law addresses various areas of telecommunications services in Ukraine, including numbering requirements, tariff and settlement regulations, interconnect, public telecommunications services, market access rules and licensing issuance and renewal. The Telecommunications Law also significantly expands the definition of the telecommunications 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, between January 1, 2005, and July 5, 2011, had been responsible for many of the functions formerly handled by the SCA. In August 2011, the NCRC was replaced with the NCCIR, which is authorized,inter alia, to issue regulations for 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 NCCIR is also authorized to
conduct hearings and to resolve disputes among operators concerning the interconnect of telecommunications networks.
In July 2010, the Telecommunications Law was amended with provisions on mobile number portability and national roaming obligations. In April 2013 the NCCIR (formerly NCRC) adopted regulations which allow subscribers to retain their mobile telephone numbers when switching from one mobile telecommunications operator to another.
On August 25, 2011, the NCCIR enacted national roaming regulations. Accordingly, telecommunications operators were permitted to conclude agreements on national roaming and prescribed to provide this service as described in the regulations (e.g., must inform users on roaming prices and maintain quality of service on the same level for own subscribers and subscribers of operators with whom roaming agreements are signed). Foreign investments in Ukrainian telecommunications operators are not 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.
Licensing of Telecommunications Services and Radio Frequency Allocation
Commencing January 1, 2005, the NCCIR (formerly NCRC) has assumed responsibility for issuing telecommunications licenses and frequency licenses pursuant to the Telecommunications Law and the 2004 amendments to the Radio Frequencies Law. Licenses are issued for the following types of telecommunications services:
Starting from July 5, 2011, the leasing of electric communications channels no longer requires licensing.
Other telecommunications services do not require licenses.
An operator that is granted a telecommunications license may not commence the provision of wireless 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 and UMTS 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. UMTS radio frequencies are currently allocated for special users, in particular, the Ministry of Defense.
Under applicable legislation, licenses for telecommunications services may be issued and renewed for periods of not less than 5 years, with the actual period generally ranging from 10 to 15 years. Renewal of a license is made by an application submitted to the NCCIR at least four months prior to the expiration of the license term. NCCIR officials have broad discretion with respect to both the issuance and the renewal of licenses. The Telecommunications Law further provides that the NCCIR must grant licenses on a first come-first served basis within 30 days from submission of an application. If resources are limited or consumer interests so require, the NCCIR may adopt a decision to limit the
number of licenses. In this event, the law requires that such decision is made public along with the rationale and that the licenses be allocated through a tender.
In accordance with the Radio Frequencies Law, the NCCIR issues a frequency license concurrently with the issuance of a telecommunications license for the type of services requiring use of radio frequency resources. A telecommunications operator that has the respective telecommunications license may apply for licenses for additional radio frequency bands. Frequency licenses may not be issued for a period shorter than the term of the relevant telecommunications license.5 years.
Under applicable legislation, a public tender or an auction for a radio frequency license must be held by the NCCIR if demand for radio frequency resources exceeds available resources. Radio frequency licenses issued on the basis of a public tender or an auction for the same type of radio technology must include identical conditions regarding the radio frequency bands and development period. Telecommunications operators are allowed to apply to the NCCIR for redistribution of the radio frequency resources previously allocated to them.
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, terms of network deployment and territory coverage, the requirement to use only certified equipment, the technical standards which must be considered and the requirement to comply with all environmental regulations. Frequency licenses issued after January 1, 2005 also contain the date by which the radio frequency resources must be fully utilized.
Telecommunications operators' activities are subject to strict regulations, especially regarding electromagnetic compatibility; construction and technical maintenance of a telecommunications network must be carried out in accordance with specific regulations applicable in Ukraine. Telecommunications operators must submit periodic reports to the NCCIR on the amount and quality of services provided under the telecommunications license. We believe that we are in 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 certain minimum thresholds 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. Both telecommunications services licenses and radio frequency licenses may be terminated for various reasons, including:
Radio frequency licenses may also be terminated for the following reasons:
Decisions of the NCCIR with respect to the termination of licenses may be appealed to a court.
MTS' Ukraine license to construct and maintain the telecommunication network and provide services using such network was due to expire on December 3, 2013. In October 2013, MTS Ukraine submitted an application to the NCCIR requesting the renewal of the license. On October 15, 2013, the NCCIR refused to renew the license and recommended that MTS Ukraine receive a new license to provide operations in the telecommunications sphere. On October 21, 2013, MTS Ukraine filed a lawsuit against the NCCIR with a demand to renew the license. On November 19, 2013, a court decision was issued in favour of MTS Ukraine. The decision obliged the NCCIR to renew the license. The NCCIR appealed against the court decision. On January 15, 2014, the court of appeal issued a judgement in which the court refused to sustain the NCCIR appeal. On January 28, 2014, the NCCIR renewed MTS Ukraine license until December, 2018. On January 27, 2014, the NCCIR filed an appeal against the court of appeals' order which was denied by the Court. The cassation procedure was started by Court of Cassation. According to decision of the Highest Administrative Court dated January 22, 2015, the satisfaction of claim dated November 19, 2013 in favor of MTS Ukraine was denied making the resolution of January 28, 2014 to prolong the license for MTS Ukraine illegitimate. In 2016, the case was sent to the new trial. The first instance Court (03/25/2016) and Appeal Court (05/31/2016) refused in satisfaction of the MTS Ukraine demand to prolong the license for MTS Ukraine. On the base of the resolution of the Superior Court of Ukraine from the July 11, 2016, cassation procedure is opened. The case is in progress.
At the same time MTS Ukraine has bought new license for providing all available mobile services in 2G and 3G networks and the NCCIR issued a license for MTS Ukraine as of January 27, 2015, which is valid until 2030.
In caseaccordance with the terms of canceling the previousobtaining a license (as prolonged by resolution of January 28, 2014),for 3G frequency, MTS Ukraine has signed conversion agreements with special users of radio frequency resource. Within an 18-month period MTS plans to expand its 3G network in all regional centers of Ukraine. Currently, MTS Ukraine complies with all license requirements and makes all necessary payments under the right to provide mobile services using the new one.license.
In September 2009,Under the NCRC announced plans to launch a tender for a single 3G/UMTS mobile services license in Ukraine. However, the NCRC canceled the planned tender in November 2009 following a decision byinstruction of the President of Ukraine on the introduction of 4G network, the Cabinet of Ministers adopted a decree "On approval of the action plan for introduction of mobile communication of the fourth generation". The decree establishes a tender process for 4G frequency in the second half of 2017, which primary requires carrying out a research and analysis of the existing radio frequency resource. This research will be assigned to putforeign consultants with payment to be imposed on telecommunications operators. The foreign consultant was chosen — Analyses Mason LTD (London, UK).
At December 2015, the tenderNCCIR founded a special working group for supporting research and conversionanalysis of the existing radio frequency resource. The research finished at December 05, 2016. The NCCIR received recommendation for the launch 4G/LTE in existing radio frequency resource by means of reforming of the spectrum, spectrum release and tendering. In accordance with recommendations of research the NCCIR will be preparing amendments to legislation on management of the radio frequencies on hold.
Following the election of Viktor Yanukovich as Ukraine's new President in February 2010, a working group was created in order to fulfill the assignment of Ukraine's Cabinet of Ministers regarding the conversion of frequencies.
In October 2010, the NCRC proposed an updated plan that stipulates carrying out the conversion within eight months of November 2010 and at a cost of 841 million hrivnias (RUB 3,245 million) in one stage by means of releasing the whole 100 MHz frequency range. In March 2011, the NCRC developed a draft regulation (which has yet to be approved by the Ukrainian government) for the compensation of costs incurred by various governmental agencies (including the Ministry of Defense) that currently hold frequencies to be converted. In 2012, theresource. The NCCIR wasis planning to determinemake the specific requirements of a publicfirst tender at October, 2017. The first recommended diapasons for the sale of frequencies for the development of 3G networks.4G/LTE are 1800, 2300, 2600 MHz. The tender was not held in 2012.
In July 2014, the President of Ukraine Petro Poroshenko issued a decree that prescribes NCCIR to hold an open auction for 3G-licenses for mobile operators until October 30, 2014. In December 2014, NCCIR published terms of a UMTS technology radio frequencies tender and started thefinal process of submission the applications from operators.licensing 4G/LTE will be determined at the 2017.
NCCIR published "Tender Conditions for assignment of the licenses on the use of frequency spectrum of Ukraine for the implementation of radio technology "Digital cellular radio communication IMT-2000 (UMTS)" in radio frequency bands 1920-1935/2110-2125, 1950-1965/2140-2155, 1965-1980/2155-2170 MHz" dated November 5, 2014 providing for key tender terms, such as, lot starting price 2.7 billion hryvnias (RUB 8.7 billion); conversion costs in the amount of 1.6 billion hryvnias (RUB 5.2 billion) (534 million hryvnias (RUB 1.7 billion) per each successful bidder).
The three largest mobile operators Kyivstar, MTS Ukraine and Astelit submitted bids (for each of the three lots). According to the results of the auction held by NCCIR on February 23, 2015, MTS Ukraine won the second lot for the use of 1950-1965/2140-2155 MHz frequency bands for 2.7 billion hryvnias (RUB 9.7 billion at the acquisition date). Successful bidder's portion of radio frequency conversion costs are to be financed under the Plan on Conversion of Radio Frequency Bands approved by NCCIR and the Defense Ministry. Successful bidders are obliged to obtain the approval of NCCIR, special users and other 3G licenses purchasers on requirements specification, including description of conversion terms and conditions, within two months from the tender results announcement date. To date, the terms of the contracts on conversion are being developed together with special users. After receiving a 3G license and signing a contract on conversion, MTS Ukraine will be able to start the process of obtaining permissive documents on exploitation of 3G network (base stations) equipment.
Equipment Certification
For installation on a telecommunications network either the manufacturer or the vendor must provide the operator with a document of confirmation to the normative documents compliance and documentary confirmation of inclusion in the registry of technical equipment that can be used in the telecommunication network. The Administration of State Service on Special Communications and Information Protection of Ukraine sets the technical standards for equipment designed for use in telecommunications networks in Ukraine.
The Radio Frequencies Law provides that users of radio frequency resources must obtain permits for the operation of radio-electronic and radio-emitting equipment, except for equipment used on a permit-free basis in accordance with this law. In order to obtain such operation permit, a company is required to file an application with the SCRF.UCRF. 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 within the NCCIR.special list which NCCIR maintains.
Competition
The Telecommunications Law provides that one of the purposes of the licensing of telecommunications services is to encourage competition and de-monopolization in the telecommunications industry.
Ukrainian antimonopoly legislation prohibits a company operating in Ukraine from abusing its dominant position in its market to gain,inter alia,, an unfair or anti-competitive advantage in the provision of its services or products. A legal 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. Further, Ukrainian antimonopoly legislation provides that a company shall be deemed dominant if its market share in the respective product market exceeds 35% unless such company proves that it faces significant competition in the respective product market. A telecommunications operators which are found by the AMC as having a dominant position in the markethave to use the rates for national and international interconnect, which are established by the NCCIR.
According to AC&M-Consulting, MTS Ukraine had a 34%36% market share of the wireless communications market in Ukraine as of December 31, 2014.
A telecommunications operator which is found by the AMC to have a dominant position in the market, in particular, may specifically be required to:
In June 2010, the AMC confirmed a finding dating back to May 2009 that eight mobile operators, including MTS Ukraine and its closest competitors, have a dominant position on the market for interconnecting to their own mobile networks. As a result, the interconnect fees charged by these operators, including MTS Ukraine, for termination of calls on their networks are currently regulated by the NCCIR. In February 2010, the NCRC approved interconnect rates for telecommunications operators found by the AMC to have a dominant position. Thus, MTS Ukraine was obligated to charge interconnect rates established by the NCRC, which were 0.35-0.40 hryvnias per minute excluding VAT (approximately RUB 0.011—RUB 0.012 as of December 31, 2013). See also "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Governmental regulation of SMP operators in Ukraine could adversely affect our results of operations."
In December 2010, the Telecommunications Law was amended to introduce the term "significant market power operator." An operator qualifies as a SMP operator if its share of gross revenue from the provision of traffic transfer services on fixed or mobile telecommunications networks during the last 12 months exceeded 25% of total gross revenues of all telecommunications operators for the same services during the same period. An operator can be classified as a significant market power operator on either the fixed telecommunications market, the mobile telecommunications market, or on both. Such an amendment could allow the NCCIR to recognize certain operators, including us, as operators with significant market power (rather than operators with dominant positions) and to regulate consequently their fees for traffic transfer services (rather than interconnect fees for termination of calls on the operators' networks).
In July 2010, the term "significant market power operator" was changed by the amendment to the Telecommunications Law which came into effect on January 1, 2011. From this date, the significant market power operator will be qualified in the market which is defined by NCCIR.
On October 20, 2011, the NCCIR issued a decision, which recognizes all mobile operators, including MTS Ukraine, as SMP operators on the market of call termination on their own networks.
On December 1, 2011, the NCCIR approved an interconnect rate of 0.36 hrivnias per minute excluding VAT (approximately RUB 0.011 as of December 31, 2013) which came into effect on January 1, 2012, for all SMP operators on the market of call termination on their own networks.
The Telecommunications Law also extends the power of the NCCIR to receive financial and economic data from telecommunications operators. Such information allows the NCCIR to analyze the Ukrainian telecommunications services market in order to determine which operators (if any) have a dominant position and which ones (if any) are significant market power operators for purposes of regulating fees such operators can charge for interconnect and traffic transfer services. In addition, the financial and economic data permits the NCCIR to better regulate the interaction of operators with regard to traffic transfer services and to assist without court dispute settlement. New amendments to the Telecommunications Law also set forth the methodology for fee determination that can be charged
for traffic transfer services based largely on a calculation that includes an operator's base cost plus profit level of certain services. Furthermore, in order to prevent "dumping" fees, operators that do not have a dominant position nor significant market power are prohibited under the Telecommunications Law from charging fees less than those charged by the regulated entities, but can charge more if they choose.
Due to the currently large market shares held by MTS Ukraine and Kyivstar in Ukraine, we believe that the AMC may determine that only these two operators (and not the current eight operators) have dominant positions on the market. If so, we and Kyivstar would remain the only regulated operators in Ukraine and, as a result, we could suffer a significant decrease in our interconnect revenues as well as an increase in the interconnect fees we pay to other operators not deemed to have a dominant position or significant market power.
On December 30, 2011, the AMC commenced an investigation of the telecommunications services market for the purpose of determining dominant market force abuse by MTS Ukraine in relation to international roaming services. During the investigation, MTS Ukraine has been continuously providing the AMC with documents and information officially requested by the AMC. A similar investigation was commenced in relation to our main competitor in Ukraine, Kyivstar. In the event that the AMC finds any operator has abused its dominant market force in relation to international roaming services, it could fine such an operator for up to 10% of its revenue for the previous year, calculated in accordance with local accounting principles.
On September 27, 2012, the AMC commenced an investigation into the telecommunications services market for the purpose of determining any abuse of a dominant market position by MTS Ukraine in relation to national mobile communications services. During the investigation, MTS Ukraine has been continuously providing the AMC with documents and information officially requested by the AMC. A similar investigation was commenced in relation to our main competitor in Ukraine, Kyivstar. In the event that the AMC finds any operator in abuse of its dominant market force in relation to international roaming services, it could fine such an operator for up to 10% of its revenue for the previous year, calculated in accordance with National Accounting Regulations (Standards) ("NR(S)AU").
On December 19, 2012, the AMC issued a mandatory recommendation following its international roaming services investigation. According to this recommendation, MTS Ukraine is obliged to decrease its tariffs on international roaming services to a competitive level. In January 2013, MTS Ukraine provided the AMC with the required information, necessary for fulfill this recommendation.
The cases on international roaming services and national mobile communications services have been closed, with MTS Ukraine receiving the relevant notices from the AMC on February 8, 2013 and February 11, 2013, respectively.2016.
Please see also "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—A finding by the AMC that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operations" for details of the AMC of Ukraine investigations in respect of international roaming services and national mobile communications services.
Tariffs
According to the Ukrainian laws, NCCIR regulates the following tariffs:
Under the Law of Ukraine on Telecommunications the Cabinet of Ministers of Ukraine is not authorized to regulate prices for telecommunication services.
In February 2006, NCCIR has set maximum tariffs on that operators having a dominant market position and, in April 2009, has set maximum tariffs on fixed line public telecommunications services.
Although there are no additional regulations limiting level of maximum tariffs on wireless telecommunications services, if the Antimonopoly Committee believes competition laws are violated, it can assert that tariffs unfair and injurious to market competition. In such cases, the AMC may,inter alia, request the telecommunications operator whom AMC considers as one violating the laws to remedy the situation, in particular, to amend its tariff scheme, and impose fines on the company for an violation.
Subject to the above, wireless operators are free to set tariffs at levels they consider appropriate.
Interconnect
Interconnect activity is regulated by the NCCIR. Operators may provide offers for interconnect to the NCCIR, and the NCCIR is required to publish on an annual or regular basis a catalog of such offers. Operators with a dominant position on the market and operators having significant market power (SMP-operators) are obliged to submit interconnect offers to the NCCIR for each catalog.
Interconnect is made pursuant to interconnect agreements between network operators as prescribed by the regulatory authorities. Such agreements are required under the law to contain certain provisions. An operator with a dominant position, as well as SMP-operator, cannot refuse an offer to conclude an interconnect agreement with another operator, if the offeror has offered points of interconnect that were previously published by the NCCIR in the catalog of interconnect proposals.
The NCCIR is authorized to conduct hearings and to resolve disputes among operators concerning the interconnection of telecommunications networks. Decisions of the NCCIR are binding upon the parties in the dispute but a party to the dispute may appeal such a decision in court.
In May 2009, the AMC issued a finding that eight mobile operators, including MTS Ukraine and its closest competitors, have a dominant position in relation to the market for interconnecting to each of their respective networks. MTS Ukraine appealed this decision in June 2009, and the AMC suspended the decision pending resolution of the appeal. In June 2010, the AMC confirmed its earlier decision and interconnect fees charged by MTS Ukraine for terminating calls on its network are currently regulated. In February 2010, the NCRC established regulated interconnect fees for termination of calls on the networks of operators that have a dominant position. See "—Competition."
In October 2011, the NCCIR defined all of operators, including MTS Ukraine, that have operated in the Ukrainian market in the period from 2009 through 2010 as having significant market power (SMP-operators) for termination traffic on their fixed and mobile networks (433 fixed and 8 mobile operators).networks. Effective 1 January 2012, the NCCIR regulates the interconnection rates for all SMP fixed and mobile operators, including MTS Ukraine. The interconnection rates charged by long- distancelong-distance operators are set up equal to rates charged by mobile operators.
The NCCIR regularly analyses the telecommunication market to determine operators with significant market power in this market. The last analysisIn October 2015 the NCCIR published the results of the latest market was carried out in October 2013. As a result of this analysis 345according to which 276 fixed and sevenall six mobile operators, including MTS Ukraine, were defined as SMP-operators. TheOn August 30, 2016 the NCCIR adopted the next regulatory act which establishes new interconnect rates charged byfor termination traffic on the networks of SMP-operators, have remained in placeeffective since January 1, 2012.
2017. As a result that the interconnect rates will be decrease from UAH 0.23 (RUB 0.513080) to UAH 0.15 (RUB 0.334618) for long- distance and mobile operators. Please see also "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"revenues and margins" for details of NCCIR' s plans to substantially lower interconnect rates for the termination of traffic.
Mobile Services
The following table shows, as of March 1, 2015,December 31, 2016, information with respect to the license areas in which we and our subsidiaries and affiliates provide or expect to provide GSM services:
| GSM 900 | GSM 1800 | ||||||
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License region | Licensee | Expiry date | Licensee | Expiry date | ||||
Moscow License Area | ||||||||
Moscow | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Moscow region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
St. Petersburg License Area | ||||||||
St. Petersburg | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Leningrad region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Russian Regional License Areas | ||||||||
European Russia | ||||||||
Adygeya Republic | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Arkhangelsk region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Astrakhan region | MTS | December 11, 2018 | MTS | October 18, | ||||
Bashkortostan Republic | MTS | August 22, 2017 | MTS | August 22, 2017 | ||||
Belgorod region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Bryansk region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Chuvashia Republic | MTS | December 30, 2018 | MTS | December 30, 2018 | ||||
Chechen Republic | MTS | June 10, 2019 | MTS | April 28, | ||||
Dagestan Republic | MTS | December 30, 2018 | MTS | December 30, 2018 | ||||
Ivanovo region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Ingushetia Republic | MTS | December 30, 2018 | MTS | December 30, 2018 | ||||
| MTS | June 10, 2019 | MTS | December 30, 2018 | ||||
Kaliningrad region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Kalmykia Republic | MTS | January 25, | MTS | December 30, 2018 | ||||
Kaluga region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
| MTS | December 30, 2018 | MTS | December 30, 2018 | ||||
Karelia Republic | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Kirov region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Komi Republic | MTS | August 22, 2017 | MTS | August 22, 2017 | ||||
Kostroma region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Krasnodar region | MTS | May 30, 2017 | MTS | May 30, 2017 | ||||
Kursk region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Lipetsk region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
| MTS | January 15, 2017 | MTS | January 15, 2017 | ||||
Mari El Republic | — | — | Smarts-Yoshkar-Ola JSC | January 26, 2022 | ||||
Mordovia Republic | MTS | December 30, 2018 | MTS | December 30, 2018 | ||||
Murmansk region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Nenetsk Autonomous region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Nizhny Novgorod region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Novgorod region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Orel region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Orenburg region | MTS | April 28,2018 | MTS | |||||
| ||||||||
| April 28, 2018 |
| GSM 900 | GSM 1800 | ||||||
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License region | Licensee | Expiry date | Licensee | Expiry date | ||||
| — | — | MTS PJSC | October 21, 2025 | ||||
Penza region | MTS | May 6, 2021 | — | — | ||||
Penza region | MTS PJSC | September 2, 2017 | MTS PJSC | September 2, 2017 | ||||
Perm region | MTS PJSC | April 28, 2018 | MTS | April 28, 2018 | ||||
Perm region | MTS PJSC | — | MTS PJSC | October 21, 2025 | ||||
Pskov region | MTS PJSC | April 28, 2018 | MTS PJSC | April 28, 2018 | ||||
Rostov region | MTS | July 1, | MTS | July 1, | ||||
Ryazan region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Samara region | MTS | December 30, 2017 | MTS | December 30, 2017 | ||||
Saratov region | MTS | July 11, 2017 | MTS | July 11, 2017 | ||||
Severnaya Osetia-Alania Republic | MTS | September 1, | MTS | September 1, | ||||
Severnaya Osetia-Alania Republic | — | — | MTS PJSC | October 21, 2025 | ||||
Smolensk region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Stavropol region | MTS | December 30, 2018 | MTS | December 30, 2018 | ||||
Tambov region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Tatarstan Republic | MTS | June 26, 2017 | MTS | June 26, 2017 | ||||
Tula region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Tver region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Udmurt Republic | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Ulyanovsk region | MTS | May 6, 2021 | MTS | December 30, 2018 | ||||
Vladimir region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Volgograd region | — | — | MTS | October 4, | ||||
Vologda region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Voronezh region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Yaroslavl region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Asian Russia | ||||||||
Altaisk region | MTS | September 8, | MTS | September 8, | ||||
Altai Republic | MTS | December 30, 2018 | MTS PJSC | December 30, 2018 | ||||
Altai Republic | MTS PJSC | July 19, | — | — | ||||
Amur region | MTS | MTS PJSC | April 28, 2018 | |||||
Amur region | MTS | |||||||
Buryatiya Republic | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Chelyabinsk region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Zabaykalsky region | Sibintertelecom | June 5, 2019 | Sibintertelecom | June 5, 2019 | ||||
Zabaykalsky region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Chukotsk Autonomous region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Jewish Autonomous region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Irkutsk region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Kamchatka region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Kemerovo region | MTS | December 30, 2018 | MTS | December 30, 2018 | ||||
Khabarovsk region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Khakassiya Republic | MTS | September 13, | MTS | September 13, | ||||
Khanty Mansiysk Autonomous region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Krasnoyarsk region | MTS | May 7, 2018 | MTS | May 7, 2018 | ||||
Kurgan region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Magadan region | MTS | April 28, 2018 | MTS | April 28, 2018 | ||||
Novosibirsk region | MTS | February 21, 2017 | MTS | February 21, 2017 | ||||
Omsk region | MTS | December 20, | MTS | December 20, | ||||
Primorsky region | MTS | April 28, 2018 | MTS | |||||
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| GSM 900 | GSM 1800 | ||||||
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License region | Licensee | Expiry date | Licensee | Expiry date | ||||
Sakha Republic (Yakutia) | MTS PJSC | April 28, 2018 | MTS PJSC | April 28, 2018 | ||||
Sakhalin region | MTS PJSC | April 28, 2018 | MTS PJSC | April 28, 2018 | ||||
Sverdlovsk region | MTS PJSC | April 28, 2018 | MTS PJSC | April 28, 2018 | ||||
Tomsk region | MTS PJSC | June 5, 2018 | MTS PJSC | June 5, 2018 | ||||
Tyumen region | MTS PJSC | April 28, 2018 | MTS PJSC | April 28, 2018 | ||||
Tyva Republic | MTS PJSC | July 19, 2021 | MTS PJSC | December 30, 2018 | ||||
Yamalo-Nenetsk Autonomous region | MTS PJSC | April 28, 2018 | MTS PJSC | April 28, 2018 | ||||
Ukraine | ||||||||
Ukraine | MTS Ukraine | MTS Ukraine | ||||||
Armenia | ||||||||
Armenia | K-Telecom CJSC | November 4, 2019 | K-Telecom CJSC | November 4, 2019 | ||||
Turkmenistan | ||||||||
Turkmenistan | July | July | ||||||
Belarus | ||||||||
Belarus | Mobile Telesystems LLC | April 30, 2022 | Mobile Telesystems LLC | April 30, 2022 | ||||
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License Region | Licensee | Expiry date | ||
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| MTS | May 21, 2017 | ||
| MTS | |||
Moscow License Area | MTS PJSC | May 21, 2017 | ||
St. Petersburg License Area | MTS PJSC | May 21, 2017 | ||
Moscow, Moscow region | MTS | April 28, 2018 | ||
St. Petersburg, Leningrad region | MTS PJSC | April 28, 2018 | ||
European Russia | ||||
Arkhangelsk region | MTS PJSC | April 28, 2018 | ||
Bashkortostan Republic | MTS PJSC | August 22, 2017 | ||
Kaliningrad region | MTS PJSC | April 28, 2018 | ||
Karelia Republic | MTS PJSC | April 28, 2018 | ||
Murmansk region | MTS PJSC | April 28, 2018 | ||
Nenetsk Autonomous region | MTS PJSC | April 28, 2018 | ||
Novgorod region | MTS PJSC | April 28, 2018 | ||
Pskov region | MTS PJSC | April 28, 2018 | ||
Vologda region | MTS PJSC | April 28, 2018 | ||
Asian Russia | ||||
Khabarovsk region | MTS PJSC | April 28, 2018 | ||
Khanty Mansiysk Autonomous region | Comstar-KHMAO JSC | May 23, 2018 | ||
Primorsky region | MTS PJSC | April 28, 2018 | ||
Turkmenistan | MTS-Turkmenistan | July | ||
Armenia | K-Telecom CJSC | November 4, 2019 | ||
Belarus | Mobile Telesystems LLC | April 30, 2022 | ||
Ukraine | MTS Ukraine | September | ||
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License Region | Licensee | Expiry date | ||
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| MTS | July 25, 2022 | ||
Asian Russia | MTS PJSC | April 15, 2026 | ||
European Russia | MTS PJSC | July 25, 2022 | ||
European Russia | MTS PJSC | April 15, 2026 | ||
Moscow License Area | MTS PJSC | July 25, 2022 | ||
Moscow License Area | MTS PJSC | December 29, 2021 | ||
St. Petersburg License Area | MTS PJSC | July 25, 2022 | ||
St. Petersburg License Area | MTS PJSC | April 15, 2026 | ||
Moscow, Moscow region | MTS | |||
| MTS | April 28, 2018 | ||
Asian Russia | ||||
Altai Republic | MTS PJSC | December 30, 2018 | ||
Altaisk region | MTS | September 8, | ||
Amur region | MTS | April 28, 2018 | ||
Amur region | MTS PJSC | October 21, 2025 | ||
Buryatiya Republic | MTS | April 28, 2018 | ||
Chelyabinsk region | MTS | April 28, 2018 | ||
Chukotsk Autonomous region | MTS PJSC | April 28, 2018 | ||
Zabaykalsky region | MTS PJSC | April 28, 2018 | ||
Irkutsk Autonomous region | MTS | April 28, 2018 | ||
Jewish Autonomous region | MTS | April 28, 2018 | ||
Kamchatka region | MTS PJSC | April 28, 2018 | ||
Kemerovo region | MTS PJSC | December 30, 2018 | ||
Khabarovsk region | MTS | April 28, 2018 | ||
Khakassiya Republic | MTS | September 13, | ||
Khanty Mansiysk Autonomous region | MTS | April 28, 2018 | ||
Krasnoyarsk Territory | MTS | May 7, 2018 | ||
Kurgan region | MTS | April 28, 2018 | ||
Magadan region | MTS PJSC | April 28, 2018 | ||
Novosibirsk region | MTS | February 21, 2017 | ||
Omsk region | MTS | December 20, | ||
Primorsky region | MTS | April 28, 2018 | ||
Sakha Republic (Yakutia) | MTS | April 28, 2018 | ||
Sakhalin region | MTS PJSC | April 28, 2018 | ||
Sverdlovsk region | MTS | April 28, 2018 | ||
Tomsk region | MTS | June 5, 2018 |
Tyumen region | MTS | April 28, 2018 | ||
Tyva Republic | MTS | December 30, 2018 | ||
YamaloNenetsk Autonomous region | MTS | April 28, 2018 | ||
European Russia | ||||
Adygeya Republic | MTS | April 28, 2018 | ||
Arkhangelsk region | MTS | April 28, 2018 | ||
Bashkortostan Republic | MTS | August 22, 2017 | ||
Belgorod region | MTS | April 28, 2018 | ||
Bryansk region | MTS | April 28, 2018 | ||
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License Region | Licensee | Expiry date | ||
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Chuvashia Republic | MTS PJSC | December 30, 2018 | ||
Dagestan Republic | MTS PJSC | December 30, 2018 | ||
Ivanovo region | MTS PJSC | April 28, 2018 | ||
Kaliningrad region | MTS PJSC | April 28, 2018 | ||
Kaluga region | MTS PJSC | April 28, 2018 | ||
KarachaevoCherkesia Republic | MTS PJSC | December 30, 2018 | ||
Karelia Republic | MTS PJSC | April 28, 2018 | ||
Kirov region | MTS PJSC | April 28, 2018 | ||
Komi Republic | MTS PJSC | August 22, 2017 | ||
Kostroma region | MTS PJSC | April 28, 2018 | ||
Krasnodar territory | MTS PJSC | May 30, 2017 | ||
Kursk region | MTS PJSC | April 28, 2018 | ||
Lipetsk region | MTS PJSC | April 28, 2018 | ||
Mari El Republic | MTS PJSC | January 15, 2017 | ||
Murmansk region | MTS PJSC | April 28, 2018 | ||
Nenetsk Autonomous region | MTS PJSC | April 28, 2018 | ||
Nizhny Novgorod region | MTS PJSC | April 28, 2018 | ||
Novgorod region | MTS PJSC | April 28, 2018 | ||
Orel region | MTS PJSC | April 28, 2018 | ||
Orenburg region | MTS PJSC | April 28, 2018 | ||
Orenburg region | MTS PJSC | October 21, 2025 | ||
Perm region | MTS PJSC | April 28, 2018 | ||
Perm region | MTS PJSC | October 21, 2025 | ||
Pskov region | MTS PJSC | April 28, 2018 | ||
Rostov region | MTS PJSC | July 1, 2020 | ||
Ryazan region | MTS PJSC | April 28, 2018 | ||
Samara region | MTS PJSC | December 30, 2017 | ||
Saratov region | MTS PJSC | July 11, 2017 | ||
Severnaya Osetia Alania Republic | MTS PJSC | September 1, 2021 | ||
Severnaya Osetia Alania Republic | MTS PJSC | October 21, 2025 | ||
Smolensk region | MTS PJSC | April 28, 2018 | ||
Stavropol territory | MTS PJSC | December 30, 2018 | ||
Tambov region | MTS PJSC | April 28, 2018 | ||
Tatarstan Republic | MTS PJSC | June 26, 2017 | ||
Tula region | MTS PJSC | April 28, 2018 | ||
Tver region | MTS PJSC | April 28, 2018 | ||
Udmurt Republic | MTS PJSC | April 28, 2018 | ||
Ulyanovsk region | MTS PJSC | December 30, 2018 | ||
Vladimir region | MTS PJSC | April 28, 2018 | ||
Volgograd region | MTS PJSC | October 4, 2021 | ||
Vologda region | MTS PJSC | April 28, 2018 | ||
Voronezh region | MTS PJSC | April 28, 2018 | ||
Yaroslavl region | MTS PJSC | April 28, 2018 | ||
Armenia | K-Telecom CJSC | November 4, 2019 |
License Region | Licensee | Expiry date | ||
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Penza region | MTS PJSC | April 22, 2020 | ||
Ivanovo region | MTS PJSC | June 4, 2020 | ||
Moscow, Moscow region | MGTS PJSC | August 2, 2018 | ||
Zabaykalsky region | Sibintertelecom | September 8, | ||
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Each of our licenses requires service to be started by a specific date. We have met this target or received extensions to these dates in those regional license areas in which we have not commenced operations. 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 (except for Uzbekistan, see Note 4 to our audited consolidated financial statements).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.
Fixed Line Services
The following table shows, as of December 31, 2014,2016, information with respect to our fixed line licenses:
Licensee | License Region(s) | License number | Expiry Date | |||
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International, national, intra-zonal and local communications services | ||||||
MTS PJSC | Ryazan region | 138952 | December 23, 2020 | |||
MTS PJSC | Sverdlovsk region | 140009 | March 15, 2021 | |||
City Telecom CJSC | Moscow | October 24, 2017 | ||||
Smarts-Yoshkar-Ola JSC | Mari El Republic | 128311 | January 26, 2017 | |||
MTS PJSC | Saratov region | 97004 | March 15, 2017 | |||
MTS PJSC | Penza region | 97010 | March 15, 2017 | |||
MTS PJSC | Tambov region | 97011 | March 15, 2017 | |||
MTS PJSC | Kaluga region | 97036 | March 15, 2017 | |||
MTS PJSC | Sverdlovsk region | 97037 | March 15, 2017 | |||
MTS PJSC | Kirov region | 97043 | March 15, 2017 | |||
MTS PJSC | Ivanovo region | 146068 | October 24, 2021 | |||
MTS PJSC | Kurgan region | 117814 | February 17, 2019 | |||
MTS PJSC | Bashkortostan Republic | 135028 | November 21, 2020 | |||
Comstar-KHMAO JSC | Khanty Mansiysk Autonomous region | 136645 | December 1, 2020 | |||
Comstar-KHMAO JSC | Khanty Mansiysk Autonomous region | 136647 | December 1, 2020 | |||
MTS PJSC | St. Petersburg, Leningrad region, Arkhangelsk region, Karelia Republic, Murmansk region, Novgorod region, Vologda region | 94373 | April 17, 2017 | |||
MTS PJSC | Altai Republic | 96181 | February 17, 2017 | |||
MTS PJSC | Irkutsk region | 97008 | March 15, 2017 | |||
MTS PJSC | Khabarovsk Territory | 97012 | March 15, 2017 | |||
MTS PJSC | Primorsky Territory | 97026 | March 15, 2017 | |||
MTS PJSC | Kaliningrad region | 104022 | December 17, 2017 | |||
MGTS PJSC | Moscow | 112865 | December 11, 2018 | |||
MGTS | ||||||
Moscow region | ||||||
MTS | Zabaykalsky Territory | 127170 | May 6, 2020 | |||
MGTS PJSC | Moscow, | |||||
Moscow region | ||||||
MTS | ||||||
March | ||||||
Licensee | License Region(s) | License number | Expiry Date | |||
---|---|---|---|---|---|---|
MTS | ||||||
Udmurt Republic | ||||||
MTS | ||||||
MTS | October 24, | |||||
MTS | ||||||
Yaroslavl region | October 24, | |||||
MTS | October 24, | |||||
MTS | ||||||
Rostov region | October 24, | |||||
MTS | Krasnodar | October 24, | ||||
MTS | Chelyabinsk region | October 24, | ||||
MTS | Perm region | October 24, | ||||
MTS | Kurgan region | October 24, | ||||
MTS | Khanty Mansiysk Autonomous region | October 24, | ||||
MTS | Tomsk region | October 24, | ||||
MTS | Novosibirsk region | October 24, | ||||
MTS | October 24, | |||||
MTS | Samara region | October 24, | ||||
MTS | ||||||
Tatarstan Republic | October 24, | |||||
MTS | Nizhny Novgorod region | October 24, | ||||
MTS | Kirov region | October 24, | ||||
MTS | Komi Republic | October 24, | ||||
MTS | Sakha Republic (Yakutia) | October 24, | ||||
MTS | Khabarovsk | October 24, | ||||
MTS | Amur region | October 24, | ||||
MTS | 140458 | June 6, 2021 | ||||
MTS PJSC | Moscow region | November 21, 2020 | ||||
MTS PJSC | Moscow | 137566 | February 16, 2021 | |||
MTS PJSC | Moscow region | 94371 | March | |||
MTS | July 3, 2020 | |||||
MTS PJSC | Moscow | 94369 | March | |||
MTS | Moscow | 94370 | March 30, 2017 | |||
MTS PJSC | Moscow region | 146093 | October 12, 2021 | |||
MTS PJSC | Belgorod region | 103569 | October 3, 2017 | |||
MTS PJSC | Orel region | 103568 | October 3, 2017 | |||
MGTS PJSC | Moscow | 108069 | July 10, 2018 | |||
MTS PJSC | Rostov region | 110869 | August 1, 2018 | |||
MTS PJSC | Severnaya Osetia Alania Republic | 110870 | August 1, 2018 | |||
MTS PJSC | Krasnodar territory | 110871 | August 1, 2018 | |||
MTS PJSC | Volgograd region | 146085 | November 17, 2021 | |||
MTS PJSC | Irkutsk region | 146069 | October 24, 2021 | |||
MTS PJSC | Sakhalin region | 146081 | October 24, 2021 | |||
MTS PJSC | Primorsky Territory | 146070 | October 24, 2021 | |||
MTS PJSC | Bashkortostan Republic | 131715 | September 8, 2020 | |||
MTS PJSC | Bashkortostan Republic | 92587 | March 5, 2017 | |||
MTS PJSC | Orenburg region | |||||
MTS | ||||||
MTS PJSC | Astrakhansk region | 114620 | January 19, 2019 | |||
MTS PJSC | Kemerovo region | 114621 | January 19, 2019 | |||
MTS PJSC | Arkhangelsk region | 114622 | January 19, 2019 | |||
MTS PJSC | Vologda region | 114623 | January 19, 2019 | |||
MTS PJSC | Kaliningrad region | 114624 | January 19, 2019 |
Licensee | License Region(s) | License number | Expiry Date | |||
---|---|---|---|---|---|---|
MTS | 114628 | January 19, 2019 | ||||
MTS PJSC | Murmansk region | January 19, 2019 | ||||
MTS PJSC | Novgorod region | 114629 | January 19, 2019 | |||
MTS PJSC | St. Petersburg | 114626 | January 19, 2019 | |||
MTS PJSC | Komi Republic | 114627 | January 19, 2019 | |||
MTS PJSC | Volgograd region | 115176 | March | |||
MTS PJSC | Omsk region | 146088 | October 4, 2021 | |||
MTS PJSC | Udmurt Republic | 146091 | October 4, 2021 | |||
MTS PJSC | Omsk region | 145060 | October 4, 2021 | |||
MTS PJSC | Nizhny Novgorod region | 123658 | October 1, 2019 | |||
MTS PJSC | Ryazan region | 129950 | July 3, 2020 | |||
MTS PJSC | Orel region, Voronezh region | 101773 | October 24, 2017 | |||
MTS | Belgorod region, Bryansk region, Kursk region, Lipetsk region | 104896 | February 7, 2018 | |||
MTS PJSC | Severnaya Osetia Alania Republic | 97615 | June 5, 2017 | |||
MTS PJSC | Dagestan Republic | 97616 | June 5, 2017 | |||
MTS PJSC | Tomsk region | 104900 | February 27, 2018 | |||
MTS PJSC | Altaisk territory | 104899 | February 27, 2018 | |||
MTS PJSC | Krasnoyarsk Territory | 104895 | February 27, 2018 | |||
MTS PJSC | Novosibirsk region | 104898 | February 27, 2018 | |||
MTS PJSC | Tver region | 104894 | February 27, 2018 | |||
MTS PJSC | Smolensk region | 104897 | February 27, 2018 | |||
MTS PJSC | Buryatiya Republic | 105547 | April 18, 2018 | |||
MTS PJSC | Saratov region | 105548 | April 18, 2018 | |||
MTS PJSC | Chuvashia Republic | 109493 | April 11, 2018 | |||
MTS PJSC | Mari El Republic | 109494 | April 11, 2018 | |||
MTS PJSC | Penza region | 116023 | March 14, 2017 | |||
MTS PJSC | Tyumen region, YamaloNenetsk Autonomous region | 135962 | December 1, 2020 | |||
MTS PJSC | Tyumen region, YamaloNenetsk Autonomous region | 134773 | August 31, 2017 | |||
MTS PJSC | Ulyanovsk region | 110736 | February 28, 2017 | |||
MTS PJSC | Tambov region | |||||
MTS | ||||||
MTS | ||||||
MTS | ||||||
MTS | ||||||
MTS | ||||||
MTS | ||||||
Kursk region | December 18, 2019 | |||||
MTS | ||||||
Leningrad region | December | |||||
MTS | ||||||
Tatarstan Republic | May 23, 2018 | |||||
Licensee | License Region(s) | License number | Expiry Date | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Telematic Services | ||||||||||||
MTS | ||||||||||||
Komi Republic , Perm region, Orenburg region, Orel region, Nizhny Novgorod region, Lipetsk region, Moscow, Kostroma region, Smolensk region, Kirov region, Kaluga region, Ivanovo region, Bryansk region, Belgorod region, Moscow region, Kursk region, Voronezh region, Tyumen region, Sverdlovsk | February 15, | |||||||||||
City Telecom CJSC | Moscow | 99296 | October 24, 2017 | |||||||||
Smarts-Yoshkar-Ola JSC | Mari El Republic | 131214 | June 4, 2020 | |||||||||
MTS | Russian Federation except Moscow, Moscow region, Krym Republic, Sevastopol | 142346 | April 15, 2026 | |||||||||
MTS PJSC | Bashkortostan Republic | June 21, | ||||||||||
MTS | Krasnoyarsk Territory | 108065 | May 7, 2018 | |||||||||
MGTS PJSC | Moscow, Moscow region | 145447 | December 11, 2021 | |||||||||
"Strim" Ltd | Russian Federation | 145493 | September 22, 2021 | |||||||||
MTS PJSC | Tyva Republic | 128521 | July 28, 2020 | |||||||||
MTS PJSC | Krasnodar territory | 129951 | July 15, 2020 | |||||||||
MTS PJSC | Chuvashia Republic, Mordovia Republic | 131717 | September 14, 2020 | |||||||||
MTS PJSC | Dagestan Republic, Ingushetia Republic, KabardinoBalkar Republic, KarachaevoCherkesia Republic, Severnaya Osetia Alania Republic | 131721 | September 14, 2020 | |||||||||
Sibintertelecom JSC | Zabaykalsky Territory | 132674 | September 14, 2020 | |||||||||
MTS PJSC | Rostov region | 134507 | October 26, 2020 | |||||||||
MTS PJSC | Khabarovsk | June 17, | ||||||||||
MTS | Novosibirsk region | April 13, | ||||||||||
MTS | Khakassiya Republic | June 17, | ||||||||||
MTS | Tomsk region | June 17, | ||||||||||
MTS | Sakha Republic (Yakutia) | July 15, | ||||||||||
MTS | Tatarstan Republic | July 15, | ||||||||||
MTS PJSC | St. Petersburg, Leningrad region, Arkhangelsk region, Kaliningrad region, Karelia Republic, Murmansk region, Nenetsk Autonomous region, Novgorod region, Vologda region | 145056 | October 4, 2021 | |||||||||
MTS PJSC | Altaisk territory | 147352 | December 1, 2021 | |||||||||
MTS PJSC | Altai Republic | 96857 | May 22, 2017 | |||||||||
MTS PJSC | Penza region | 125651 | April 1, 2020 |
Licensee | License Region(s) | License number | Expiry Date | |||
---|---|---|---|---|---|---|
MTS | ||||||
| ||||||
MTS | ||||||
Mari El Republic | ||||||
MTS | Volgograd region | 127684 | May 30, 2020 | |||
MTS PJSC | Primorsky Territory | 135961 | December 21, 2020 | |||
MTS PJSC | Buryatiya Republic, Kamchatka region, Magadan region, Sakhalin region | 128536 | June 17, 2020 | |||
MTS PJSC | Zabaykalsky | 118159 | June 5, 2019 | |||
MTS PJSC | Stavropol territory | 127678 | May 26, 2020 | |||
MTS PJSC | Samara region | May 26, 2020 | ||||
MTS PJSC | Saratov region | 127688 | May 31, 2020 | |||
MTS PJSC | Ulyanovsk region | 127681 | May 31, 2020 | |||
MTS PJSC | Kemerovo region | 128530 | May 31, 2020 | |||
MTS PJSC | Astrakhansk region | 129949 | July 15, 2020 | |||
MTS PJSC | Adygeya Republic | 129947 | July 15, 2020 | |||
MTS PJSC | Kalmykia Republic | 129957 | July 28, 2020 | |||
MTS PJSC | Chechen Republic | 104023 | December 6, 2017 | |||
MTS PJSC | Russian Federation | 101246 | July 25, 2022 | |||
Multikabel'nye sety balashikhi LLC | Moscow region | 149925 | June 19, 2021 | |||
Teleservice JSC | Voronezh region | 135894 | November 21, | |||
Leased Communications Circuits | ||||||
Smarts-Yoshkar-Ola JSC | 131215 | June 4, 2020 | ||||
City Telecom CJSC | Moscow | 99295 | October 24, 2017 | |||
MTS PJSC | Jewish Autonomous region | November 14, 2019 | ||||
MTS PJSC | Yamalo-Nenetsk Autonomous region, Tyumen region, Sverdlovsk region, Kurgan region, Khanty Mansiysk Autonomous region, Chelyabinsk region, Amur region, Udmurt Republic, Tambov region, Perm region, Orenburg region | 138262 | April 13, 2021 | |||
Comstar-KHMAO JSC | Khanty Mansiysk Autonomous region | 136356 | October 6, 2020 | |||
MTS PJSC | Russian Federation | 147355 | December 29, 2021 | |||
MTS PJSC | Tatarstan Republic | 108060 | May | |||
MTS | May | |||||
MTS | ||||||
Krasnoyarsk | May 7, 2018 | |||||
MTS | Bashkortostan Republic | May 7, 2018 | ||||
MTS | ||||||
May 7, 2018 | ||||||
MTS | ||||||
MTS | Chuvashia Republic | July 28, | ||||
MTS | 129948 | July 15, 2020 | ||||
MTS PJSC | Kaluga region, Pskov region, Ryazan region, Smolensk region, Tula region, Vladimir region | 134506 | October 7, 2020 | |||
MTS PJSC | Ivanovo region, Kirov region, Nizhny Novgorod region, Yaroslavl region | 134509 | October 13, 2020 | |||
MTS PJSC | Mordovia Republic |
Licensee | License Region(s) | License number | Expiry Date | |||
---|---|---|---|---|---|---|
MTS | ||||||
July 28, | ||||||
MTS | Khakassiya Republic | June 17, | ||||
MTS | Kaliningrad region | March 1, 2017 | ||||
MTS | March 1, 2017 | |||||
MTS | Omsk region | December 27, | ||||
MTS | Chukotsk Autonomous region | August 6, 2019 | ||||
MTS | July 2, 2019 | |||||
MTS | 110872 | October 2, 2018 | ||||
MTS PJSC | Mari El Republic | 134511 | October 5, 2020 | |||
MTS PJSC | Khabarovsk Territory, Sakha Republic (Yakutia), Zabaykalsky Territory | 135026 | November 21, 2020 | |||
MTS PJSC | Magadan region | 96042 | May 21, 2017 | |||
MTS PJSC | Irkutsk region | 96040 | May 21, 2017 | |||
MTS PJSC | Kamchatka region, Koryakski Autonomous region | May 21, 2017 | ||||
MTS PJSC | Sakhalin region | 130986 | August 25, 2020 | |||
MTS PJSC | Buryatiya Republic | 130983 | August 25, 2020 | |||
MTS PJSC | Primorsky Territory | 127171 | May 10, 2020 | |||
MTS PJSC | Moscow, Moscow region, Komi Republic, Kostroma region, Tver region | 111802 | November | |||
MTS PJSC | December | |||||
MTS PJSC | ||||||
December | ||||||
Sibintertelecom | Zabaykalsky | June 5, 2019 | ||||
MTS PJSC | Samara region, Saratov region, Ulyanovsk region | 127686 | May 31, 2020 | |||
MTS PJSC | Astrakhansk region, Stavropol territory | 127683 | May 31, 2020 | |||
MTS PJSC | Dagestan Republic | 96041 | May 21, 2017 | |||
MTS PJSC | Ingushetia Republic, KabardinoBalkar Republic, KarachaevoCherkesia Republic, Volgograd region | 105546 | April 18, 2018 | |||
MGTS PJSC | Moscow, Moscow region | 131496 | December 11, 2018 | |||
Sputnikovoe TV | Russian Federation | 129794 | August 2, 2018 | |||
Data Transmission Services | ||||||
City Telecom CJSC | Moscow | |||||
Smarts-Yoshkar-Ola JSC | Mari El Republic | 131213 | June 4, 2020 | |||
MTS PJSC | Russian Federation except Moscow, Moscow region, Krym Republic, Sevastopol | 142344 | April 15, 2026 | |||
MGTS PJSC | Moscow | 125847 | December 11, 2018 | |||
MTS PJSC | Krasnoyarsk Territory | 108058 | May 7, 2018 | |||
MGTS PJSC | Moscow region | 125854 | April 17, 2019 | |||
MTS PJSC | Tyva Republic | 128517 | July 28, 2020 | |||
MTS PJSC | Kalmykia Republic | 129942 | July 28, 2020 |
Licensee | License Region(s) | License number | Expiry Date | |||
---|---|---|---|---|---|---|
MTS PJSC | 129952 | July 15, 2020 | ||||
MTS PJSC | Chuvashia Republic, Mordovia Republic | 131718 | September 14, 2020 | |||
MTS PJSC | Dagestan Republic, Ingushetia Republic, KabardinoBalkar Republic, KarachaevoCherkesia Republic, Severnaya Osetia Alania Republic | 131719 | September 14, 2020 | |||
Sibintertelecom JSC | Zabaykalsky Territory | 132676 | September 14, 2020 | |||
MTS PJSC | Rostov region | 138261 | April 3, 2021 | |||
MTS PJSC | Bashkortostan Republic | 129955 | June 30, 2020 | |||
MTS PJSC | Khabarovsk Territory | 127172 | May 31, 2020 | |||
MTS PJSC | Altai Republic | 128534 | July 15, 2020 | |||
MTS PJSC | Novosibirsk region | 128526 | July 15, 2020 | |||
MTS PJSC | Khakassiya Republic | 128522 | June 17, 2020 | |||
MTS PJSC | Tomsk region | 128535 | June 17, 2020 | |||
MTS PJSC | Sakha Republic (Yakutia) | 128527 | June 17, 2020 | |||
MTS PJSC | Tatarstan Republic | 129953 | July 15, 2020 | |||
MTS PJSC | Perm region, Chelyabinsk region, Khanty Mansiysk Autonomous region, Kurgan region, Omsk region, Sverdlovsk region, Tyumen region, YamaloNenetsk Autonomous region | 93682 | April 17, 2017 | |||
MTS PJSC | Orenburg region | 93684 | April 17, 2017 | |||
MTS PJSC | Kirov region, Nizhny Novgorod region, Udmurt Republic | 93685 | April 17, 2017 | |||
MTS PJSC | Moscow, Moscow region | 93680 | April 17, 2017 | |||
MTS PJSC | Amur region | 93681 | April 17, 2017 | |||
MTS PJSC | Belgorod region, Bryansk region, Kursk region, Lipetsk region, Orel region, Voronezh region | 93686 | April 17, 2017 | |||
MTS PJSC | Ivanovo region, Kaluga region, Kostroma region, Ryazan region, Smolensk region, Tambov region, Tula region, Tver region, Vladimir region, Yaroslavl region | 93687 | April 17, 2017 | |||
MTS PJSC | St. Petersburg, Leningrad region, | 93683 | April 17, 2017 | |||
MTS PJSC | Penza region | 125652 | April 1, 2020 | |||
MTS PJSC | Chukotsk Autonomous region, | |||||
August 13, | ||||||
MTS | Zabaykalsky | June 5, 2019 | ||||
MTS | Mari El Republic | September 14, | ||||
MTS | October 31, 2018 | |||||
MTS | Volgograd region | June 30, | ||||
MTS | June 17, | |||||
Licensee | License Region(s) | License number | Expiry Date | |||
---|---|---|---|---|---|---|
MTS | Primorsky Territory | 135957 | December 21, 2020 | |||
MTS PJSC | Stavropol territory | 127685 | May 26, 2020 | |||
MTS PJSC | Samara region | May 26, | ||||
MTS | Kemerovo region | May 31, | ||||
MTS | Saratov region | May 31, | ||||
MTS | Ulyanovsk region | May 31, | ||||
MTS | July 15, | |||||
MTS | Adygeya Republic | July 15, | ||||
MTS | Chechen Republic | December 6, 2017 | ||||
MTS | Russian Federation | 101248 | July 25, 2022 | |||
Multikabel'nye sety balashikhi LLC | Moscow region | 149923 | June 19, 2021 | |||
Teleservise JSC | Voronezh region | 135893 | December 21, 2020 | |||
Data Transmission Services for Voice | ||||||
City Telecom CJSC | Moscow | 122706 | December 18, 2019 | |||
MTS PJSC | Russian Federation except Moscow, Moscow region, Krym Republic, Sevastopol | 142345 | April 15, 2026 | |||
Smarts-Yoshkar-Ola JSC | Mari El Republic | 131212 | June 4, 2020 | |||
MTS PJSC | Bashkortostan Republic | 138260 | April 11, 2021 | |||
MTS PJSC | Arkhangelsk region | 117815 | February 17, 2019 | |||
MTS PJSC | Krasnoyarsk Territory | 117816 | February 17, 2019 | |||
MTS PJSC | Novosibirsk region | |||||
MTS | Leningrad region | 117818 | February 17, 2019 | |||
MTS PJSC | Nizhny Novgorod region | 117819 | February 17, 2019 | |||
MTS PJSC | Omsk region | 117820 | February 17, 2019 | |||
MTS PJSC | Smolensk region | 117821 | February 17, 2019 | |||
MTS PJSC | Novgorod region | 117822 | February 17, 2019 | |||
MTS PJSC | Tula region | 117823 | February 17, 2019 | |||
MTS PJSC | Volgograd region | 117824 | February 17, 2019 | |||
MTS PJSC | Kemerovo region | 117825 | February 17, 2019 | |||
MTS PJSC | Yaroslavl region | 131138 | June 4, 2020 | |||
Comstar-KHMAO JSC | Khanty Mansiysk Autonomous region | 136646 | December 1, 2020 | |||
MTS PJSC | Mordovia Republic | 97001 | March 15, 2017 | |||
MTS PJSC | Saratov region | 97002 | March 15, 2017 | |||
MTS PJSC | Tomsk region | 97003 | March 15, 2017 | |||
MTS PJSC | Mari El Republic | 97005 | March 15, 2017 | |||
MTS PJSC | Amur region | 97006 | March 15, 2017 | |||
MTS PJSC | Altaisk territory | 97013 | March 15, 2017 | |||
MTS PJSC | Buryatiya Republic | 97014 | March 15, 2017 | |||
MTS PJSC | Kalmykia Republic | |||||
MTS | ||||||
MTS | ||||||
MTS | 97018 | March 15, 2017 | ||||
MTS PJSC | Komi Republic | |||||
MTS | ||||||
MTS | ||||||
MTS | Altai Republic | |||||
MTS | ||||||
Vologda region |
Licensee | License Region(s) | License number | Expiry Date | |||
---|---|---|---|---|---|---|
MTS | ||||||
March 15, | ||||||
MTS PJSC | ||||||
MTS PJSC | Sakha Republic (Yakutia) | 97031 | March 15, 2017 | |||
MTS PJSC | Stavropol territory | 97032 | March 15, 2017 | |||
MTS PJSC | Tyva Republic | 97033 | March 15, 2017 | |||
MTS PJSC | Chechen Republic | 97035 | March 15, 2017 | |||
MTS PJSC | Zabaykalsky | |||||
March | ||||||
MTS | ||||||
Kirov region | March 15, 2017 | |||||
MTS | ||||||
Khakassiya Republic | March 15, 2017 | |||||
MTS | March 15, 2017 | |||||
MTS | Ulyanovsk region | 97042 | March 15, 2017 | |||
MTS PJSC | Adygeya Republic | 97044 | March 15, 2017 | |||
MTS PJSC | Ingushetia Republic | 97045 | March 15, 2017 | |||
MTS PJSC | Kaliningrad region | 97046 | March 15, 2017 | |||
MTS PJSC | Karelia Republic | 97047 | March 15, 2017 | |||
MTS PJSC | Penza region | 97048 | March 15, 2017 | |||
MTS PJSC | Severnaya Osetia Alania Republic | March 15, 2017 | ||||
MTS | March 15, 2017 | |||||
MTS | March 15, 2017 | |||||
MTS | 108752 | March 25, 2018 | ||||
MTS PJSC | Nenetsk Autonomous region | 108753 | March 25, 2018 | |||
MTS PJSC | Tatarstan Republic | March 25, 2018 | ||||
MTS PJSC | Ryazan region, Vladimir region | 108755 | March 25, 2018 | |||
MTS PJSC | Chukotsk Autonomous region, Jewish Autonomous region | 108756 | March 25, 2018 | |||
MGTS PJSC | Moscow | 135506 | February 16, 2021 | |||
MTS PJSC | Magadan region | 97007 | March 15, 2017 | |||
MTS | March 15, 2017 | |||||
MTS | March 15, 2017 | |||||
MTS | March | |||||
MTS | ||||||
MTS | ||||||
MTS | ||||||
MTS | ||||||
MTS | ||||||
MTS | ||||||
MGTS PJSC | Moscow region | 125849 | January 26, 2017 | |||
MTS | ||||||
MTS PJSC | Krasnodar territory | 110717 | August 17, 2017 | |||
MTS PJSC | Perm region | 110716 | February 27, 2018 | |||
MTS PJSC | Russian Federation | 101245 | July 25, 2022 | |||
MTS PJSC | Tambov region | 122730 | December 18, 2019 | |||
MTS PJSC | Tyumen region, YamaloNenetsk Autonomous region | 135966 | December 1, 2020 | |||
MTS PJSC | St. Petersburg | 124994 | January 28, 2020 |
Licensee | License Region(s) | License number | Expiry Date | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
MTS | ||||||||||||
Udmurt Republic | February 27, 2018 | |||||||||||
MTS | Samara region | 123560 | December 31, 2019 | |||||||||
MTS PJSC | Tver region | November 24, 2019 | ||||||||||
Mobile Radio Services | ||||||||||||
MTS | Orenburg region | October 2, | ||||||||||
MTS | Rostov region | August 31, 2017 | ||||||||||
MTS | December 15, | |||||||||||
MTS PJSC | Khanty | December 15, |
MGTS | Moscow, Moscow Region | August 02, 2018 | ||||
Telecommunications Services for Cablecasting | ||||||
MTS | Russian Federation | November 24, 2019 | ||||
MGTS | Moscow | January 27, | ||||
MGTS | Moscow region | June 18, 2018 | ||||
Multikabel'nye sety balashikhi LLC | Moscow region | 149924 | June 19, 2021 | |||
Teleservice JSC | Voronezh region | 138177 | March 15, 2021 | |||
Telecommunications Services for Broadcasting | ||||||
Sputnikovoe TV | ||||||
October 1, 2019 | ||||||
Cable Radio (communication services for the purpose of wire broadcasting) | ||||||
MTS | Nizhny Novgorod region | October 1, 2019 | ||||
MTS PJSC | Sverdlovsk region | May 23, 2019 | ||||
MTS PJSC | Kirov region | 149715 | November 16, 2021 | |||
MTS PJSC | Perm region | 129415 | April 22, 2020 | |||
MTS PJSC | Chelyabinsk region | 137711 | November 20, 2020 |
C. Organizational Structure
The table below presents our significant subsidiaries and investees, the places of incorporation and our effective ownership interests therein as of December 31, 2014.2016.
Subsidiary | Accounting Method | Ownership Interest | Place of Incorporation/ Organization | ||||
---|---|---|---|---|---|---|---|
| |||||||
Russian Telephone Company | Consolidated | 100.0 | % | Russia | |||
| Consolidated | 100.0 | % | Ukraine | |||
MTS Turkmenistan | Consolidated | 100.0 | % | Turkmenistan | |||
Sibintertelecom | Consolidated | 100.0 | % | Russia | |||
NVision Group | Consolidated | 100.0 | % | Russia | |||
Sitronics Telecom Solutions | Consolidated | 100.0 | % | Russia | |||
Nvision Czech Republic | Consolidated | 100.0 | % | Czech Republic | |||
Sputnikovoe TV | Consolidated | 100.0 | % | Russia | |||
Stream LLC | Consolidated | 100.0 | % | Russia | |||
Dega Retail Holding Limited | Consolidated | 100.0 | % | British Virgin Islands | |||
Stream Digital LLC(1) | Consolidated | 100.0 | % | Russia | |||
Metro-Telecom | Consolidated | 95.0 | % | Russia | |||
MGTS | Consolidated | % | Russia | ||||
| |||||||
| |||||||
| |||||||
| |||||||
| |||||||
| |||||||
K-Telecom | Consolidated | 80.0 | % | Armenia | |||
| Consolidated | % | |||||
MTS International Funding(2) | Consolidated | SE | Ireland | ||||
MTS Belarus | Equity | 49.0 | % | Belarus | |||
| |||||||
| |||||||
MTS Bank | Equity | % | Russia | ||||
Zifrovoe TV | Equity | 20.0 | % | Russia | |||
OZON | Equity | 10.8 | % | Cyprus |
See also Note 2 to our audited consolidated financial statements.
D. Property, Plant and Equipment
We own and occupy premises in Moscow at 4 Marksistskaya Street Bldgs. 1-4, 34 Marksistskaya Street Bldg. 10, 1/3 Vorontsovskaya Street Bldgs. 2 and 2a, 5 Vorontsovskaya Street Bldgs. 1 and 2, 13/ 14 Vorontsovskaya Street Bldg. 4, 8 Vorontsovskaya Street Bldg. 4,4A, 12/12 Pankratievsky Pereulok, 2/10 Perviy Golutvinskiy Pereulok Bldg. 1 and 2, 4 Perviy Golutvinskiy Pereulok Bldg. 1, 9 Magnitogorskaya Street , 6 Vtoroy Vyazovskiy Proezd Building 1-3, 2A Konstantina Simonova Street, 19 Dmitrovskoye shosse Bldg. 2, 103 Prospect Mira, 42 Profsoyuznaya Street Bldg. 1, Panfilovskiy prospect Zelenograd Bldg 1101A, 24/2 Malaya Dmitrovka Street, 5/9 Malaya Dmitrovka Street, Sheremetyevo Airport, 58/1 Ryazanskiy prospect, 60 Varshavskoe shosse, 27 Smolenskaya-Sennaya square Bldg 2, 27 Smolenskaya-Sennaya square Bldg 3, 6 Ostrovitjanova Street, 2 Mozhayskoe shosse, which we use for administration, sales and other service centers as well as the operations of mobile switching centers.
We also lease buildings in Moscow for similar purposes, including marketing and sales and other service centers. In addition, through our subsidiary MGTS, we own approximately 235132 buildings located
throughout Moscow, which serve as sales and customer service offices, house MGTS' telecommunication equipment and are leased to third parties. We also own office buildings in some of our regional license areas and in Ukraine, and we lease office space on an as-neededas- needed basis. We believe
that our properties are adequate for our current needs and additional space is available to us if and when it is needed.
The primary elements of our network are base stations, base station controllers, transcoders and mobile switching centers. Base stations occupy sites leased at selected locations in all the areas in which we provide network coverage. GSM, 3G and 4G technologies are 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 otherdifferent suppliers.
The table below sets forth certain information on our network equipment as of December 31, 2014.
| Base stations GSM-900 | Base stations GSM-1800 | Base stations UMTS-900 | Base stations UMTS-2100 | Femtocells UMTS-2100 | Base stations LTE-800 | Base stations LTE-1800 | Base stations LTE-2600 | Small Cell | Base station controller(1) | Switches(2) | Media gateways(2) | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Russia | 27895 | 20071 | 1363 | 32852 | 3129 | 488 | 593 | 13255 | 197 | 964 | 121 | 166 | |||||||||||||||||||||||||
Ukraine | 5221 | 8250 | — | — | — | — | — | — | — | 256 | 72 | — | |||||||||||||||||||||||||
Uzbekistan | 787 | 2011 | — | 815 | — | — | — | 11 | — | 66 | 35 | 27 | |||||||||||||||||||||||||
Turkmenistan | 855 | 793 | — | 298 | — | — | — | — | — | 22 | 6 | — | |||||||||||||||||||||||||
Armenia | 1031 | 591 | — | 1091 | — | — | — | 250 | — | 18 | 10 | 6 |
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is intended to help the reader understand us, our operations and our present business environment and 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 Russian ruble and our consolidated financial statements have been prepared in accordance with U.S. GAAP.IFRS.
We are a leading telecommunications provider in Russia and the CIS, providing a wide range of mobile and fixed line voice, and data telecommunications and digital services, including transmission, broadband, pay-TV, and various value-added services as well as integratrion services and selling equipment and accessories.
According to AC&M-Consulting, we are the largest mobile operator in Russia and the second largest in Ukraine in terms of mobile subscribers. We are also the largest operator in Armenia in terms of mobile subscribers, according to our estimates. As of December 31, 2014,2016, we had a mobile subscriber base of approximately 98.8104.6 million.
We are also the largest operator in the Moscow residential broadband market in terms of subscribers, with a 29.0%32% market share as of December 31, 2014,2016, based on TMT consulting data.
Our revenues for the year ended December 31, 2014, were2016 increased by 2.1% to RUB 410,758435,692 million an increase of 3% fromdue to sustained growth in data usage throughout key markets and increased handset sales in Russia. Our operating income for the year ended December 31, 2013.2016 decreased by 6.7% to RUB 87,670 million due to additional expenses in retail as well as generally increased costs in Russia due to macroeconomic pressure. Our netprofit for the year ended December 31, 2016 decreased slightly by 2.1% to RUB 48,474 million generally repeating our operating income attributabledynamics. Our profit was also affected by an increase in finance costs related to repurchase of our Eurobonds due in 2020 and
decreased finance income. Those effects were partially offset by the Groupstrengthening of the ruble coupled with improved performance of our non-operating affiliates (mainly MTS Bank).
Our revenues for the year ended December 31, 2015 increased by 3.9% to RUB 426,639 from RUB 410,678 for the year ended December 31, 2014 was RUB 51,822 million, a decreasedue to increase in usage of 35.1% fromvalue added services by our subscribers. Our operating income for the year ended December 31, 2013.2015 totaled to RUB 93,923 million, a decrease of 5.9% from RUB 99,858 for the year ended December 31, 2014. The decrease was mainly attributable to impairment of goodwill in Armenia (RUB 3,516) as well as higher depreciation and amortization expenses resulting from renewal of our billing and other software and continued development of GPON project in Russia. Our net incomeprofit for the year ended December 31, 2015 decreased by 3.5% to RUB 49,489 million from continuing operationsRUB 51,306 million for the year ended December 31, 2014 decreased. In addition to the operating income trend, our profit was affected by RUB 24,662 million or 32.0% to RUB 52,393 million, the decline was mainly attributable to an increase of RUB 12,550 millionfinance costs (RUB 9,170 million) and loss from discontinued operations related to our subsidiary in Uzbekistan (RUB 11,443 million). The described negative effects were partially offset by decrease in currency exchange and translationtransaction loss due(RUB 11,772 million), higher finance income (RUB 4,849 million), lower non-operating share of loss of our non-operating affiliates (RUB 2,757 million) and positive change in fair value of liability related to depreciation of the Russian Ruble, write off of RUB 5,138 million investmentput option agreement in Delta Bank in Ukraine and an impairment of MTS BankArmenia (RUB 3,2251,273 million), the effect was partially compensated by a gain of RUB 6,734 million resulting from our reentrance into Uzbekistan. In addition in 2013, we recognized a gain as a result of the settlement of Bitel litigation (the gain totaled to RUB 12,147 million). Our revenues have historically increased through organic growth, as well as through acquisitions.
We also aggressively expanded our proprietary retail and distribution network over the course of 2012, 2013 and 2014, both organically and through the acquisition of several national and regional retail chains. See "Item 4. Information on Our Company—B. Business Overview—Mobile Operations—Sales and Marketing—Sales and Distribution" and "—Acquisitions."
We require significant funds to support our subscriber growth, primarily for increasing network capacity, maintaining and modernizing our mobile and fixed line networks, developing our network in the regions and continuing the build-out of our LTE, 3G and broadband Internet networks.
Our cash outlays for capital expenditures (consisting of purchases of property, plant and equipment and intangible assets) for the years ended December 31, 2012, 20132014, December 31, 2015 and 20142016 were RUB 87,78391,929 million, RUB 81,575 million106,537 and RUB 92,59986,149 million, respectively.
We have financed our cash requirements through our operating cash flows and borrowings. Net cash provided by operating activities from continuing operations for the years ended December 31, 2012, 20132014, December 31, 2015 and 20142016 was RUB 134,856 million,158,979, RUB 159,924144,087 million and RUB 159,518130,565 million, respectively.
Our borrowings consist of notes and bank loans. Since 2001, we have raised a totalOur notes comprise of $3.0U.S. dollar and ruble denominated notes. As of December 31, 2016 and December 31, 2015 U.S. dollar denominated notes totaled to RUB 46.8 billion (approximatelyand RUB 92.876.1 billion, at the date of issue) through eight U.S. dollar-denominated unsecured bond offerings in the international capital markets, as well as ruble-denominated bonds totalingand ruble denominated notes amounted to RUB 96 billion.31.4 billion and RUB 23.9 billion , respectively. Our bank loans consist of U.S. dollar, euro and ruble-denominated borrowings totaling approximately RUB 176.5195.1 billion as of December 31, 2014.2016 and RUB 234.0 billion as of December 31, 2015.
We repaid approximately RUB 52.690.2 billion of indebtedness in 2014.2016. As of December 31, 2014,2016, the total amount available to us under our credit facilities amounted to RUB 44.440.9 billion. We had total indebtedness of approximately RUB 292.4284.3 billion as of December 31, 2014,2016, including capital lease obligations, compared to approximately RUB 219.1345.9 billion as of December 31, 2013.2015.
Our total interest expensefinance costs for the years ended December 31, 20132014, December 31, 2015 and 20142016 was RUB 15,49817,252 million, RUB 26,423 million and RUB 16,45327,136 million, net of amounts of interest capitalized, respectively. See Note 1715 to our audited consolidated financial statements for a description of our indebtedness.
Our reporting currency is Russian Rubles.rubles. Our and our subsidiaries' functional currencies are the ruble in Russia, the hryvnia in Ukraine, the U.S. dollar in Uzbekistan, the manat in Turkmenistan, and the dram in Armenia.Armenia and the som in Uzbekistan (before UMS (as difined below) was deconsolidated). See "—Certain Factors Affecting our Financial Position and Results of Operations—Currency Fluctuations"fluctuations" and "Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk."
Management analyzes and reviews results of the Company's operating segments separately based on the nature of products and services, regulatory environments and geographic areas. MTS Group's management evaluates the segments' performance based on revenue and operating profit, excluding depreciation and amortization. Management does not analyze assets or liabilities by reportable segments.
The Group identified the following reportable segments:
Russia convergent: represents the results of mobile and fixed line operations, which encompasses services rendered to customers across regions of Russia, including voice and data services, transmission, broadband, pay-TV and various value-added services.services and retail operations.
Moscow fixed line: represents the results of fixed line operations carried out in Moscow by the Group's subsidiary MGTS. MGTS is the only licensed PSTN operator in Moscow and is considered a natural monopoly under Russian antimonopoly regulations. Consequently, substantial part of services provided by MGTS are subject to governmental regulation.
Ukraine: represents the results of mobile and fixed line operations carried out across multiple regions of Ukraine.
The segments are organized and managed separately based on the nature of products and services, regulatory environments and geographic areas.
The "Other" category does not constitute a reportable segment. It includes both the results of a number of other operating segments that do not meet the quantitative thresholds for separate reporting, such as Turkmenistan, Armenia, Uzbekistan, Turkmenistan,System Integrator, Sputnikovoe TV, Belarus and the headquarters. See also Note 29 to our audited consolidated financial statements for segment information.
In 2014,2016, the Group ceased presenting Russia convergent and Moscow fixed lineSystem Integrator as one reporting segment.reportable segment . Management has determinedcome to a conclusion that disaggregation may helpassist users of the financial statements better understand the Group's future performance. Related financial information has, therefore, been retrospectively restated.
System Integrator includes NVision Group which develop and supply unique solutions and services in Russia's and Ukraine's information technology market.
The net operatingresults of operations of UMS are reported as discontinued operations in the accompanying consolidated statements of profit or loss for all periods presented. The segment reporting for the years ended December 31, 2015 and 2014 was restated accordingly. The consolidated statement of financial position is not required to be retrospectively restated with respect to discontinued operations and therefore as of December 31, 2015 statement of financial position captions in the "Other" category of the following presentation include UMS.
Total revenues of our segments for the years ended December 31, 2012, 20132014, 2015 and 20142016 were as follows:
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2013 | 2014 | 2014 | 2015 | 2016 | ||||||||||||||
| (in millions of Russian Rubles) | (in millions of Russian rubles) | ||||||||||||||||||
Net operating revenues | ||||||||||||||||||||
Total revenues | ||||||||||||||||||||
Russia convergent | 305,991 | 321,075 | 340,732 | 340,732 | 357,518 | 363,678 | ||||||||||||||
Moscow fixed line | 37,856 | 40,324 | 40,824 | 40,824 | 39,606 | 39,667 | ||||||||||||||
Ukraine | 37,722 | 39,732 | 32,786 | 32,810 | 28,194 | 29,187 | ||||||||||||||
Other | 6,382 | 9,129 | 11,198 | 11,094 | 17,214 | 25,514 | ||||||||||||||
Eliminations(1) | (9,711 | ) | (11,817 | ) | (14,782 | ) | (14,782 | ) | (15,893 | ) | (22,354 | ) | ||||||||
| | | | | | | | | | | | | | | | | | | | |
Net operating revenues as reported | 378,240 | 398,443 | 410,758 | |||||||||||||||||
Total revenues as reported | 410,678 | 426,639 | 435,692 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Below we provide certain operating data not included in our financial statements that we believe is useful for evaluating our business and results. The data focuses primarily on our mobile operations, particularly in Russia and Ukraine, which comprise the most significant share of our revenue in the periods presented, and is among the information routinely reviewed by our management as part of their regular evaluation of our performance.
Mobile Subscriber Data
The following table shows our mobile subscribers by country as of the dates indicated:
| At December 31, | At December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2013 | 2014 | 2014 | 2015 | 2016 | ||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||
Subscribers(1) | ||||||||||||||||||||
Russia | 71.2 | 69.4 | 74.6 | 74.6 | 77.3 | 80.0 | ||||||||||||||
Ukraine | 20.7 | 21.5 | 20.2 | 20.2 | 20.4 | 20.9 | ||||||||||||||
Turkmenistan | 1.5 | 1.7 | 1.7 | 1.7 | 1.6 | 1.7 | ||||||||||||||
Armenia | 2.4 | 2.0 | 2.1 | 2.1 | 2.1 | 2.1 | ||||||||||||||
Uzbekistan(3) | n/a | n/a | 0.2 | |||||||||||||||||
| | | | | | | | | | |||||||||||
Total consolidated | 95.8 | 94.7 | 98.8 | 98.6 | 101.4 | 104.7 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
MTS Belarus (unconsolidated) | 5.2 | 5.2 | 5.3 | 5.3 | 5.3 | 5.2 |
We had approximately 74.680.0 million subscribers in Russia as of December 31, 2014,2016, and a leading 31% market share of total mobile cellular subscribers in Russia, according to AC&M-Consulting. Overall penetration in Russia was at approximately 168.2%178.9%, according to AC&M-Consulting. We had approximately 20.220.9 million subscribers in Ukraine as of December 31, 20142016 and, according to AC&M-Consulting, a 34%36% market share of total mobile cellular subscribers in Ukraine. In addition, as of December 31, 2014,2016, we had approximately 2.1 million subscribers in Armenia, and 1.7 million subscribers in Turkmenistan, representing a 60.4%59% and 25.5%30% market share, respectively, according to our
estimates. For a description of our fixed line subscriber base, see "Item 4. Information on Our Company—B. Business Overview—Fixed Line Services."
Mobile churn rate
We define mobile churn as the total number of subscribers who cease to be a subscriber 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. We view the subscriber churn 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, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2013 | 2014 | |||||||
Subscriber Churn | ||||||||||
Russia | 42.4 | % | 38.1 | % | 41.0 | % | ||||
Ukraine | 30.5 | % | 27.2 | % | 34.2 | % |
The churn rate is highly dependent on competition in our license areas and those subscribers who migrate as a result of such competition.
A vast majority of our subscribers are prepaid subscribers with no contractual commitment to us. As a result, these subscribers have unfettered freedom to migrate between operators at their convenience. This freedom, combined with the relative ease with which subscribers can obtain SIM cards, contributes to churn and increasing penetration levels in the markets where we operate.
The churn rate is highly dependent on competition in our license areas and those subscribers who migrate as a result of such competition. Our churn rate in Russia slightly increased to 41.0% during the year ended December 31, 2014, as compared to 38.1% for the year ended December 31, 2013, due to growth in the number of new connections. We continued to offer our popular tariff plan "Super MTS" (free calls to all subscribers of MTS Russia), updated options for unlimited mobile Internet, further improved network quality and enhanced data rate by expanding our 3G and LTE capabilities. We expect that the extension of the MTS-Bonus loyalty program and further development of our mono-brand retail network will allow us to keep churn rate under control in 2015, stimulate value-added services usage and promote subscriber loyalty through superior customer service.
The churn rate in Ukraine increased to 34.2% for the year ended December 31, 2014, from 27.2% for the year ended December 31, 2013 due to the fact that MTS Ukraine terminated operations in Crimea in October 2014.
Mobile ARPU
We calculate mobile average monthly service revenue per subscriber by dividing our service revenues for a given period, including interconnect, guest roaming fees and connection 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 Russian and Ukrainian subscriber based on our current calculation methodology and average monthly minutes of use per Russian and Ukrainian subscriber for the periods indicated.
| Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2013 | 2014 | |||||||
Average monthly service revenue per subscriber, RUB | ||||||||||
Russia | 297.1 | 338.6 | 339.1 | |||||||
Ukraine | 152.7 | 157.5 | 129.1 | |||||||
Average monthly minutes of use per subscriber | ||||||||||
Russia | 304 | 359 | 372 | |||||||
Ukraine | 597 | 608 | 554 |
Average monthly service revenue per subscriber in Russia slightly increased to RUB 339.1 for the year ended December 31, 2014, from RUB 338.6 for the year ended December 31, 2013. This increase was coupled with an increase in subscriber base in 2014 to 74.6 million from 69.4 million, and was caused by inflation and an increase in the disposable income of the general population. Average monthly minutes of use per subscriber in Russia increased to 372 minutes in 2014 from 359 minutes in 2013 mainly due to decrease in tariffs for on- net traffic and various roaming-related offers.
In Ukraine, average monthly service revenue per subscriber decreased to RUB 129.1 for the year ended December 31, 2014, from RUB 157.5 for the year ended December 31, 2013. The average monthly minutes of use per subscriber decreased to 554 minutes in 2014 from 608 minutes in 2013 due to the negative impact of macroeconomic factors on overall voice traffic and difficulty in provision of services in eastern Ukraine.
Our principal sources of revenue are:
Our mobile service subscriber tariffs in Russia and Ukraine are not currently regulated by any organization or governmental authority. The interconnect fees we charge to other operators for terminating calls interconnecting to our mobile network are not regulated in Russia, but are regulated in Ukraine. See also "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Governmental regulation of SMP operators in Ukraine could adversely affect our results of operations," "—If we are found to have a dominant position in the markets where we operate and are determined to have abused this position, the governmentFAS may regulateinfluence our subscriber tariffs and restrictimpose certain restrictions on our operations" and "—If we or any of our mobile operator subsidiaries operating in Russia are identified as an operator occupying a "substantial position," the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations."
Certain of our fixed service tariffs are regulated, including tariffs charged by Moscow incumbent operator MGTS for installation fees, monthly subscription fees and local call charges, as well as interconnect and traffic transit tariffs. The interconnect tariffs charged by us are also regulated by the Federal Agency on Communications.
Service revenues
We have changed the revenues breakdown description by combining revenues from usage fees, value added fees and monthly subscription fees into "subscription, voice and data revenues." We believe the new presentation is more accurate and reflects the revenues from bundled services offers. The change in the revenue breakdown description does not effect in any changes in revenue amounts.
Usage feesSubscription, voice and data revenues primarily include amountsmonthly fees paid by our users of tariff plans which contain fixed volume of services such as minutes of usage, sms, internet traffic and other services. The over-the-limit consumption of services are 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 outgoing calls. Since July 2006, pursuant to an amendment to the Federal Law on Communications, mobile operators in Russia have been prohibited from charging their subscribers for incoming calls.
The prices 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 on our network dependdepending on a number of factors, including the subscriber's tariff plan, call duration, the time of day when the call was placedplan. Subscription, voice and the call destination. Usage feesdata revenues as a percentage of our total revenues were 27.6%56.1% in 2012, 26.4%2015 and 56.0% in 20132016. We expect subscription, voice and 23.8% in 2014. Usage feesdata revenues as a percentage of our total revenues have been decreasing largely dueoperating revenue to the increaseremain stable in revenues from value-added services as a percentage of our total revenues.2017.
Interconnect fees, which are fees for connecting users of other operators' fixed line and wireless networks to our network, comprised 11.3%, 11.1%11.6% and 12.1%11,4% of our total revenues in 2012, 20132015 and 2014,2016, respectively. The interconnect fees as a percentage of our total revenues remained relatively stable. However, inIn absolute terms, interconnect fees grew by RUB 5.6 billion in 2014 as compared to 2013remained stable and we expect it to continue to grow due to the increasesremain stable in traffic volumes from our competitors.
Value-added services as a percentage of our total revenues comprised 21.5% in 2012, 24.1% in 2013 and 26.9% in 2014. We offer our subscribers an array of value-added services. The increase in 2014 in2017.
revenue from value-added services was due to an increase in data traffic, resulting from active marketing initiatives, expansion of mobile internet penetration and overall improvement of the quality of these services.
Monthly subscription fees consist of fixed monthly charges for network access and access to additional services. Monthly subscription fees as a percentage of our total revenues represented 7.1% in 2012, 6.8% in 2013 and 5.8% in 2014, respectively. The fluctuations of the monthly subscription fees as a percentage of our total revenues corresponds to the change in the share of subscribers with monthly subscription fees in the subscriber mix from year to year and the subscription-based services we offer. Many of our monthly subscription fee-based tariff plans also include a usage fee-based component for minutes used over a certain number of prepaid minutes as well as certain amount of prepaid megabytes. The percentage of our total 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.
Roaming fees for guest subscribers include amounts charged to other cellular operators for their subscribersi.e., guest roamers, utilizing our network while traveling in our service area. We bill other cellular operators for calls of guest roamers carried on our network. Roaming fees for guest subscribers as a percentage of our total revenues representedremained stable and comprised 0.7% and 0.8% in 2012, 0.6% in 20132015 and 0.7% in 2014.2016, respectively. We generally expect that roaming fees will declineto remain stable as a percentage of our total revenues due to the large increase of revenues from our value-added services. In addition, roaming tariffs between mobile operators have a tendency to decrease relative to the increase in the total number of mobile users. We may also be pressured or required to lower our roaming tariffs by FAS.revenues. See "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Antimonopoly Proceedings."
Roaming fees for our own subscribers include amounts charged to our subscribers while traveling out of our service area. Roaming fees for own subscribers as a percentage of our total revenues represented 8.6%6.9% in 2012, 8.6%2015 and 5.6% in 2013 and 8.3% in 2014.2016. We expect that our roaming fees will declinedecrease slightly as a percentage of our total revenuesoperating revenue, due to the continuing growthindividually insignificant changes in ther types of revenues from our value-added services.revenue
Connection fees consist of charges incurred 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 in our network as described in Note 20 to our audited consolidated financial statements.or over the period of service rendering. Connection fees represented 0.3%,0.4% and 0.2%, 0.3% of our total revenues in 2012, 2013,2015 and 2014,2016, respectively. We expect connection fee revenues to remain at a low level as a percentage of our total revenues.
Fixed service revenues which consist primarily of fixed line telephony services, broadband internet and pay-TV services, comprised 14.7%, 14.7%13.4% and 14.1%13.0% of our total revenues in 2012, 20132015 and 2014,2016, respectively. In absolute terms, we expect an increase in the number of internet and TV users to stimulate further growth of our fixed service revenues was stimulated by an increase in revenues from internet and TV services due to the increase in number of users attributable to the development of theour GPON project and consequent improvement in quality and uptake of services provided. We expect that it will continue to grow due to the further development of GPON.
Sales of Handsets and Accessoriesgoods
Revenue fromSales of goods primary consist of the sale of handsets and accessories and sales of software products and as a percentage of total revenue comprised 7.6%9.5% in 2012, 6.6%2015 and 10.4% in 2013 and 7.0% in 2014.2016. The increase in 20142016 as compared to 20132015 is attributable to the expansionacquisition of our retail chain.NVision Grpoup which regularly resale software products. We expect that sales of handsets and accessoriesgoods will decreaseremain stable as a percentage of total revenue, due toas smartphones and devices sales support the expected increaseusage of revenues from our value-added services.voice and data tariff plans. We do not subsidize handset sales in Russia. In Ukraine, we subsidize handsets for some of our contract subscribers as well as modems for GSM and CDMA users. See "—Cost of Handsets and Accessories"goods" below.
Cost of Services
Interconnect and line rental. Interconnect 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. Interconnect charges as a percentage of our total revenues represented 12.3%11.7% in 2012, 11.9%2015 and 11.1% in 2013 and 12.6% in 2014.2016. Line rental charges as a percentage of our total revenues represented 1.9%1.7% in 2012, 20132015 and 2014.1.7% in 2016.
We expect that interconnect expenses payable by us to other operators for termination of traffic generated by our subscribers will continue to increase. Primarily, this increase will likely be attributable to the growth in the volume of traffic resulting from our efforts to encourage greater usage through the introduction of new services, which may be supported by marketing campaigns.
We expect line rental costs to increase based on the number of base stations, base station controllers, the number and capacity of rented lines.
Roaming expenses. Roaming expenses consist of amounts charged by other cellular operators under agreements for roaming services provided to our subscribers while outside our service area. Roaming expenses as a percentage of our total revenues represented 1.7%3.2% in 2012, 1.4%2015 and 3.6% in 20132016.
The increase of roaming expenses as a percentage of our total revenues was largely due to the increase in roaming traffic.
Other direct costs. Our other direct costs primary consist of:
Our other direct costs as a percentage of our total revenues represented 11.0% in 2014.2015 and 11.5% in 2016. The increase is mainly attributable to rise of the salary and social contributions expenses resulting from higher number of employees (including those retained through business combinations). In addition electricity and rental charges for placement of technical facilities grew as a result of inflation and increasing number of sites rented. Other direct costs as a percentage of revenue are expected to increase over time as a result of inflation.
Cost of Handsets and Accessoriesgoods
This type of expense includes primarily the cost of handsets and accessories sold to subscribers, and the cost of SIM cards provided to our customers.customers, the cost of software products sold and inventory obsolescence provision. Cost of handsets, accessories sold and SIM cards provided to customers as a percentage of our total revenues represented 6.6%8.5% in 2012, 5.7%2015 and 10.5% in 2013 and 6.1% in 2014.2016. The increase in 20142016 was primarily attributable to the continuing growth in our handsets sales.sales stimulated by aggressive smartphone pricing strategy aimed to counteract competitors' efforts to markedly increase their share of distribution in the market and drive further migration to higher value tariffs. We do not subsidize handset sales other than in Ukraine, where we subsidize handsets on a limited basis to contract subscribers as well as modems for CDMA users. In the years ended December 31, 2012, 2013, and 2014 we provided net handset subsidies in Ukraine totaling RUB 168 million, RUB 120 million, and RUB 67 million, respectively.
Generally, we provide SIM cards to our customers free of charge. The cost of SIM cards amounted to RUB 1,1940,974 million in 2012,2015 and RUB 1,3090,940 million in 2013 and RUB 1,144 million in 2014.2016.
SalesSelling, general and Marketing Expensesadministrative expenses
Our salesselling expenses comprise of all costs relating to the activities that do not directly increase the value of our products and marketing expensesservices, but serve to secure sales. These costs consist primarily consist of:
Sales and marketing expenses reflect, among other things, advertising, promotions and other costs associated with the expansion of services in our license areas. TheseSelling expenses have generally increased in prior years as subscriber numbers,subscribers number, market saturation and market competition have increased, as well
as in connection with the further development of our brand and introduction of new value-added services. In 2012, we changed the motivation scheme for our dealers, shifting from a fixed bonus per acquired subscriber to a bonus depending on the subscriber quality which is measured by a percentage of subscriber payment. This resulted in the decrease of sales2016 and marketing2015, selling expenses in 2012. In 2013, salescomprised 12.3% and marketing expenses remained at the same level as in 2012 (5.7% of the revenue). In 2014, sales and marketing expenses decreased to 5.3%11.8% of our total revenue, duerespectively. The increase of selling expenses in 2016 was mainly attributable to decreaseexpansion of our retail network, number of opened stores increased by 25% in subscriber base in Ukraine and more active usage of own retail network.comparison to 2015.
We retain some degree of flexibility to increase or decrease these expenses in any given period based on our requirements, strategy and the general economic environment. For the structure of our
dealer commissions in Russia and Ukraine please see "Item 4. Information on Our Company—B. Business Overview—Mobile Operations—Sales and Marketing—Sales and Distribution."
Sundry Operating Expenses
Our sundry operatinggeneral and administrative expenses comprise of expenses attributable to the core administrative functions that cannot be allocated directly to the production or selling process. These consist primarily of:
Sundry operatingGeneral and administrative expenses as a percentage of our total revenues represented 22.9%8.7% in 2012, 23.6%2015 and 9.3% in 20132016. The increase of general and 23.6%administrative expenses was mainly due to increase in 2014. Sundry operatingour personnel costs and the release of provisions for VAT and custom duties recognized in 2015. General and administrative expenses as a percentage of revenue are expected to increase over time as a result of inflation.
Sundry Operating Income/Expenses
Our sundry operating income/expenses include:
Sundry operating income/expenses as a percentage of our total revenues represented 0.6% and 0.1% as of December 31, 2015 and 2016, respectively. In 2016 sundry operating income amounted to RUB 222 million against operating expenses of RUB 2,480 in 2015. The income was mainly attributable to gain on sale of property, plant and equipment as well as compensation received from other operators for the transfer of our radio frequencies. Furthermore, the decrease of sundry operating expenses was due to reduction of allowance for doubtful accounts.
Depreciation of Property, Network Equipment and Amortization of Intangible Assets
Our expense for depreciation of property, network equipment and amortization of intangible assets as a percentage of our total revenues remained relatively stable and amountedincreased to 18.2%18,7% for the year ended December 31, 20142016 as compared to 18.4%18.2% of our total revenues for the year ended December 31, 2013. We2015. This increase was in line with our expectations, and we expect further increases in future in connection with our ongoing network development and modernization program and the build-out associated with our regional networks.
Interest ExpenseFinance costs
Our interest expensefinance costs for 20142016 increased by RUB 955713 million or 6.2%2.70% compared to 20132015 and amounted to RUB 16,45327,136 million. The increase iswas primarily attributable to the rise in our total indebtedness, revision of interest rates during 2014 as well as raising funds at higher interest rates due to the increase in the CBR key rate. We expect interest expense to increase in 2015.partial early
redemption of our Eurobond due in 2020. We expect our finance costs to remain relatively stable in 2017.
Provision for Income Taxes
Taxation on income of Russian companies is regulated by a number of laws, government decrees and implementation instructions.
The income tax base for Russian companies is defined as income received from sales of goods and services reduced by the amount of business expenses incurred in such operations with certain exceptions.
The statutory income tax rate in Russia is 20%. Effective April 1, 2011, theThe statutory income tax rate in Ukraine was reduced from 25% to 23%, to 21% in 2012, to 19% in 2013 and tois 18% in 2014. As of today, no changes in tax rates are expected in the future.. The effective tax rate applicable to our consolidated group in the year ended December 31, 2016, 2015 and 2014 was 23.8%.22.4%, 20,8% and 25,8%, respectively. The effective tax rate differs from the statutory rate insignificantly, mainly as a result of earnings distributions from subsidiaries,items not liable for tax purposes, effect of the lower tax rates of subsidiaries and other items not liable for tax purposes.effect of the change in fair value of derivative financial instruments.
Certain Factors Affecting our Financial Position and Results of Operations
Change inof reporting currencystandards
Beginning with the period commencing onfrom January 1, 2013,2015, we changed our reporting currency from U.S. dollar to Russian Ruble. Previously, we had presentedprepare our consolidated financial statements in accordance with IFRS as issued by the International Accounting Standards Board. For periods up to and including the year ended December 31, 2014, we prepared our consolidated financial statements in accordance with U.S. Dollars. Our change in reporting currencyGAAP. The date of transition to IFRS is to allow better transparency of reporting.January 1, 2014.
Currency fluctuations
A majority of our capital expenditure and a significant part of our liabilities and borrowings are either denominated in or tightly linked to the U.S. dollar or euro. A significant part of our financial assets and liabilities, denominated in U.S. dollars, excluding trade accounts receivables and payables, is hedged through financial instruments with various banks. We conduct our operations within the Russian Federation, Ukraine, Turkmenistan and Armenia, and we are therefore subject to currency fluctuations. The local currencies of these countries fluctuate significantly against the U.S. dollar and euro. As a result of thesethe fluctuations we may incur significant currency exchange gains/losses which may adversely affect our net income.
Inflation
Our financial position and results of operations as reflected in our audited consolidated financial statements included elsewhere in this document have been influenced by inflation.
The Russian economy has been characterized by high rates of inflation:
Year | Inflation rate | |||
---|---|---|---|---|
2008 | 13.3 | % | ||
2009 | 8.8 | % | ||
2010 | 8.8 | % | ||
2011 | 6.1 | % | ||
2012 | 6.6 | % | ||
2013 | 6.5 | % | ||
2014 | 11.4 | % |
Year | Inflation rate | |||
---|---|---|---|---|
2014 | 11.4 | % | ||
2015 | 12.9 | % | ||
2016 | 5.4 | % |
Source:
The Ukrainian economy has been characterized by high rates of inflation:
Year | Inflation/(deflation) rate | |||
---|---|---|---|---|
2008 | 25.2 | % | ||
2009 | 15.9 | % | ||
2010 | 9.4 | % | ||
2011 | 8.0 | % | ||
2012 | (0.2 | )% | ||
2013 | (0.3 | )% | ||
2014 | 12.1 | % |
Year | Inflation/(deflation) rate | |||
---|---|---|---|---|
2014 | 12.1 | % | ||
2015 | 48.7 | % | ||
2016 | 13.9 | % |
Source:
Inflation rates in Armenia and Turkmenistan and Uzbekistan in 20142016 were estimated at 4.6%, 4.4%4.0% and 6.1%6.17%, respectively.
We expect inflation-driven increases in 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. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Ourour Financial Condition—Inflation could increase our costs and adversely affect our results of operations."
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. See "Item 3. Key Information—A. Selected Financial Data."
Below is a list of our major acquisitions during 2012, 20132014, 2015 and 2014.2016.
Company | Type | Date of acquisition | Stake acquired | Purchase price | Type | Date of acquisition | Stake acquired | Purchase price | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | ||||||||||||||||||||||
Tascom | Provider of telecommunication services to corporate clients in Moscow and the Moscow Region | May 2012 | 100 | % | 1,437 | |||||||||||||||||
Elf Group | Regional fixed line operator | August 2012 | 100 | % | 191 | |||||||||||||||||
Intercom | Regional fixed line operator | August 2012 | 100 | % | 80 | |||||||||||||||||
Zhelgortelecom | Regional fixed line operator | October 2012 | 100 | % | 147 | |||||||||||||||||
Pilot | Regional fixed line operator | October 2012 | 100 | % | 32 | |||||||||||||||||
TVK & K | Regional fixed line operator | December 2012 | 100 | % | 59 | |||||||||||||||||
| | | | | | |||||||||||||||||
1,946 | ||||||||||||||||||||||
| | | | | | |||||||||||||||||
| | | | | ||||||||||||||||||
| | | | | | |||||||||||||||||
2013 | ||||||||||||||||||||||
MTS Bank | Commercial bank | April 2013 | 25.1 | % | 5,089 | |||||||||||||||||
| | | | | | |||||||||||||||||
5,089 | ||||||||||||||||||||||
| | | | | | |||||||||||||||||
| | | | | ||||||||||||||||||
| | | | | | |||||||||||||||||
2014 | ||||||||||||||||||||||
Ozon Holdings Limited | e-commerce retailer | April 2014 | 10.8 | % | 2,702 | e-commerce retailer | April 2014 | 10.8 | % | 2,702 | ||||||||||||
SMARTS-Ivanovo | Regional mobile operator | December 2014 | 100 | % | 424 | Regional mobile operator | December 2014 | 100 | % | 428 | ||||||||||||
SMARTS-Ufa | Regional mobile operator | December 2014 | 100 | % | 399 | Regional mobile operator | December 2014 | 100 | % | 400 | ||||||||||||
Penza-GSM | Regional mobile operator | December 2014 | 100 | % | 1,934 | Regional mobile operator | December 2014 | 100 | % | 2,039 | ||||||||||||
| | | | | | | | | | | | | ||||||||||
5,459 | 5,569 | |||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||
| | | | | | | | | | | | | ||||||||||
2015 | ||||||||||||||||||||||
Navigation Information Systems Group | Systems integrator for GLONASS satellite projects | January 2015 | 89.5 | % | 44 | |||||||||||||||||
NVision Group | System integrator and complex IT solutions provider | July - December 2015 | 100 | % | 11,213 | |||||||||||||||||
Stream | Content aggregator | December 2015 | 55 | % | 1,650 | |||||||||||||||||
| | | | | | | ||||||||||||||||
12,907 | ||||||||||||||||||||||
| | | | | | | ||||||||||||||||
| | | | | | |||||||||||||||||
| | | | | | | ||||||||||||||||
2016 | ||||||||||||||||||||||
Smarts-Yoshkar-Ola | Regional mobile operator | September 2016 | 100 | % | 13 | |||||||||||||||||
| | | | | | | ||||||||||||||||
13 | ||||||||||||||||||||||
| | | | | | | ||||||||||||||||
| | | | | | |||||||||||||||||
| | | | | | |
Our management identified the following reportable segments: Russia convergent, Moscow fixed line and Ukraine. See "—Segments."
Intercompany eliminations presented below consist primarily of sales transactions between segments conducted in the normal course of operations.
Financial information by reportable segments is presented below:
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2013 | 2014 | 2014 | 2015 | 2016 | ||||||||||||||
| (in millions of Russian Rubles) | |||||||||||||||||||
Net operating revenues | ||||||||||||||||||||
Total revenues | ||||||||||||||||||||
Russia convergent | 305,991 | 321,075 | 340,732 | 340,732 | 357,518 | 363,678 | ||||||||||||||
Moscow fixed line | 37,856 | 40,324 | 40,824 | 40,824 | 39,606 | 39,667 | ||||||||||||||
Ukraine | 37,722 | 39,732 | 32,786 | 32,810 | 28,194 | 29,187 | ||||||||||||||
Other | 6,382 | 9,129 | 11,198 | 11,094 | 17,214 | 25,514 | ||||||||||||||
Eliminations(1) | (9,711 | ) | (11,817 | ) | (14,782 | ) | (14,782 | ) | (15,893 | ) | (22,354 | ) | ||||||||
| | | | | | | | | | | | | | | | | | | | |
Net operating revenues as reported | 378,240 | 398,443 | 410,758 | |||||||||||||||||
Total revenues as reported | 410,678 | 426,639 | 435,692 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Costs of services, excluding depreciation and amortization shown separately below, and cost of handsets and accessories | ||||||||||||||||||||
Costs of services, excluding depreciation and amortization shown separately below, and cost of goods | ||||||||||||||||||||
Russia convergent | 99,852 | 98,359 | 108,405 | 129,531 | 145,479 | 151,649 | ||||||||||||||
Moscow fixed line | 5,685 | 5,990 | 5,458 | 12,965 | 12,702 | 12,985 | ||||||||||||||
Ukraine | 9,691 | 10,067 | 9,275 | 11,941 | 11,327 | 13,297 | ||||||||||||||
Other | 1,400 | 2,234 | 2,628 | 3,749 | 8,235 | 17,253 | ||||||||||||||
Eliminations(1) | (8,535 | ) | (10,237 | ) | (11,084 | ) | (13,688 | ) | (14,383 | ) | (19,452 | ) | ||||||||
| | | | | | | | | | | | | | | | | | | | |
Cost of services and cost of handsets and accessories as reported | 108,093 | 106,413 | 114,682 | |||||||||||||||||
Cost of services and cost of goods as reported | 144,498 | 163,360 | 175,732 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Sundry operating expenses(2) | ||||||||||||||||||||
Russia convergent | 59,473 | 67,149 | 70,111 | 1,948 | 4,382 | 1,677 | ||||||||||||||
Moscow fixed line | 12,241 | 12,693 | 13,495 | (127 | ) | (1,842 | ) | (2,106 | ) | |||||||||||
Ukraine | 6,242 | 6,360 | 11,430 | 4,908 | 1,743 | (33 | ) | |||||||||||||
Other | 9,687 | 9,057 | 5,353 | (3,283 | ) | (149 | ) | (3,047 | ) | |||||||||||
Eliminations(1) | (867 | ) | (1,101 | ) | (3,280 | ) | 47 | 39 | 172 | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Sundry operating expenses as reported | 86,776 | 94,158 | 97,109 | 3,493 | 4,173 | (3,337 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Sales and marketing expenses | ||||||||||||||||||||
Selling, general and administrative expenses | ||||||||||||||||||||
Russia convergent | 17,839 | 18,712 | 18,479 | 65,299 | 63,700 | 67,694 | ||||||||||||||
Moscow fixed line | 731 | 781 | 660 | 6,809 | 7,294 | 7,038 | ||||||||||||||
Ukraine | 2,570 | 2,664 | 1,911 | 5,773 | 5,210 | 6,019 | ||||||||||||||
Other | 817 | 1,060 | 1,157 | 11,237 | 12,434 | 15,107 | ||||||||||||||
Eliminations | (290 | ) | (356 | ) | (299 | ) | ||||||||||||||
Eliminations(1) | (1,023 | ) | (1,298 | ) | (1,812 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Sales and marketing expenses as reported | 21,667 | 22,861 | 21,908 | |||||||||||||||||
Selling, general and administrative expenses as reported | 88,095 | 87,340 | 94,046 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expenses | ||||||||||||||||||||
Russia convergent | 51,994 | 57,655 | 57,773 | 57,647 | 61,266 | 60,285 | ||||||||||||||
Moscow fixed line | 4,251 | 5,182 | 7,609 | 7,609 | 7,715 | 10,900 | ||||||||||||||
Ukraine | 9,571 | 8,896 | 6,780 | 6,779 | 5,199 | 6,304 | ||||||||||||||
Other | 2,104 | 1,588 | 2,619 | 2,771 | 3,743 | 4,232 | ||||||||||||||
Eliminations | (10 | ) | (68 | ) | (71 | ) | ||||||||||||||
Eliminations(1) | (72 | ) | (80 | ) | (139 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization as reported | 67,910 | 73,253 | 74,710 | |||||||||||||||||
Depreciation and amortization expenses as reported | 74,774 | 77,843 | 81,582 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Operating income | ||||||||||||||||||||
Operating profit | ||||||||||||||||||||
Russia convergent | 76,832 | 79,199 | 85,964 | 86,310 | 82,691 | 82,375 | ||||||||||||||
Moscow fixed line | 14,948 | 15,678 | 13,601 | 13,568 | 13,737 | 10,850 | ||||||||||||||
Ukraine | 9,647 | 11,745 | 3,390 | 3,409 | 4,715 | 3,599 | ||||||||||||||
Other | (7,625 | ) | (4,810 | ) | (559 | ) | (3,383 | ) | (7,049 | ) | (8,032 | ) | ||||||||
Eliminations | (8 | ) | (54 | ) | (47 | ) | ||||||||||||||
Eliminations(1) | (46 | ) | (171 | ) | (1,123 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Operating income as reported | 93,794 | 101,758 | 102,349 | |||||||||||||||||
Operating profit as reported | 99,858 | 93,923 | 87,669 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 20142016 compared to Year Ended December 31, 2013
2015
Revenues and cost of services and cost of handsets and accessoriesgoods
Consolidated revenues for the year ended December 31, 2014,2016, increased by RUB 12,3159,053 million, or 3.1%2.1%, to RUB 410,758435,692 million from RUB 398,443426,639 million for the year ended December 31, 2013.2015. The principal reason for the growth of our consolidated revenues for the year ended December 31, 2014,2016, was the large increase in the usage of value-added servicesvoice and data tariffs by our subscribers (by RUB 14,4324,811 million), which was mainly attributable to the increase of data traffic driven by our active promotion of value-added services, an increase in mobile internet penetration, an increase in usage of smartphones by our subscribers, and active 3G and LTE network expansion and the consequent improvement of the quality and uptake of value-added services. The increase of our consolidated revenues for the year ended December 31, 20142016 was also supported by the growth of interconnect revenues by RUB 5,619 million and increase in revenues from sales of handsets and accessories by RUB 2,4435,023 million and by the increase of revenues from sales of software products by RUB 3,718 million. The growth of our interconnect revenues was due to increases in the volume of traffic from our competitors and the appreciation of U.S. dollar and EUR against Russian ruble by approximately 21% based on average exchange rates for the year ended December 31, 2014 and 2013 which affected our interconnect revenue in ruble terms. The increase in sales of handsets and accessories by RUB 2,4435,023 million was stimulated by theresulted from active marketing initiatives and continued expansion of our retail operations. InThe increase in sales of software products is attributable to the year ended December 31, 2014, we experienced a decline inacquisition of NVision group at the end of 2015.
The decrease of our revenues from voice servicesroaming fees of own subscribers by RUB 7,260 million due to continued refocusing of our strategy to promote data services. The decrease in subscription fees by RUB 3,3165,262 million in the year ended December 31, 2014 as compared to the year ended December 31, 20132016 is attributable to the reallocationpromotion of our subscriber basetariff plans with reduced price per minute and overall decrease of consumption due to more affordable contract tariff plans.adverse changes in macroeconomic situation in Russia and Ukraine. Our consolidated mobile subscriber base increased and amounted to 98.8104.6 million as of December 31, 20142016 as compared to 94.7101.4 million as of December 31, 2013.2015. The increasedecrease in the mobile churn rate in Russia to 41.0%39.0% from 38.1%39.6% in 20132015 had an immaterial impact on our consolidated revenues.
Consolidated cost of services and cost of handsets and accessoriesgoods for the year ended December 31, 20142016 increased by RUB 12,372 million and amounted to RUB 114,682175,372 million as compared to RUB 106,413163,360 million for the year ended December 31, 20132015 and comprised 27.9%40.3% and 26.7%38.3% as a percentage of consolidated revenues for the year ended December 31, 20142016 and 2013,2015, respectively. The increase was mainly attributable to the growth of interconnect expenses by RUB 4,192 million, roaming expenses by RUB 3,307 million and cost of handsets and accessories by RUB 2,6234,753 million, cost of software products by RUB 3,135, roaming expenses by RUB 1,941 million, salary and social contribution expenses by RUB 1,435 million, charges for network placement and electricity by RUB 1,883 million. The growthcost of our interconnecthandsets and accessories grew as percentage of consolidated revenues by 1.0% as a result of promoting sales of smartphones and aggressive pricing policy aimed to boost smartphone penetration. The increase in cost of software products is attributable to the acquisition of NVision Group at the end of 2015. The increase in roaming expenses was dueis mainly attributable to the increase in outgoing traffic volumestraffic. The rise of the salary and social contributions resulted from the appreciationincrease in number of U.S. dollaremployees. Electricity and EUR against Russian rublerental charges for network placement increased due to inflation and growth of the number of rented sites.
Russia convergent revenues for the year ended December 31, 2016, increased by 1.7% to RUB 363,678 million from RUB 357,518 million for the year ended December 31, 2015. The increase in Russia convergent revenues in the year ended December 31, 2014 which affected2016, was primarily due to the growth of revenues from voice and data tariffs by RUB 3,095 million, revenues from sales of handsets and accessories by RUB 4,738 million, revenues from sales of software products by RUB 2,093. Revenue from voice and data tariffs increased due to active promotion of such tariffs, significant volume of Internet traffic included and the constant improvement of services provided. Revenues from sales of handsets and accessories increased to RUB 44,738 million in the year ended December 31, 2016 from RUB 40,000 million in the year ended December 31, 2015 due to pricing strategy aimed to push subscribers data adoption and attract new subscribers. Revenues from sales of software products increased due to the acquisition of NVision group at the end of 2015. The decrease of our revenues from roaming fees from own subscribers by RUB 5,204 million as compared to the year ended
December 31, 2015 is attributable to overall decrease of consumption due to adverse changes in macroeconomic situation in Russia.
Russia convergent cost of services and cost of goods for the year ended December 31, 2016, increased by 4.2% to RUB 151,649 million from RUB 145,479 million for the year ended December 31, 2015. The increase of Russia convergent cost of services and cost of goods was mainly attributable to the growth of cost of handsets, accessories and other goods by RUB 4,371 million, cost of software products by RUB 1,554 million and of charges for network placement and electricity by RUB 1,421 million. The growth in cost of handsets, accessories and other goods resulted from the increase in volume of sales of handsets and accessories sales by 11.8% in the year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase in the cost of software products sold is attributable to the acquisition of NVision Group in the end of 2015. Electricity and rental charges for network placement increased due to inflation and growth of the number of rented sites. The growth of the Russia mobile cost of services and cost of goods was offset by reduction of interconnect expenses by RUB 2,756 million due to the decline of outgoing traffic volumes and cost of value added services by RUB 597 million resulted from the change in the structure of value added services sold in favor of high margin services.
Moscow fixed line revenues for the year ended December 31, 2016, remained relatively stable and amounted to RUB 39,667 million as compared to RUB 39,606 million.
Moscow fixed line cost of services and cost of goods for the year ended December 31, 2016, increased by 2.2% to RUB 12,985 million from RUB 12,702 million for the year ended December 31, 2015. The increase was primarily attributable to the growth of rent expenses by RUB 257 million as a result of rental rates indexation.
Ukraine revenues increased by 3.5% to RUB 29,187 million in the year ended December 31, 2016, from RUB 28,194 million in the year ended December 31, 2015, primarily due to the active marketing campaigns to promote Vodafone brand and maintain subscribers' loyalty.
Ukraine cost of services and cost of goods increased by 17.4% to RUB 13,297 million in the year ended December 31, 2016, from RUB 11,327 million in the year ended December 31, 2015. The increase was attributable to the growth of roaming expenses by RUB 1,600 million due to the significant traffic growth attributable to the dramatic tariffs decrease.
Other countries and business activities revenues for the year ended December 31, 2016, increased to RUB 25,514 million from RUB 17,214 million for the year ended December 31, 2015. Thegrowth of revenue by RUB 8,299 million resulted from the acquisition of NVision Group in the end of 2015.
Other countries and business activities cost of goods for the year ended December 31, 2016, increased to RUB 17,253 million from RUB 8,235 million for the year ended December 31, 2015 due to the acquisition of NVision Group in the end of 2015.
Sundry operating expenses
Consolidated sundry operating expenses for the year ended December 31, 2016, decreased by RUB 7,510 million. We generated income of RUB 3,337 million and expense of RUB 4,173 million for the year ended December 31, 2016 and 2015, respectively. These amounts comprised (0.8)% and 1.0% as a percentage of consolidated revenue for the year ended December 31, 2016 and 2015. In the year ended December 31, 2015 consolidated sundry operating expenses included impairment of goodwill in Armenia in the amount of RUB 3,516 million and impairment charges related to distressed Ukrainian banks in the amount of RUB 1,698 million. In the year ended December 31, 2016 consolidated sundry operating income included compensation from other operators for the transfer of our radio frequencies in the amount of RUB 848 million (income). The decrease in bad debt provision in Russia in the year ended December 31, 2016 also contributed to the decrease in consolidated sundry operating expenses.
Russia convergent sundry operating expenses for the year ended December 31, 2016, decreased by 62% or RUB 2,705 million to RUB 1,677 million from RUB 4,382 million for the year ended December 31, 2015 and comprised 0.5% and 1.2% of Russia convergent revenues for the year ended December 31, 2016 and 2015, respectively. In the year ended December 31, 2016 Russia convergent sundry operating expenses included compensation from other operators for submitted radio frequencies in the amount of RUB 848 million (income). The decrease in bad debt provision in Russia corresponding with decrease in trade receivables in the year ended December 31, 2016 also contributed to the decrease in Russia convergent sundry operating expenses.
Moscow fixed line sundry operating income for the year ended December 31, 2016, increased by RUB 264 million to RUB 2,106 million from RUB 1,842 million for the year ended December 31, 2015. Moscow fixed line sundry operating income as a percentage of Moscow fixed line revenues increased to 5.3% for the year ended December 31, 2016, from 4.7% for the year ended December 31, 2015. The increase of Moscow fixed line sundry operating income was mainly attributable to the compensation received for cable communication lines accidentally demolished by other entities.
Ukraine sundry operating expenses for the year ended December 31, 2016, decreased by RUB 1,776 million to income of RUB 33 million from expense of RUB 1,743 million for the year ended December 31, 2015. Ukraine sundry operating expenses as a percentage of Ukraine revenues comprised (0.1)% for the year ended December 31, 2016 and 6.2% for the year ended December 31, 2015. Ukraine sundry operating expenses for the year ended December 31, 2015 included impairment charges related to distressed Ukrainian banks in the amount of RUB 1,698 million.
Other countries and business activities sundry operating income for the year ended December 31, 2016, increased by RUB 2,898 million to RUB 3,047 million from RUB 149 million for the year ended December 31, 2015. In the year ended December 31, 2015 other countries and business activities sundry operating income was decreased by impairment of goodwill in Armenia in the amount of RUB 3,516 million.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses for the year ended December 31, 2016, increased by 7.7%, or RUB 6,706 million, to RUB 94,046 million from RUB 87,340 million for the year ended December 31, 2015. Salary expenses and related social contributions increased by RUB 4,321 million amounting to 10.2% of consolidated revenues for the year ended December 31, 2016 compared to 9.4% of consolidated revenues for the year ended December 31, 2015 due to indexation of salaries and increase in number of employees. Rent expenses as a percentage of consolidated revenues increased to 2.1% for the year ended December 31, 2016 compared to 1.6% for the year ended December 31, 2015 mainly due to expansion of own retail network. Taxes other than income tax as a percentage of consolidated revenues increased to 0.9% for the year ended December 31, 2016 compared to 0.5% for the year ended December 31, 2015 mainly due to recognition of a gain from release of provision for custom duties and VAT in 2015. Dealers commissions as a percentage of consolidated revenues decreased to 1.5% for the year ended December 31, 2016 compared to 2.1% for the year ended December 31, 2015 mainly due to expansion of own retail network.
Russia convergent selling, general and administrative expenses for the year ended December 31, 2016, increased to RUB 67,694 million, or 18.6% of Russia convergent revenue, from RUB 63,700 million, or 17.8% of Russia convergent revenue, for the year ended December 31, 2015. Salary expenses and related social contributions increased by RUB 1,690 million amounting to 8.1% of Russia convergent revenues for the year ended December 31, 2016 compared to 7.7% of Russia convergent revenues for the year ended December 31, 2015 due to indexation of salaries and increase in number of employees. Taxes other than income tax as a percentage of Russia convergent revenues increased to 0.6% for the
year ended December 31, 2016 compared to 0.1% for the year ended December 31, 2015. In the year 2015 we recorded a gain from release of provision for custom duties and VAT in the amount of RUB 2,480. Rent expenses as a percentage of Russia convergent revenues increased to 2.4% for the year ended December 31, 2016 compared to 1.9% for the year ended December 31, 2015 mainly due to expansion of own retail network. Dealers commissions as a percentage of Russia convergent revenues decreased to 1.5% for the year ended December 31, 2016 compared to 2.2% for the year ended December 31, 2015 mainly due to expansion of own retail network.
Moscow fixed line selling, general and administrative expenses for the year ended December 31, 2016, decreased by RUB 256 million, to RUB 7,038 million, or 17.7% of Moscow fixed line revenue, from RUB 7,294 million, or 18.4% of Moscow fixed line revenue, for the year ended December 31, 2015.
Ukraine selling, general and administrative expenses for the year ended December 31, 2016, increased to RUB 6,019 million from RUB 5,210 million for the year ended December 31, 2015 mainly due to growth of dealers commisision related to revenue sharing resulting from active use of services introduced in partnership with Vodafone as well as expenses related to use of Vodafone trade mark.
Other countries and business activities selling, general and administrative expenses for the year ended December 31, 2016, increased by 21.5% to RUB 15,107 million from RUB 12,434 million for the year ended December 31, 2015. Other countries and business activities selling, general and administrative expenses grew as a result of an increase in salary and related social contributions due to an annual indexation (growth of RUB 1,947 million), costs of advertising campaigns carried out by our Sputnikovoe TV subsidiary (increase by RUB 278 million), as well as expenses incurred by our operating segment System Integrator acquired at the end of 2015.
Depreciation and amortization expenses
Consolidated depreciation and amortization of property, network equipment, customer base, license costs and other intangible assets for the year ended December 31, 2016, increased by 4.8% to RUB 81,582 million from RUB 77,843 million for the year ended December 31, 2015 due to the development of our network infrastructure.
Russia convergent depreciation and amortization for the year ended December 31, 2016, decreased by 1,6% to RUB 60,285 million from RUB 61,266 million for the year ended December 31, 2015 mainly due to reduced volume of constructions of network and base stations.
Moscow fixed line depreciation and amortization for the year ended December 31, 2016 increased by 41.3% and amounted to RUB 10,900 million as compared to RUB 7,715 million for the year ended December 31, 2015. The growth resulted from the continued development of our network infrastructure.
Ukraine depreciation and amortization for the year ended December 31, 2016, increased by RUB 1,105 million to RUB 6,304 million from RUB 5,199 million for the year ended December 31, 2015. The growth is attributable to the development of 3G network in Ukraine and it was partially offset by the depreciation of hryvnia against ruble.
Other countries and business activities depreciation and amortization for the year ended December 31, 2016, increased by RUB 489 million to RUB 4,232 million from RUB 3,743 million for the year ended December 31, 2015. The increase is mainly attributable to weakening of the Russian ruble terms.as compared to Armenian dramm.
Operating profit
Consolidated operating profit declined by RUB 6,254 million from RUB 93,923 million in the year ended December 31, 2015 to RUB 87,669 million in the year December 31, 2016 mainly due to decrease in operating profit of Moscow fixed line and Ukraine segments.
Russia convergent operating profit for the year ended December 31, 2016, remained stable, it totaled to RUB 82,375 million and RUB 82,691 million for the year ended December 31, 2016 and 2015, respectively. Russia convergent operating profit decreased as a percentage of Russia convergent revenues from 23.1% for the year ended December 31, 2015, to 22.7% for the year ended December 31, 2016, due to decline of Russia convergent gross margin to 58.7% for the year ended December 31, 2016 from 59.4% for the year ended December 31, 2015. The decline of the Russia convergent gross margin resulted from lower margin on sale of goods due to aggressive pricing policy, inflationary rise of salaries and social contributions as well as other direct costs. In addition, Russia convergent operating profit for the year ended December 31, 2016 decreased due to inflationary rise of salaries of sales and marketing and general and adminidtrative personnel (growth of RUB 1,690 million), higher taxes other than income (change by RUB 2,030 — in the year 2015 we recorded a gain from release of provision for custom duties and VAT in the amount of RUB 2,480) as well as high sales and marketing rent expenses resulting from expansion of own retail network (change by RUB 2,237 RUB). The decribed negative effects were partially offset by gain from compensation of radiofrequencies won by other operators (RUB 848 million), decrease of dealers commissions resulting from expansion of own retail network (RUB 2,516 million), decline in depreciation and amortization expenses by RUB 981 million and in provision for bad debt in the amount of RUB 807 million.
Moscow fixed line operating profit for the year ended December 31, 2016, decreased by 21.0% to RUB 10,850 million from RUB 13,737 million for the year ended December 31, 2015. Moscow fixed line operating profit declined as a percentage of Moscow fixed line revenues to 27.3% for the year ended December 31, 2016 from 34.7% for the year ended December 31, 2015 due to increased depreciation and amortization expense (growth of RUB 3,185 million or 41.2%) resulting from network development.
Ukraine operating profit for the year ended December 31, 2016, decreased by 23.7% to RUB 3,599 million for the year, ended December 31, 2016 compared to RUB 4,715 million for the year ended December 31, 2015. Ukraine operating profit reduced as a percentage of Ukraine revenues to 12.3% for the year ended December 31, 2016, from 16.7% for the year ended December 31, 2015. The decrease in operating income due to depreciation of Ukrainian Hryvnia totaled to RUB 230 million. Ukraine gross margin decreased from 59.8% for the year ended December 31, 2015 to 54.5% for the year ended December 31, 2016 due to increase in roaming expenses by 207.5% (roaming initiatives in 2016). Furthermore, Ukraine operating profit for the year ended December 31, 2015 was affected by increase of depreciation and amortization expenses (21.3% due to build out of 3G network) as well as sales and marketing expenses (24.3% due to growth of dealers commisision related to revenue sharing resulting from active use of services introduced in partnership with Vodafone as well as expenses related to use of Vodafone trade mark).
Other countries and business activities operating loss for the year ended December 31, 2016, increased by 13.9% to RUB 8,032 million from RUB 7,049 million for the year ended December 31, 2015. The increase in operating loss was mainly attributable to increase of operating loss of MTS Group Headquarter (growth of RUB 1,768 million due to higher personnel expenses), higher operating loss of our Sputnikovoe TV subsidiary (growth of RUB 591 million due to higher advertising costs (change by RUB 278 million), in addition in 2015 Sputnikovoe TV recorded gain from disposal of transponders in the amount of RUB 277 million, which positively effected 2015 operating profit) as well as increased operating loss of included NVision subsidiaries (change by RUB 461 million, last year operating loss is included from acquisition date and not for the full year as in 2016). Positive effect of
dynamics of other countries and business activities operating loss resulted from our business in Armenia, in the financial year ended December 31, 2016 operating profit of MTS Armenia totaled to RUB 460 million against operating loss of RUB 1,595 million for the financial year ended December 31, 2015 (in 2015 we recorgnised an impairment loss for goodwill in Armenia in the amount of RUB 3,516 million).
Currency exchange and transaction gains/losses
Consolidated currency exchange and transaction gain for the year ended December 31, 2016, was RUB 3,241 million, compared to the loss of 6,154 million for the year ended December 31, 2015. The gain recognized in the year ended December, 31 2016 was mainly attributable to the appreciation of the Russian ruble against U.S. dollar and euro during the year ended December 31, 2016.
Finance costs
Consolidated finance costs for the year ended December 31, 2016, increased by RUB 714 million, or 2.70%, to RUB 27,136 million from RUB 26,422 million for the year ended December 31, 2015, primarily as a result of the partial early redemption of our Eurobonds due in 2020.
Equity in net income of associates
Non-operating share of the profit or loss of associates for the year ended December 31, 2016 decreased by RUB 2,494 million to a loss of RUB 1,287 million compared to a loss of RUB 3,781 million for the year ended December 31, 2015. The decrease results mainly from a smaller loss at MTS Bank in the year ended December 31, 2016.
Other expenses (income), net
Consolidated other expenses for the year ended December 31, 2016 increased to RUB 317 million, as compared to the income of RUB 54 million for the year ended December 31, 2015 due to decrease of the gain on sale of foreign currencies in the year ended December, 31 2016.
Provision for income taxes
Consolidated provision for income taxes for the year ended December 31, 2016 increased by 8.7% to RUB 15,138 million from RUB 13,931 million for the year ended December 31, 2015 mainly due to increase in the effective tax rate. The effective tax rate increased to 22.4% in the year ended December 31, 2016, from 20.8% in the year ended December 31, 2015 mainly as a result of increase in earnings distributions from subsidiaries, partly offset by decrease of expenses not deductible for tax purposes (in particular, decrease of impairment of goodwill in Armenia) and as a result of lower contribution of UMC income, taxed at lower rate.
Net loss/income attributable to the non-controlling interest
Net loss attributable to the non-controlling interest for the year ended December 31, 2016 totaled to RUB 24 million compared to RUB 2,085 million for the year ended December 31, 2015. The loss for the year ended December 31, 2015 is mainly attributable to the non-controlling interest in the amount of RUB 2,834 million recognized in relation to UMS, our subsidiary in Uzbekistan.
Net income attributable to the Group
Net income attributable to the Group for the year ended December 31, 2016, decreased by RUB 1,015 million, or 2.1%, to RUB 48,474 million, compared to RUB 49,489 million for the year ended December 31, 2015. Net income as a percentage of revenues was 11.1% in the year ended
December 31, 2016, and 11.6% in the year ended December 31, 2015. Net income attributable to the Group for the year ended December 31, 2016, as compared to the year ended December 31, 2015, decreased primarily due the following factors: decreased operating profit (RUB 6,256 million—please refer to explanation of the decrease above), lower finance income due to reduced volume of investments in deposits and loans (RUB 3,095 million), higher income tax expense (RUB 1,208 million—higher taxable profit due to currency exchange gain in 2016) as well as increased finance costs (RUB 713 million, thereof 3,044 attributable to repurchase of Eurobonds 2020). Negative effects were primarily offset by currency exchange gain recorded in 2016 (effect compared to loss in 2015—RUB 9,395 million).
Year Ended December 31, 2015 compared to Year Ended December 31, 2014
Revenues and cost of services and cost of goods
Consolidated revenues for the year ended December 31, 2015, increased by RUB 15,961 million, or 3.9%, to RUB 426,639 million from RUB 410,678 million for the year ended December 31, 2014. The principal reason for the growth of our consolidated revenues for the year ended December 31, 2015, was the large increase in the usage of voice & data services by our subscribers (by RUB 7,663 million), which was mainly attributable to our active promotion of such tariffs, an increase in mobile internet penetration, an increase in usage of smartphones by our subscribers, active 3G and LTE network expansion and the consequent improvement of the quality and uptake of services. The increase of our consolidated revenues for the year ended December 31, 2015 was also supported by the growth in revenues from sales of handsets and accessories by RUB 10,945 million. The increase in sales of handsets and accessories by RUB 10,945 million resulted from active marketing initiatives and continued expansion of our retail operations.
The decrease of our revenues from roaming fees of own subscribers by RUB 4,250 million in the year ended December 31, 2015 is attributable to promotion of tariff plans with reduced price per minute and overall decrease of consumption due to adverse changes in macroeconomic situation in Russia and Ukraine. Our consolidated mobile subscriber base increased and amounted to 101.4 million as of December 31, 2015 as compared to 98.8 million as of December 31, 2014. The decrease in the mobile churn rate in Russia to 39.6% from 41.0% in 2014 had an immaterial impact on our consolidated revenues.
Consolidated cost of services and cost of goods for the year ended December 31, 2015 increased by RUB 18,862 million and amounted to RUB 163,360 million as compared to RUB 144,498 million for the year ended December 31, 2014 and comprised 38.3% and 35.2% as a percentage of consolidated revenues for the year ended December 31, 2015 and 2014, respectively. The increase was mainly attributable to the growth of cost of handsets and accessories by RUB 10,820 million, roaming expenses by RUB 4,780 million, salary and social contribution expenses by RUB 1,797 million, charges for network placement and electricity by RUB 2,948 million. The cost of handsets and accessories grew as percentage of consolidated revenues by 2.3% as a result of promoting sales of smartphones and aggressive pricing policy aimed to boost smartphone penetration. The increase in roaming expenses is mainly attributable to the appreciation of U.S. dollar and EUR against Russian ruble in the year ended December 31, 2014.2015. The growth in costrise of handsetsthe salary and accessories was mainly attributable tosocial contributions resulted from the increase in volumenumber of handsetsemployees. Electricity and accessories salesrental charges for network placement increased due to inflation and growth of the number of rented sites.
Russia convergent revenues for the year ended December 31, 2015, increased by 9.2%4.9% to RUB 357,518 million from RUB 340,732 million for the year ended December 31, 2014. The increase in Russia convergent revenues in the year ended December 31, 2015, was primarily due to the growth of revenues from voice & data tariffs by RUB 8,796 million, revenues from sales of handsets and accessories by RUB 10,635 million Revenues from voice & data services as a percentage of Russia
convergent revenues in the year ended December 31, 2015, grew as a result of new marketing initiatives aimed at stimulating greater usage of Internet driven tariffs among our subscribers and the overall improvement of quality of these services. Revenues from sales of handsets and accessories increased to RUB 40,000 million in the year ended December 31, 2015 from RUB 29,366 million in the year ended December 31, 2014 due to aggressive pricing strategy aimed to push subscribers data adoption and attract new subscribers. The decrease of our revenues from roaming fees from own subscribers by RUB 3,934 million as compared to the year ended December 31, 2013. The increase2014 is attributable to promotion of tariff plans with reduced price per minute and overall decrease of consumption due to adverse changes in the consolidatedmacroeconomic situation in Russia.
Russia convergent cost of services and cost of goods for the year ended December 31, 2015, increased by 12.3% to RUB 145,479 million from RUB 129,531 million for the year ended December 31, 2014. The increase of Russia convergent cost of services and cost of goods was mainly attributable to the growth of cost of handsets, accessories and other goods by RUB 10,580 million, roaming expenses by RUB 4,037 million and of salary and social contributions by RUB 1,520 million. The growth in cost of handsets, accessories and other goods resulted from the increase in volume of sales of handsets and accessories sales by 36.2% in the year ended December 31, 2015 as compared to the year ended December 31, 2014. Roaming expenses grew due to the appreciation of U.S. dollar and EUR against Russian ruble in the year ended December 31, 2015 which affected our roaming expenses in ruble terms. The rise of salary and social contribution resulted mainly from the increase in number of employees. The growth of the Russia mobile cost of services and cost of goods was offset by reduction of interconnect expenses by RUB 2,058 million due to the decrease indecline of outgoing traffic volumes and cost of value added services by RUB 2,252755 million which is attributable toresulted from the change in the structure of value added services sold in favor of high margin services.
Russia convergent revenues for the year ended December 31, 2014, increased by 6.1% to RUB 340,732 million from RUB 321,074 million for the year ended December 31, 2013. The increase in Russia convergent revenues in the year ended December 31, 2014, was primarily due to the growth of revenues from value- added services by RUB 17,103 million, interconnect revenues by RUB 5,905 million, revenues from sales of handsets and accessories by RUB 2,462 million and roaming revenues by RUB 782 million. Revenues from value-added services as a percentage of Russia convergent revenues in the year ended December 31, 2014, grew to 29.3% as compared to 25.8% in the year ended December 31, 2013, due to the increase in data traffic volumes attributable to the introduction of new marketing initiatives aimed at stimulating greater usage of value-added services among our subscribers and the overall improvement of quality of these services. Interconnect revenues
grew to RUB 45,639 million, as compared to RUB 39,734 million, in the year ended December 31, 2013, due to the growth in the volume of traffic from our competitors and the appreciation of U.S. dollar and EUR against Russian ruble in the year ended December 31, 2014. Revenues from sales of handsets and accessories increased to RUB 28,778 million in the year ended December 31, 2014 from RUB 26,317 million in the year ended December 31, 2013 due to the continued expansion of our retail operations. The growth in roaming revenues to RUB 34,978 million for the year ended December 31, 2014 as compared to RUB 34,196 million for the year ended December 31, 2013 was mainly attributable to the increase in revenues from guest subscribers in ruble terms due to appreciation of U.S. dollar and EUR against Russian ruble in the year ended December 31, 2014. In the year ended December 31, 2014, we experienced a decline in Russia convergent revenues from voice services by RUB 3,183 million due to continued refocusing of our strategy to promote data services. The decrease in subscription fees by RUB 3,553 million in the year ended December 31, 2014 as compared to the year ended December 31, 2013 is attributable to the reallocation of our subscriber base to more affordable contract tariff plans.
Russia convergent cost of services and cost of handsets and accessories for the year ended December 31, 2014, increased by 10.2% to RUB 108,406 million from RUB 98,359 million for the year ended December 31, 2013. The increase was mainly attributable to the growth of interconnect expenses by RUB 6,442 million, roaming expenses by RUB 3,978 million and cost of handsets and accessories by RUB 2,715 million. The growth of our interconnect expenses was due to the increase in outgoing traffic volumes and the appreciation of U.S. dollar and EUR against Russian ruble in the year ended December 31, 2014 which affected our interconnect expenses in ruble terms. The increase in roaming expenses is mainly attributable to the appreciation of U.S. dollar and EUR against Russian ruble in the year ended December 31, 2014. The growth in cost of handsets and accessories was mainly attributable to the increase in volume of handsets and accessories sales by 9.4% in the year ended December 31, 2014 as compared to the year ended December 31, 2013. The increase in the Russia mobile cost of services and cost of handsets and accessories was offset by the decrease in cost of value added services by RUB 1,905 million which is attributable to the change in the structure of value added services sold in favor of high margin services. The decrease in other direct cost by RUB 1,229 million in the year ended December 31, 2014 as compared to the year ended December 31, 2013 is attributable to the decrease in volume of construction works performed in 2014.
Moscow fixed line revenues for the year ended December 31, 2014, increased2015, decreased by 1.2%3.0% to RUB 40,82439,606 million from RUB 40,32440,824 million for the year ended December 31, 2013.2014. The increasedecrease in Moscow fixed line revenues in the year ended December 31, 2014,2015, was primarily due to the growth ofdecline in revenues from internet and TV servicesIP telephony by RUB 1,1881,821 million which is attributable to the increasecontinued reduction in number of users due to the development of the GPON project and consequent improvement in quality and uptake of services provided. Other fixed line revenues increasedsubscribers. The decrease was partially offset by RUB 320 million for the year ended December 31, 2014 due to the growth of other revenues, such as renting space in tariffsindustrial buildings and cable line infrastructure for the rent of fixed line infrastructure. The growth was offset by decrease in revenues from IP-telephony by RUB 1,014 million for the year ended December 31, 2014 due to continued decline in number of subscribers.telecommunication equipment layout.
Moscow fixed line cost of services and cost of handsets and accessoriesgoods for the year ended December 31, 2014,2015, decreased by 8.9%2.0% to RUB 5,45812,702 million from RUB 5,99012,965 million for the year ended December 31, 2013.2014. The declinedecrease was primarily attributable to the decrease inreduction of interconnect and line rental expenses by RUB 257 million and the decrease in other direct cost by RUB 472685 million due to overall decline in outgoing traffic volumevolume. The decrease of cost of services and the completioncost of project "Svetofor," centralized monitoring and control of traffic lightsgoods in Moscow. The2015 was partially offset by growth of line rentalrent expenses by RUB 152618 million in the year ended December 31, 2014 as compared to the year ended December 31, 2013 was attributable to increased volumea result of line rental.
Table of Contentsrental rates indexation.
Ukraine revenues decreased by 17.5%14.1% to RUB 32,78728,194 million in the year ended December 31, 2014,2015, from RUB 39,73232,810 million in the year ended December 31, 2013,2014, primarily due to the depreciation of Ukrainian hryvnia against Russian ruble by 24%16% which resulted in decrease of Ukraine revenues in ruble terms by RUB 7,3874,576 million. The decline was offset by the growth in interconnect revenues for the year ended December 31, 2014 by RUB 1,220 million due to the increase in the volume of traffic from our competitors.
Ukraine cost of services and cost of handsets and accessoriesgoods decreased by 7.9%5.1% to RUB 9,27511,327 million in the year ended December 31, 2014,2015, from RUB 10,06711,941 million in the year ended December 31, 2013. Ukraine cost of services and cost of handsets and accessories as a percentage of Ukraine revenues for the year ended December 31, 2014 increased and amounted to 28.3% as compared to 25.3% for the year ended December 31, 2013.2014. The moderate decrease in ruble terms was primarily attributable to the depreciation of Ukrainian hryvnia against Russian ruble by 24%16% which resulted in decline of Ukraine cost of services and cost of handsets and accessories in ruble termsgoods by RUB 2,2131,670 million. The decrease was offset byHowever, as a percentage of Ukraine revenues Ukraine cost of services and cost of goods for the growth in interconnect expenses by RUB 943 million dueyear ended December 31, 2015 increased to 40.2% as compared to 36.4% for the increase in outgoing traffic volumes.year ended December 31, 2014. The increase in other direct cost by RUB 453 million iswas attributable to the growth in outgoing interconnect traffic volumes and related expenses by RUB 447 million and to the rise of fees for radio frequencies.spectrum costs by RUB 725 million.
Other countries and business activities revenues for the year ended December 31, 2014,2015, increased by 22.7% to RUB 11,19817,214 million from RUB 9,12911,094 million for the year ended December 31, 2013.2014. Thegrowth of revenue by RUB 2,631 million resulted from acquisition of NVision Group in the end of 2015. Depreciation of Russian ruble against local currencies (Armenian dram and Turkmenian manat) caused the increase of revenue by RUB 3,914 million that was causedpartially offset by the decline of local and international calling in Armenia driven by macroeconomic factors.
Other countries and business activities cost of goods for the year ended December 31, 2015, increased to RUB 8,235 million from RUB 3,749 million for the year ended December 31, 2014 mainly due to acquisition of NVision Group in the end of 2015 (RUB 2,581 million) and depreciation of Russian ruble against local currencies — Armenian dram and Turkmenian manat. The effect of our reentrance into Uzbekistan was not significant.
Other countries and business activities cost of services and cost of handsets and accessories for the year ended December 31, 2014, increased to RUB 8,570 million from RUB 6,895 million for the year ended December 31, 2013. The increase was caused by depreciation of Russian ruble against local currencies — Armenian dram and Turkmenian manat. The effect of our reentrance into Uzbekistan was not significant.manat (RUB 1,107 million).
Consolidated sundry operating expenses for the year ended December 31, 2014,2015, increased by 3.1%RUB 680 million to RUB 97,1094,173 million from RUB 94,1583,493 million for the year ended December 31, 20132014 due to a number of factors described below and comprised 23.6%1.0% and 0.9% as a percentage of consolidated revenue for the year ended December 31, 20142015 and 2013. The increase was mainly attributable to the increase in salary expenses and related social contributions by RUB 3,324 million amounting to 12% of our revenues for the year ended December 31, 2014 compared to 11.5% of our revenues for the year ended December 31, 2013 due to indexation of salaries, as well as increases in the number of employees (mainly resulting from our continuing retail expansion).2014.
Russia convergent sundry operating expenses for the year ended December 31, 2014,2015, increased by 4.4%125% to RUB 70,1104,382 million from RUB 67,1491,948 million for the year ended December 31, 2013. Russia convergent sundry operating expenses as a percentage2014 and comprised 1.2% and 0.6% of Russia convergent revenues decreased to 20.6% for the year ended December 31, 2015 and 2014, from 20.9% for the year ended December 31, 2013.respectively. The increase of Russia convergent sundry operating expenses was mainly attributable to the growth in bad debt provision corresponding with increase in rent expenses by RUB 3,349 million amounting to 4.8% of Russia convergent revenues for the year ended December 31, 2014 compared to 4.0% of Russia convergent revenues for the year ended December 31, 2013 due to increases in the number of rented base station sites and retail expansion.trade receivables.
Moscow fixed line sundry operating expensesincome for the year ended December 31, 2014,2015, increased by 6.3%RUB 1,714 million to RUB 13,4951,842 million from RUB 12,693127 million for the year ended December 31, 2013.2014. Moscow fixed line sundry operating expensesincome as a percentage of Moscow fixed line revenues increased to 33.1%4.7% for the year ended December 31, 2014,2015, from 31.5%0.3% for the year ended December 31, 2013.2014. The increase of Moscow fixed line sundry operating expensesincome as a percentage of Moscow fixed line revenues
was mainly attributable to the increase inof the percentagecompensation received for cable communication lines accidentally demolished by other entities and proceeds from sale of salary expenses and related social contributions to 19.8% for the year ended December 31, 2014, from 18.4% for the year ended December 31, 2013 due to salary indexation.copper cable.
Ukraine sundry operating expenses for the year ended December 31, 2014, increased2015, decreased by 79.7%64.5% or RUB 3,165 million to RUB 11,4311,743 million from RUB 6,3604,908 million for the year ended December 31, 2013.2014. Ukraine sundry operating expenses as a percentage of Ukraine revenues increaseddecreased to 34.9%6.2% for the year ended December 31, 2015, from 15.0% for the year ended December 31, 2014 from 16.0% fordue to reduction of impairment charges related to distressed Ukrainian banks to RUB 1,698 million in the year ended December 31, 2013. This increase was mainly due to the recognition of a provision for investments in DeltaBank in Ukraine amounting to2015 from RUB 5,138 millionand an increase of taxes other than income tax to 2.9% of our total revenues formillion in the year ended December 31, 2014 from 0.1% for the year ended December 31, 2013 — which was partially offset by a decrease caused by appreciation of the cross currency rate of Russian ruble to Ukrainian hryvnia of RUB 416 million for salary expenses and related social contributions and RUB 266 million for rent expenses.2014.
Other countries and business activities sundry operating income for the year ended December 31, 2015, decreased by RUB 3,134 million to RUB 149 million from RUB 3,283 million for the year ended December 31, 2014. In the year ended December 31, 2015 other countries and business activities sundry operating income was decreased by impairment of goodwill in Armenia in the amount of RUB 3,516 million.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses for the year ended December 31, 2014,2015, decreased by 40.9%0.9%, or RUB 755 million, to RUB 5,35387,340 million from RUB 9,05788,095 million for the year ended December 31, 2013. Other countries2014. Salary expenses and business activities sundry operating expenses as a percentagerelated social contributions increased by RUB 3,037 million amounting to 9.4% of other countries and business activitiesconsolidated revenues decreasedfor the year ended December 31, 2015 compared to 47.8%9.0% of consolidated revenues for the year ended December 31, 2014 from 99.2%due to indexation of salaries and increase in number of employees. Dealer commissions as a percentage of consolidated
revenues declined to 2.1% for the year ended December 31, 2013. The decrease was mainly attributable2015 compared to the gain from reentrance into Uzbekistan in the amount of RUB 6,734 million recognized in the year ended December 31, 2014. The impact of this was offset by the recognition of a gain resulting from the settlement of the Bitel litigation amounting to RUB 1,060 million in the year ended December 31, 2013, an increase in2.6% for the year ended December 31, 2014 in our salary expenses of RUB 994 million mainly due to salary indexation,focus on proprietary retail network after cessation of cooperation with Svyaznoy. Advertising and an increasemarketing expenses increased by 13.6%, or RUB 1,144 million, to RUB 9,543 million for the year ended December 31, 2015, from RUB 8,399 million for the year ended December 31, 2014 due to the growth of the number of advertising campaigns aided to promote new services and attract subscribers. Taxes other than income tax as a percentage of consolidated revenues declined to 0.5% for the year ended December 31, 2015 compared to 1.4% for the year ended December 31, 2014 mainly due to reversal of tax reserves for uncertain tax positions in sundry operatingRussia and decreasing non-taxable expenses in Uzbekistan of RUB 550 million driven by resuming of our activities.
Sales and marketing expensesUkraine.
Consolidated salesRussia convergent selling, general and marketingadministrative expenses for the year ended December 31, 2014, decreased by 4.2%, or RUB 953 million, to RUB 21,908 million from RUB 22,861 million for the year ended December 31, 2013. This decrease was mainly attributable to the decrease in commissions payable to dealers by RUB 803.0 million. Dealer commissions as a percentage of our revenues declined to 3.3% for the year ended December 31, 2014 compared to 3.6% for the year ended December 31, 2013. Advertising and promotion expenses decreased by 1.8%, or RUB 149.5 million, to RUB 8,313 million for the year ended December 31, 2013, from RUB 8,463 million for the year ended December 31, 2013. Sales and marketing expenses as a percentage of our total revenues decreased to 5.3% for the year ended December 31, 2014 compared to 5.7% for the year ended December 31, 2013.
Russia convergent sales and marketing expenses for the year ended December 31, 2014,2015, decreased to RUB 18,47963,700 million, or 5.4%17.8% of Russia convergent revenue, from RUB 18,71265,299 million, or 5.8%19.2% of Russia convergent revenue, for the year ended December 31, 2013. The decrease in sales and marketing expenses by 1.2% was due to the decrease of dealer commissions by RUB 227.5 million and advertising and marketing expenses by RUB 6.1 million.2014. Dealer commissions as a percentage of Russia convergent revenues declined to 3.5%2.2% for the year ended December 31, 2015, compared to 2.9% for the year ended December 31, 2014 compared to 3.8% for the year ended December 31, 2013mainly due to more active usagefocus on proprietary retail network after cessation of own retail network.cooperation with Svyaznoy. Advertising and marketing expenses as a percentage of Russia convergent revenues remained relatively stable atincreases to 2.1% for the year ended December 31, 2015, compared to 1.9% for the year ended December 31, 2014 as compareda result of inflation, promotion of new services and efforts to 2.0%increase customer base. Salary expenses and related social contributions increased by RUB 1,690 million amounting to 7.7% of Russia convergent revenues for the year ended December 31, 2013.2015 compared to 7.7% of Russia convergent revenues for the year ended December 31, 2014 due to indexation of salaries and increase in number of employees. Taxes other than income tax as a percentage of Russia convergent revenues declined to 0.1% for the year ended December 31, 2015 compared to 1.0% for the year ended December 31, 2014. The decrease relates to reserves for uncertain tax positions reversed in the year ended December 31, 2015.
Moscow fixed line salesselling, general and marketingadministrative expenses for the year ended December 31, 2014, decreased2015, increased to RUB 6607,294 million, or 1.6%18.4% of Moscow fixed line revenue, from RUB 7816,809 million, or 1.9% of Moscow fixed line revenue, for the year ended December 31, 2013. The decrease of RUB 239 million resulted from decline in dealers commission from RUB 541 million, or 1.3% of Moscow fixed line revenue, for
the year ended December 31, 2013 to RUB 302 million, or 0.7%16.7% of Moscow fixed line revenue, for the year ended December 31, 2014. The declineincrease of RUB 916 million resulted from rise in dealers commission was due to partial business disposal. Advertisingsalary expenses and marketing expensesrelated social contributions from RUB 3,257 million, or 8.0% of Moscow fixed line revenue, for the year ended December 31, 2014 increased byto RUB 1184,173 million, or 49% from RUB 240 million due to active promotion of GPON. As a percentage10.5% of Moscow fixed line revenue, advertisingfor the year ended December 31, 2015 mainly due to indexation. The growth of salary and marketingsocial contribution expenses increased from 0.6% in 2013was offset by the reduction of the security and logistics expenses by RUB 215 million due to 0.9% in 2014.the disposal of our subsidiary Rent Nedvizhimost.
Ukraine salesselling, general and marketingadministrative expenses for the year ended December 31, 2014,2015, decreased to RUB 1,9115,210 million or 5.8% of Ukraine revenues, from RUB 2,6645,773 million or 6.7% of Ukraine revenues, for the year ended December 31, 2013. The decrease2014. Decrease related to selling, general and administrative expenses in sales and marketing expenses byUkraine in the amount of RUB 753807 million was attributable to both a decline in dealer commissions and a decline in advertising and marketing expenses by RUB 437 million and RUB 316 million, respectively. The decline caused by appreciationresulted from the depreciation of the cross currency rate of Russian Ruble to Ukrainian hryvnia amounted to RUB 217 million for dealers commissions and RUB 210 million for advertising and marketing expenses. The remaining decrease in dealer commissions is attributable to a decrease inagainst the subscriber base resulting from termination of activities in Crimea as well as lower subscriber activity due to starting economy downturn. The same factors affected advertising and marketing expenses incurred in 2014.Russian ruble.
Other countries and business activities salesselling, general and marketingadministrative expenses for the year ended December 31, 2014,2015, increased by 9.2%10.7% to RUB 1,15712,434 million from RUB 1,06011,237 million for the year ended December 31, 2013. This2014. The increase was partiallymainly attributable to the increase in salesappreciation of the Armenian dram and marketing expenses in Uzbekistan for RUB 22 million driven by reentrance intoTurkmen manat against the country. The remaining increase related to sales and marketing expenses in Turkmenistan (increaseRussian ruble (growth by RUB 57584 million and RUB 315 million respectively), higher advertising costs of our Sputnikovoe TV subsidiary (growth by RUB 130 million) resulting from depreciation, as well as increased expenses due to acquisition of cross currency rate of Russian ruble to Turkmen manat. As a percentage of other countries and business activities total revenues, other countries and business activities sales and marketing expenses decreased to 10.3% for the year endedcompanies included in operating segment System Integrator in December 31, 2013, from 11.6% for the year ended December 31, 2013.2015 (change by RUB 205 million).
Depreciation and amortization expenses
Consolidated depreciation and amortization of property, network equipment, telephone numbering capacity,customer base, license costs and other intangible assets for the year ended December 31, 2014, slightly2015, increased by 2.0%4.2% to
RUB 74,71077,843 million from RUB 73,25374,734 million for the year ended December 31, 2013.2014. The consolidated depreciation and amortization expenses grew mainly in Moscow fixed lineas a result of growth of amortization charges for intangible assets of Russia convergent by RUB 3,109 million caused by renewal of our billing and resulted from the continued development of GPON project.other software.
Russia convergent depreciation and amortization for the year ended December 31, 2014, remained stable and amounted2015, increased by 6.3% to RUB 57,77361,265 million as compared tofrom RUB 57,65457,647 million for the year ended December 31, 2013.2014 mainly due to growth of amortization charges for intangible assets caused by renewal of our billing and other software.
Moscow fixed line depreciation and amortization for the year ended December 31, 20142015 slightly increased by 46.8%1.4% and amounted to RUB 7,6097,715 million fromas compared to RUB 5,1827,609 million for the year ended December 31, 2013.2014. The growth resulted from the continued development of GPON project.
Ukraine depreciation and amortization for the year ended December 31, 2014,2015, decreased by RUB 2,1161,580 million to RUB 6,7805,199 million from RUB 8,8966,779 million for the year ended December 31, 2013.2014. The decline of RUB 947 million is attributable to the appreciationdepreciation of cross currency rate of Russian ruble to Ukrainian hryvnia which resulted in RUB 1,391 million of Ukraine depreciation and amortization expense decrease in ruble terms. In the year ended December 31, 2013 there was accelerated depreciation of certain equipment to be replaced.against Russian ruble.
Other countries and business activities depreciation and amortization for the year ended December 31, 2014, decreased2015, increased by 64.9%RUB 972 million to RUB 2,6193,743 million from RUB 1,5882,771 million for the year ended December 31, 2013,2014. The increase is mainly attributable to the reentrance into Uzbekistan in September 2014.
Operating profit
Consolidated operating profit declined by RUB 5,935 million from RUB 99,858 million in the year ended December 31, 2014 to RUB 93,923 million in the year December 31, 2015 mainly due to decrease in operating profit of "Russia convergent" and increased"Other countries and business activities" segments.
Russia convergent operating profit for the year ended December 31, 2015, declined by 4.2% to RUB 82,692 million from RUB 86,310 million for the year ended December 31, 2014. Russia convergent operating profit also decreased as a percentage of Russia convergent revenues from 25.3% for the year ended December 31, 2014, to 23.1% for the year ended December 31, 2015, due to decline of Russia convergent gross margin to 59.3% for the year ended December 31, 2015 from 62.0% for the year ended December 31, 2014. The decline of the of Russia convergent gross margin resulted from lower margin on sale of goods due to aggressive pricing policy, inflationary rise of salaries and social contributions and growth of roaming expenses due to depreciation of Russian rubles against EUR and USD.
Moscow fixed line operating profit for the year ended December 31, 2015, increased by 1.2% to RUB 13,738 million from RUB 13,568 million for the year ended December 31, 2014. Moscow fixed line operating profit grew as a percentage of Moscow fixed line revenues to 34.7% for the year ended December 31, 2015 from 33.2% million for the year ended December 31, 2014 due to increased compensation received for cable communication lines accidentally demolished by other countriesentities and business activities totaladditional income from sale of copper cable.
Ukraine operating profit for the year ended December 31, 2015, increased by 38.3% to RUB 4,715 million for the year, ended December 31, 2015 compared to RUB 3,409 million for the year ended December 31, 2014. Ukraine operating profit grew as a percentage of Ukraine revenues to 16.7% for the year ended December 31, 2015, from 10.4% for the year ended December 31, 2014. The increase of Ukraine operating profit was largely attributable to the reduction of provision for investment in distressed Ukrainian banks by RUB 3,440 million in the year ended December 31, 2015 as compared to the year ended December 31, 2014.
revenues to 23.4% from 17.4% respectively. The increase was caused by depreciation of Russian ruble against local currencies — Armenian dram and Turkmenian manat. The acquisition of transponder and transfer of majority ownership interest in UMS in the year ended December 31, 2014 added additional RUB 678 million to other countries and business activities depreciation and amortization expense.
Operating income
Consolidated operating income remained relatively stable both in absolute terms and as a percentage of consolidated revenues and amounted to RUB 102,349 million for the year ended December 31, 2014, from 101,758 million for the year ended December 31, 2013.
Russia convergent operating income for the year ended December 31, 2014, increased by 8.5% to RUB 85,964 million from RUB 79,199 million for the year ended December 31, 2013. Russia convergent operating income increased insignificantly as a percentage of Russia convergent revenues to 25.2% for the year ended December 31, 2014, from 24.7% for the year ended December 31, 2013, mainly due to the increase in Russia convergent revenues by 6.1% which was offset by the increase in Russia convergent cost of services and cost of handsets and accessories as a percentage of Russia convergent revenues to 31.8% for the year ended December 31, 2014 from 30.6% for the year ended December 31, 2013.
Moscow fixed line operating income for the year ended December 31, 2014, decreased by 13.2% to RUB 13,601 million from RUB 15,678 million for the year ended December 31, 2013. Moscow fixed line operating income decreased as a percentage of Moscow fixed line revenues to 33.3% for the year ended December 31, 2014 from 38.9% million for the year ended December 31, 2013. The decline is attributable to the growth of sundry operating expenses as a percentage of revenues to 33.1% for the year ended December 31, 2014 from 31.5% for the year ended December 31, 2013 and the simultaneous increase of depreciation and amortization expense as percentage of revenues to 18.6% for the year ended December 31, 2014 from 12.9% for the year ended December 31, 2013.
Ukraine operating income for the year ended December 31, 2014, decreased by 71.1% to RUB 3,390 million from RUB 11,745 million for the year ended December 31, 2013. Ukraine operating income decreased as a percentage of Ukraine revenues to 10.3% for the year ended December 31, 2014, from 29.6% for the year ended December 31, 2013. This decrease was largely due to the recognition of provision for investment in DeltaBank in the amount of RUB 5,138 million, and the decrease in Ukraine revenues by 17.5% in the year ended December 31, 2014 as explained above.
Other countries and business activities operating loss for the year ended December 31, 2014, amounted to RUB 559 million, while other countries and business activities' operating loss for the year ended December 31, 2013, was2015, increased by 108.4% to RUB 4,810 million. The decrease in operating loss is mainly attributable to the gain7,049 million from reentrance into Uzbekistan in the amount of RUB 6,7343,383 million recognized infor the year ended December 31, 2014. The decreaseincrease in operating loss was offset by the releasemainly attributable to impairment of damages, interest and other costs that had been provided forgoodwill in relation to the dispute with NomiholdArmenia in the amount of RUB 1,060 million which we recognized in the year ended December 31, 2013.3,516 million.
Currency exchange and transaction gains/losses
Consolidated currency exchange and transaction loss for the year ended December 31, 2014,2015, was RUB 18,0246,154 million, compared to the loss of 5,47317,926 million for the year ended December 31, 2013.2014. We conduct our operations within the Russian Federation, Ukraine, Turkmenistan and Armenia and we are therefore subject to currency fluctuations. The local currencies of these countries fluctuated significantly against the U.S. dollar and euro during the years ended December 31, 20142015 and 2013,2014, and the currency exchange and transaction gains/losses we incurred were primarily due to the translation effect of our U.S. dollar and euro-denominated debt and deposits as of December 31, 20142015 and 2013.2014. The increasedecreases in losses recognized in 2014the year ended December, 31 2015 as compared to those recorded in 2013the year ended December, 31, 2014 were mainly due to the significant
depreciation of the Russian ruble against the U.S. dollar and euroEuro during the year ended December 31, 2014, as compared to 2013.2015.
Interest expenseFinance costs
Consolidated interest expensefinance costs for the year ended December 31, 2014,2015, increased by RUB 9559,170 million, or 6.2%53.2%, to RUB 16,45326,422 million from RUB 15,49817,252 million for the year ended December 31, 2013,2015, primarily as a result of the increase in our total indebtedness.
Equity in net income of associates
Consolidated equity in net incomeNon-operating share of the profit or loss of associates for the year ended December 31, 2014,2015 decreased by RUB 5,3522,757 million to a loss of RUB 2,8803,781 million compared to a gainloss of RUB 2,4726,538 million for the year ended December 31, 2013.2014. The decrease results mainly from the larger loss of MTS Bank and the impairment of investment in MTS Bank in the amount of RUB 3,225 million during the year ended December 31, 2014.2014, compensated by a larger loss at MTS Bank in the year ended December 31, 2015.
Other expenses (income), net
Consolidated other expensesincome for the year ended December 31, 2014 amounted2015 increased to RUB 77154 million, as compared to the incomeexpenses of RUB 10,636936 million for the year ended December 31, 2013. This decrease2014 due to growth of income was primarily attributable to the recognitiongain on sale of foreign currencies in the year ended December, 31 2013 of release of the provision to exercise the put option for acquisition of the remaining 49% stake in Bitel and the release of damages, interest and other costs that had been provided for in relation to the dispute with Nomihold.2015.
Provision for income taxes
Consolidated provision for income taxes for the year ended December 31, 20142015 decreased by 16.7%12.4% to RUB 16,34713,931 million from RUB 19,63315,909 million for the year ended December 31, 20132014 mainly as a result of decrease in income before provision for income taxes, partly offsetenhanced by an increasea decrease in the effective tax rate. The effective tax rate increaseddecreased to 23.8%20.8% in the year ended December 31, 2015, from 25.8% in the year ended December 31, 2014 from 20.3% in the year ended December 31, 2013 mainly as a result of decrease in earnings distributions from subsidiaries, effectpartly offset by higher level of theexpenses not deductible for tax purposes (in particular, impairment of goodwill in Armenia) and as a result of lower tax ratescontribution of subsidiaries and other items not liable for income tax purposes.change in fair value of derivative financial instruments.
Net loss/income attributable to the non-controlling interest
Net incomeloss attributable to the non-controlling interest for the year ended December 31, 2014 decreased by 39.9% and amounted2015 totaled to RUB 5712,085 million compared to net income attributable to the non-controlling interest of RUB 949190 million for the year ended December 31, 2013.2014. The decreaseloss is mainly attributable to the
non-controlling interest share of loss in the amount of RUB 4442,834 million recognized in relation to UMS, our former subsidiary in Uzbekistan.
Net income attributable to the Group
Net income attributable to the Group for the year ended December 31, 2014,2015, decreased by RUB 28,0171,817 million, or 35.1%3.5%, to RUB 51,82249,489 million, compared to RUB 79,83951,306 million for the year ended December 31, 2013.2014. Net income as a percentage of revenues was 12.6%11.5% in the year ended December 31, 2014,2015, and 20.0%12.5% in the year ended December 31, 2013.2014. Net income attributable to the Group for the year ended December 31, 2014,2015, as compared to the year ended December 31, 2013,2014, decreased primarily due to the increasefollowing factors: impairment of goodwill in foreignArmenia (RUB 3,516 million), increased loss from discontinued operations in Uzbekistan (RUB 11,443 million), higher finance cost (RUB 9,170 million) and increased depreciation and amortization expenses (RUB 3,109 million). Negative effects were partially offset by the lower amount of impairment of investments in distressed Ukrainian banks (RUB 3,440 million), decrease in currency exchange and transaction losses by 229.3% and recognitiontranslation loss (RUB 11,772 million), higher finance income (RUB 3,849 million), lower non-operating share of theloss of associates (RUB 2,757 million, thereof RUB 3,225 million impairment of our investment in MTS Bank recognized in the amount2014),positive change in fair value of RUB 3,225 million. Another reason for the decline of net income for the year ended December 31, 2014 was the recognitionliability related to put option agreement in the year ended December 31, 2013 of a gain in the amount of RUB 12,147 million
Armenia (RUB 1,273 million) and higher loss attributable to the release of the provision relating to the exercise of the put option to acquire the 49% stake in Bitel and the release of provisions for damages, interest and other costs that had been provided for in relation to the dispute with Nomihold. The net income decrease in 2014 is also attributable to the recognition in 2013 of a gain in the amount of RUB 3,733 from discontinued operations related to the bankruptcy and deconsolidation of Uzdunrobita.
Year Ended December 31, 2013 compared to Year Ended December 31, 2012
Revenues and cost of services and cost of handsets and accessories
Consolidated revenues for the year ended December 31, 2013, increased by RUB 20,203 million, or 5.3%, to RUB 398,443 million from RUB 378,240 million for the year ended December 31, 2012. The principal reason for the growth of our consolidated revenues for the year ended December 31, 2013, was the large increase in the usage of value-added services by our subscribers (by RUB 14,860 million), which was mainly attributable to the increase of data traffic driven by our active promotion of value-added services, an increase in mobile Internet penetration, an increase in usage of smartphones by our subscribers and active 3G network expansion and the consequent improvement of the quality and uptake of value-added services. The increase of our consolidated revenues for the year ended December 31, 2013 was also supported by the growth of interconnect revenues by RUB 1,208 million, increases in roaming revenues by RUB 1,663 million and a growth in fixed line revenues by RUB 2,838 million. The growth of our interconnect revenues was due to increases in the volume of traffic from our competitors. The increase in roaming revenues was attributable to increases in the volume of traffic from our subscribers resulting from the launch of attractive roaming propositions. The increase in fixed line revenues was mainly attributable to the growth of revenues from fixed line Internet and TV due to the development of the GPON project and consequent improvement in quality and uptake of services provided. In the year ended December 31, 2013, we experienced a decline in our revenues from sales of handsets and accessories by RUB 2,409 million due to refocusing of our devices strategy to promote sales of affordable smartphones. Our consolidated mobile subscriber base, excluding Uzbekistan amounted to 94.7 million as of December 31, 2013 as compared to 95.8 million as of December 31, 2012. The decrease in the mobile churn rate in Russia to 38.1% from 42.4% in 2012 had an immaterial impact on our consolidated revenues.
Consolidated cost of services and cost of handsets and accessories for the year ended December 31, 2013 decreased slightly and amounted to RUB 106,413 million as compared to RUB 108,093 million for the year ended December 31, 2012 and comprised 26.7% and 28.6% as a percentage of consolidated revenues for the year ended December 31, 2013 and 2012, respectively. The decline was mainly attributable to the decrease in the cost of handsets and accessories as a percentage of revenue to 5.4% of consolidated revenues for the year ended December 31, 2013 as compared to 6.3% of consolidated revenues for the year ended December 31, 2012 attributable to an increase in the amount of volume discounts offered by our handsets vendors.
Russia convergent revenues for the year ended December 31, 2013, increased by 4.9% to RUB 321,074 million from RUB 305,990 million for the year ended December 31, 2012. The increase in Russia convergent revenues in the year ended December 31, 2013, was primarily due to the growth of revenues from value-added services by RUB 13,372 million, interconnect revenues by RUB 1,806 million and roaming revenues by RUB 1,614 million. Revenues from value-added services as a percentage of Russia convergent revenues in the year ended December 31, 2013, grew to 25.8% as compared to 22.7% in the year ended December 31, 2012, due to the increase in data traffic volumes attributable to the introduction of new marketing initiatives aimed at stimulating greater usage of value-added services among our subscribers and the overall improvement of quality of these services. Interconnect revenues grew to RUB 39,734 million, as compared to RUB 37,928 million, in the year ended December 31, 2012, due to the growth in the volume of traffic from our competitors. The increase in roaming revenues to RUB 34,196 million for the year ended December 31, 2013 as
compared to RUB 32,582 million for the year ended December 31, 2012 was attributable to increased traffic volumes from our subscribers resulting from the launch of attractive roaming propositions. Interconnect revenues and roaming revenues as a percentage of Russia convergent revenues for the year ended December 31, 2013 remained stable and amounted to 12.4% and 10.7%, respectively as compared to 12.4%, and 10.7%, respectively for the year ended December 31, 2012. In the year ended December 31, 2013, we experienced a decline in our revenues from the sales of handsets and accessories as a percentage of Russia convergent revenues to 8.2% of Russia convergent revenues in the year ended December 31, 2013 as compared to 9.4% for the year ended December 31, 2012 due to refocusing of our retail strategy to promote affordable smartphones.
Moscow fixed line revenues for the year ended December 31, 2013, increased by 6.5% to RUB 40,324 million from RUB 37,856 million for the year ended December 31, 2012. The increase was mainly attributable to the growth of revenues from fixed line Internet and TV due to the development of the GPON project and consequent improvement in quality and uptake of services provided. The increase in other revenue of fixed line is attributable to an increase in rent due to Business-Nedvizhimost spin off from MGTS.
Russia convergent cost of services and cost of handsets and accessories for the year ended December 31, 2013, decreased by 1.5% to RUB 98,359 million from RUB 99,852 million for the year ended December 31, 2012. The decline was primarily attributable to the decrease in cost of handsets and accessories by RUB 2,430 million and as a percentage of Russia convergent revenues to 6.5% of Russia convergent revenues in the year ended December 31, 2013 from 7.7% in the year ended December 31, 2012 attributable to a decrease in sales of handsets and accessories and an increase in the amount of volume discounts offered by our handsets vendors.
Ukraine revenues increased by 5.3% to RUB 39,732 million in the year ended December 31, 2013, from RUB 37,722 million in the year ended December 31, 2012, primarily due to the growth in usage of value-added services by our subscribers, an increase in interconnect revenues and the increase in the number of our subscribers by 3.9% to 21.5 million from 20.7 million. Value-added services revenues increased by 8.8% to RUB 12,088 million in the year ended December 31, 2013, from RUB 11,114 million in the year ended December 31, 2012, due to the active promotion of these services among our subscribers. Value-added services revenues as a percentage of Ukraine revenues in the year ended December 31, 2013, grew to 30.4%, as compared to 29.5% in the year ended December 31, 2012. An increase in interconnect revenues by RUB 699 million to 18.9% as a percentage of Ukraine revenues for the year ended December 31, 2013 as compared to 18.1% for the year ended December 31, 2012 is attributable to the increase in traffic volume from our competitors. The increase in air time revenue by RUB 492 million arose from the growth of our Ukraine subscriber base by 3.9%.
Ukraine cost of services and cost of handsets and accessories increased insignificantly by 3.9% to RUB 10,067 million in the year ended December 31, 2013, from RUB 9,691 million in the year ended December 31, 2012. Ukraine cost of services and cost of handsets and accessories as a percentage of Ukraine revenues for the year ended December 31, 2013 remained relatively stable and amounted to 25.3% as compared to 25.7% for the year ended December 31, 2012. The moderate growth was primarily attributable to the increase in interconnect expenses by RUB 302 million and an increase in other direct costs by RUB 216 million due to the growth in overall volume of outgoing traffic.
Other countries and business activities revenues for the year ended December 31, 2013, increased by 43.0% to RUB 9,129 million from RUB 6,382 million for the year ended December 31, 2012. The increase was caused by us resuming mobile telecommunications services in Turkmenistan in the second half of 2012. The subscriber base in Turkmenistan as of December 31, 2013 increased to 1.7 million as compared to 1.4 million as of December 31, 2012.
Other countries and business activities cost of services and cost of handsets and accessories for the year ended December 31, 2013, increased to RUB 2,234 million from RUB 1,400 million for the year
ended December 31, 2012. The decline was caused by us resuming mobile telecommunications services in Turkmenistan in the second half of 2012.
Consolidated sundry operating expenses for the year ended December 31, 2013, increased by 8.5% to RUB 94,158 million from RUB 86,776 million for the year ended December 31, 2012. Sundry operating expenses as a percentage of our total revenues increased to 23.6% in the year ended December 31, 2013, from 22.9% in the year ended December 31, 2012. The change was mainly attributable to the increase in salary expenses and related social contributions by RUB 5,304 million amounting to 11.5% of our revenues for the year ended December 31, 2013 compared to 10.7% for the year ended December 31, 2012 due to increases in the number of employees (mainly resulting from our continuing retail expansion), as well as indexation of salaries. In addition, our rent expenses grew due to increases in the number of rented base station sites as well as retail expansion. Rent expenses as a percentage of our total revenues grew to 3.7% for the year ended December 31, 2013, from 3.5% for the year ended December 31, 2012. The increase was also attributable to the increase of taxes other than income tax to 1.6% of our total revenues for the year ended December 31, 2013 from 1.4% for the year ended December 31, 2012.
Russia convergent sundry operating expenses for the year ended December 31, 2013, increased by 12.9% to RUB 67,149 million from RUB 59,473 million for the year ended December 31, 2012. Russia convergent sundry operating expenses as a percentage of Russia convergent revenues increased to 20.9% for the year ended December 31, 2013, from 19.4% for the year ended December 31, 2012. The increase of Russia convergent sundry operating expenses as a percentage of Russia convergent revenues was mainly attributable to the increase in the percentage of salary expenses and related social contributions to 9.2% for the year ended December 31, 2013, from 8.1% for the year ended December 31, 2012 due to increases in the number of employees and salary indexation. Rent expenses grew to 4.0% of our Russia convergent revenues for the year ended December 31, 2013, from 3.8% for the year ended December 31, 2012, attributable to an increase in the number of rented base station sites and retail expansion. Taxes other than income as a percentage of Russia convergent revenues increased to 1.5% of our Russia convergent revenues for the year ended December 31, 2013 from 1.3% for the year ended December 31, 2012.
Moscow fixed line sundry operating expenses for the year ended December 31, 2013, increased by 3.7% to RUB 12,693 million from RUB 12,241 million for the year ended December 31, 2012. Moscow fixed line sundry operating expenses as a percentage of Moscow fixed line revenues decreased to 31.5% for the year ended December 31, 2013, from 32.3% for the year ended December 31, 2012. The increase of Moscow fixed line sundry operating expenses as a percentage of Moscow fixed line revenues was mainly attributable to the increase in the percentage of salary expenses and related social contributions to 18.4% for the year ended December 31, 2013, from 17.7% for the year ended December 31, 2012 due to salary indexation.
Ukraine sundry operating expenses for the year ended December 31, 2013, increased by 1.9% to RUB 6,360 million from RUB 6,243 million for the year ended December 31, 2012. Ukraine sundry operating expenses as a percentage of Ukraine revenues decreased to 16.0% for the year ended December 31, 2013, from 16.5% for the year ended December 31, 2012. The increase in sundry operating expenses was primarily attributable to the increase in salary expenses and related social contributions and rent.
Other countries and business activities sundry operating expenses for the year ended December 31, 2013, decreased by 6.5% to RUB 9,057 million from RUB 9,687 million for the year ended December 31, 2012. Other countries and business activities sundry operating expenses as a percentage of other countries and business activities revenues decreased to 99.2% for the year ended
December 31, 2013, from 151.8% for the year ended December 31, 2012. This decrease was mainly due to the recognition of a one off operating gain resulting from the settlement of the Bitel litigation amounting to RUB 1,060 million.
Sales and marketing expenses
Consolidated sales and marketing expenses for the year ended December 31, 2013, increased by 5.5%, or RUB 1,194 million, to RUB 22,861 million from RUB 21,667 million for the year ended December 31, 2012. This increase was mainly attributable to the increase in commissions payable to dealers by RUB 639.1 million. Dealer commissions as a percentage of our revenues remained stable at 3.6% for the year ended December 31, 2013 compared to 3.6% for the year ended December 31, 2012. This resulted from the fact that in 2012 we introduced changes into the motivation scheme for our dealers shifting from a fixed bonus per acquired subscriber to a bonus depending on the subscriber quality, which is measured by a percentage of subscriber payment and this scheme remained in place in 2013. Advertising and promotion expenses increased by 7%, or RUB 554.7 million, to RUB 8,463 million for the year ended December 31, 2013, from RUB 7,908 million for the year ended December 31, 2012, which was primarily attributable to our marketing efforts. Sales and marketing expenses as a percentage of our total revenues remained stable at 2.1% for the year ended December 31, 2013 and 2012.
Russia convergent sales and marketing expenses for the year ended December 31, 2013, increased to RUB 18,712 million, or 5.8% of Russia convergent revenue, from RUB 17,839 million, or 5.8% of Russia convergent revenues, for the year ended December 31, 2012. The increase in sales and marketing expenses by 4.9% was due to the increase of dealer commissions by RUB 414.5 million and advertising and marketing expenses by RUB 458.2 million. Dealer commissions as a percentage of Russia convergent revenues remained stable at 3.9% for the year ended December 31, 2013, compared to 3.8% for the year ended December 31, 2012. Advertising and marketing expenses as a percentage of Russia convergent revenues also remained stable at 2.0% for the year ended December 31, 2013, as compared to 2.0% for the year ended December 31, 2012.
Moscow fixed line sales and marketing expenses for the year ended December 31, 2013 increased by RUB 50 million to RUB 781 million, or 6.8% against RUB 731 million for the year ended December 31, 2012. As a percentage of Moscow fixed line revenues sales and marketing expenses remained stable in both years at 1.9%. The increase was wholly attributable to increase in dealers commission, which rose from RUB 491 million in 2012 to RUB 541 million in 2013.
Ukraine sales and marketing expenses for the year ended December 31, 2013, increased to RUB 2,664 million, or 6.7% of Ukraine revenues, from RUB 2,570 million, or 6.8% of Ukraine revenues, for the year ended December 31, 2012. The increase in sales and marketing expenses by RUB 94 million was primarily attributable to the increase in dealer commissions by RUB 70 million as a result of subscriber base growth by 3.9%.
Other countries and business activities sales and marketing expenses for the year ended December 31, 2013, increased by 29.7% to RUB 1,060 million from RUB 817 million for the year ended December 31, 2012. This increase was mainly attributable to the increase in sales and marketing expenses in Turkmenistan in the amount of RUB 167 million driven by resuming of its activities. As a percentage of other countries and business activities total revenues, other countries and business activities sales and marketing expenses decreased to 11.6% for the year ended December 31, 2013, from 12.8% for the year ended December 31, 2012. The decrease was mainly attributable to the significant increase in Turkmenistan revenue in 2013 as our operations resumed there.
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, 2013, increased by 7.9% to RUB 73,253 million from RUB 67,910 million for the year ended December 31, 2012. The expenses grew mainly in Russia and resulted from the continued expansion of our network through builds-outs, as well as accelerated depreciation of certain equipment. In Ukraine and Armenia the expenses decreased as part of the equipment was fully amortized and was replaced at the end of reporting period. Depreciation and amortization expenses as a percentage of our total revenues increased to 18.4% for the year ended December 31, 2013, from 18.0% for the year ended December 31, 2012.
Russia convergent depreciation and amortization for the year ended December 31, 2013, increased by 10.9% to RUB 57,655 million from RUB 51,994 million for the year ended December 31, 2012, mainly as a result of the development of our network in the regions, the build-out of our 3G and broadband Internet networks and accelerated depreciation of certain equipment which we intend to replace. Depreciation and amortization expenses as a percentage of total revenues increased to 18.0% for the year ended December 31, 2013, from 17.0% for the year ended December 31, 2012.
Moscow fixed line depreciation and amortization for the year ended December 31, 2013 increased by 21.9% to RUB 5,182 million from RUB 4,251 million for the year ended December 31, 2012, mainly as a result of the continued development of GPON project.
Ukraine depreciation and amortization for the year ended December 31, 2013, was RUB 8,896 million, or 22.4% of Ukraine revenues, and RUB 9,571 million or 25.4% of Ukraine revenues, for the year ended December 31, 2012. In the year ended December 31, 2012, there was accelerated depreciation of certain equipment to be replaced.
Other countries and business activities depreciation and amortization for the year ended December 31, 2013, decreased by 24.5% to RUB 1,588 million from RUB 2,104 million for the year ended December 31, 2012, and decreased as a percentage of other countries and business activities total revenues to 17.4% from 33.0% respectively. The decrease in other countries and business activities depreciation and amortization expense was primarily attributable to the decrease of property, plant and equipment depreciation expenses in Armenia, part of which was fully amortized and replaced.
Operating income
Consolidated operating income increased by 8.5% to RUB 101,758 million for the year ended December 31, 2013, from 93,793 million for the year ended December 31, 2012. Operating income as a percentage of our total revenues increased insignificantly to 25.5% for the year ended December 31, 2013, compared to 24.8% for the year ended December 31, 2012. The main reason for the growth was the increase in our consolidated revenues by RUB 20,203 million which was offset by the increase in sundry operating expense by RUB 7,382 million and depreciation and amortization expense by RUB 5,343 million due to the reasons described in more detail above.
Russia convergent operating income for the year ended December 31, 2013, increased by 3.1% to RUB 79,199 million from RUB 76,832 million for the year ended December 31, 2012. Russia convergent operating income decreased insignificantly as a percentage of Russia convergent revenues to 24.7% for the year ended December 31, 2013, from 25.1% for the year ended December 31, 2012, mainly due to the increase in Russia convergent revenues by 4.9% which was offset by the increase in Russia convergent sundry operating expenses as a percentage of Russia convergent revenues to 20.9% for the year ended December 31, 2013 from 19.4% for the year ended December 31, 2012 as well as by the increase in Russia convergent depreciation and amortization expense to 18.0% for the year ended December 31, 2013 from 17.0% for the year ended December 31, 2012 as explained above.
Moscow fixed line operating income for the year ended December 31, 2013 increased by 4.9% to RUB 15,678 million from RUB 14,948 million for the year ended December 31, 2012. The increase is attributable to the growth in Moscow fixed line revenues by RUB 2,468 million offset by the increase in sundry operating expenses by RUB 451 million, increase in depreciation and amortization expenses by RUB 931 million and increase in cost of services and cost of handsets and accessories by RUB 305 million due to the reasons described above.
Ukraine operating income for the year ended December 31, 2013, increased by 21.7% to RUB 11,745 million from RUB 9,647 million for the year ended December 31, 2012. Ukraine operating income increased as a percentage of Ukraine revenues to 29.6% for the year ended December 31, 2013, from 25.6% for the year ended December 31, 2012. These increases were largely due to the growth in Ukraine revenues by 5.3% and the simultaneous decline of depreciation and amortization expenses as a percentage of Ukraine revenues to 22.4% for the year ended December 31, 2013 from 25.4% for the year ended December 31, 2012 as explained above.
Other countries and business activities operating loss for the year ended December 31, 2013, amounted to RUB 4,810 million, while other countries and business activities operating loss for the year ended December 31, 2012, was RUB 7,626 million. The decrease in other countries and business activities operating loss was attributable to the fact that we resumed our operations in Turkmenistan in the second half of 2012 with the subsequent growth of other countries and business activities revenues. The decline was also reduced due to the release of damages, interest and other costs that had been provided for in relation to the dispute with Nomihold.
Currency exchange and transaction gains/losses
Consolidated currency exchange and transaction loss for the year ended December 31, 2013, was RUB 5,473 million, compared to the gains of 3,952 million for the year ended December 31, 2012. We conduct our operations within the Russian Federation, Ukraine, Turkmenistan and Armenia, and we are therefore subject to currency fluctuations. The local currencies of these countries fluctuated significantly against the U.S. dollar and euro during the years ended December 31, 2013 and 2012, and the currency exchange and transaction gains/losses we incurred were primarily due to the translation effect of our U.S. dollar and euro-denominated debt as of December 31, 2013 and 2012. The losses recognized in 2013 as compared to gains recorded in 2012 were mainly due to the depreciation of the Russian ruble against the U.S. dollar and euro during the year ended December 31, 2013, as compared to 2012.
Interest expense
Consolidated interest expense for the year ended December 31, 2013, decreased by RUB 2,175 million, or 12.3%, to RUB 15,498 million from RUB 17,673 million for the year ended December 31, 2012, primarily as a result of the decrease in our total indebtedness, revision of interest rates during 2013 as well as raising credit funds at more attractive rates.
Equity in net income of associates
Consolidated equity in net income of associates for the year ended December 31, 2013, increased by RUB 1,603 million, or 184.5%, to a gain of RUB 2,472 million, compared to a gain of RUB 869 million for the year ended December 31, 2012. The increase results mainly from income growth of our equity investee in in Belarus during the year ended December 31, 2013. In addition, in April 2013, we acquired a 25.0945% stake in MTS Bank, consolidated equity in net income of MTS Bank for the year ended December 31, 2013 amounted to RUB 229 million.
Other expenses (income), net
Consolidated other income for the year ended December 31, 2013, amounted to RUB 10,636 million, as compared to RUB 687 million for the year ended December 31, 2012. This increase was primarily attributable to the release of the provision to exercise the put option for acquisition of the remaining 49% stake in Bitel and the release of damages, interest and other costs that had been provided for in relation to the dispute with Nomihold.
Provision for income taxes
Consolidated provision for income taxes for the year ended December 31, 2013, increased by 1.3% to RUB 19,633 million from RUB 19,384 million for the year ended December 31, 2012. The effective tax rate decreased to 20.3% in the year ended December 31, 2013, from 23.4% in the year ended December 31, 2012 mainly as a result of earnings distributions from subsidiaries, effect of the lower tax rates of subsidiaries and other items not liable for tax purposes.
Net income attributable to the non-controlling interest
Net income attributable to the non-controlling interest for the year ended December 31, 2013 remained relatively stable and amounted to RUB 949 million compared to net income attributable to the non-controlling interest of RUB 970 million for the year ended December 31, 2012.
Net income attributable to the Group
Net income attributable to the Group for the year ended December 31, 2012, increased by 50,197 million, or 169%, to RUB 79,839 million, compared to RUB 29,642 million for the year ended December 31, 2012. Net income as a percentage of revenues was 20.0% in the year ended December 31, 2013, and 7.8% in the year ended December 31, 2012. Net income attributable to the Group for the year ended December 31, 2013, as compared to the year ended December 31, 2012, increased due to the overall growth of consolidated revenues by 5.3%, recognition of other income in the amount of RUB 12,147 million attributable to the release of the provision retaling to the exercise of the put option to acquire the remaining 49% stake in Bitel and the release of provisions for damages, interest and other costs that had been provided for in relation to the dispute with Nomihold. Another reason for the growth of net income was the recognition of gain in the amount of RUB 3,733 million related to discontinued operations in Uzbekistan in the year ended December 31, 2013 as compared to the loss in the amount of RUB 32,846 million recognized in the year ended December 31, 2012.(RUB 2,275 million).
B. Liquidity and Capital Resources
Our borrowings consist of notes and bank loans. Since 2001, we have raised a total of $3.0 billion (RUB 92.8 billion at the date of transactions) through seven U.S. dollar-denominated unsecured bond offerings in the international capital markets, as well as ruble-denominated bonds totaling RUB 96106 billion. Our bank loans consist of U.S. dollar-, euro-, Armenian dram-, Uzbek som-Czech crown- and ruble- denominated borrowings totaling approximately RUB 176.5195.1 billion as of December 31, 2014.2016. We repaid approximately RUB 52.690.2 billion of indebtedness in 2014.2016. As of December 31, 2014,2016, the total amount available to us under our credit facilities amounted to RUB 44.440.9 billion. We had total indebtedness of approximately RUB 292.4284.3 billion as of December 31, 2014,2016, including capital lease obligations, compared to approximately RUB 219.1345.9 billion as of December 31, 2013.2015. Our total interest expensefinance costs for the years ended December 31, 20132015 and 2014,2016, was RUB 15.526.4 billion and RUB 16.527.1 billion, net of amounts of interest capitalized, respectively. See Note 1715 to our audited consolidated financial statements for a description of our indebtedness.
Capital Requirements
We need capital to finance the following:
We anticipate that capital expenditures, acquisitions, repayment of long- termlong-term debt and dividends will represent the most significant uses of funds for several years to come.
Our cash outlays for capital expenditures in 2012, 20132014, 2015 and 20142016 were RUB 87,78391,929 million, RUB 81,575106,537 million and RUB 92,59986,149 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 network and expansion into new license 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 total capital expenditures in 20152017 to be approximately 20% of our total 20142016 revenue. These investments are required to support the growth in our subscriber base (i.e., to improve network capacity), to maintain and modernize our mobile and fixed line networks, to develop our network in the regions and to continue with the roll out of LTE networks throughout Russia as well as the development of our proprietary retail chain in Russia. We expect that the development of LTE networks will be among our most significant capital expenditures and require considerable management resources. See "Item 4. Information on Our Company—B. Business Overview—Mobile Operations—Services Offered—3G Technology" for additional information. Our actual capital expenditures may vary significantly from our estimates.
In addition to capital expenditures, RUB 2,198 million (net of cash acquired) in 2012, was spent to acquire businesses. See "Item 3. Key Information—A. Selected Financial Data" and Note 3 to our audited consolidated financial statements. In 2013 we bought a 25.0945% stake in MTS Bank for RUB 5,089 million. In December 2014 we acquired controlling interests in a number of mobile operators in certain regions of Russia (SMARTS-Ivanovo, SMARTS-Ufa and Penza-GSM) for cash payment of RUB 2,7572,867 million. In December 2014, we increased our interest in MTS Bank from 26.3% to 27.0% through participation in an additional share issue of MTS Bank. In April 2014, we acquired a 10.82% stake in OZON Holdings Limited through the purchase of OZON Holdings Limited's additional share issuance amounting to USD 75 million (RUB 2,702 million). In January 2015, the Group acquired 89.5% of Navigation Information Systems from Sistema for RUB 44 million. In July and December 2015, we acquired 100% share in the holding company NVision Group from subsidiaries of Sistema for RUB 11.2 billion. In December 2015, the Group increased its share in Stream from 45% to 100% for RUB 1,650 million. In February 2016, we acquired 946,347 ordinary shares of MTS Bank, placed as part of an earlier approved additional issue, for a total consideration of RUB 1,325 million. In November 2016 the Group acquired 2,637,310 ordinary shares of MTS Bank of 10,000,000 shares, placed as a part of an earlier approved additional share issuance, for a total consideration of RUB 2,769 million. In September 2016, the Group acquired 100% of the shares of Smarts-Yoshkar-Ola CJSC ("Smarts-Yoshkar-Ola"), operating in the Republic of Mari El and holding rights to use 1800 MHz radio frequencies for RUB 13 million.
We also used cash provided by operating activities as well as external credit facilities to finance our capital expenditures. We plan to finance future acquisitions through operating cash flows and additional borrowings. We may continue to expand our business through acquisitions. Our cash requirements relating to potential acquisitions can vary significantly based on market opportunities.
We expect to refinance our existing debt when it becomes due. Of our notesFor scheduled maturities of debt principal outstanding as of December 31, 2014, RUB 22,701 million are due in 2015, RUB 1,788 million are due in 2016 and RUB 10,000 million are due in 2017. Ofsee Note 15 of our bank loans outstanding as of December 31, 2014, RUB 19,435 million is due in 2015, RUB 33,821 million is due in 2016 and RUB 39,937 million is due in 2017. Weaudited consolidated financial statements.We generally use the proceeds from our financing activities for our corporate purposes and refinancing existing indebtedness.
Sistema, which currently controls 51.46%48.94% of our total charter capital (53.46%(50.03% excluding treasury shares) and consolidates our results in its financial statements, has a significant amount of outstanding debt and requires funds for debt service. These funds may come, in part, from dividends paid by its subsidiaries, including us. Our shareholders approved cash dividends in the amount of RUB 30,046 million (including dividends on treasury shares of RUB 1,127 million) for the year 2010, of which RUB 6 million remained payable as of December 31, 2011, RUB 30,397 million (including dividends on treasury shares of RUB 1,140 million) for 2011, of which RUB 4 million remained payable as of December 31, 2012, and RUB 30,168 million (including dividends on treasury shares of RUB 1,131 million) for 2012. In 2013, MTS started to pay out dividends on a semi-annual basis using interim 6 months and full-year financial results as a foundation, and the amount of semi-annual dividends for 2013 approved by our shareholders was RUB 10,786 million (including dividends on treasury shares of RUB 405 million). Our shareholders approved annual cash dividends for the year 2013 in the amount of RUB 38,435 million (including dividends on treasury shares in the amount of RUB 1,441 million), semi-annual dividends for 2014 in the amount of RUB 12,812 million (including dividends on treasury shares in the amount of RUB 480.5 million). Dividends payable to ourOur shareholders asapproved annual cash dividends for the year 2014 in the amount of RUB 40,419 million (including dividends on treasury shares in the amount of RUB 1,516 million), semi-annual dividends for 2015 in the amount of RUB 11,593 million (including dividends on treasury shares in the amount of RUB 434.8 million), annual dividends for 2015 in the amount of RUB 27,997 million (including dividends on treasury shares in the amount of RUB 119 million), semi-annual dividends for 2016 in the amount of RUB 23,961 million (including dividends on treasury shares in the amount of RUB 102 million). As of December 31, 2014, amounted to2016 and 2015 dividends payable were RUB 1.7 million.87.0 and
32.0 million, respectively, and included in the trade and other payables of the statement of financial position.
�� We generally intend to finance our dividend requirements through operating cash flows, and accordingly, our payment of dividends may make us more reliant on external sources of capital to finance our capital expenditures and acquisitions.
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 and ruble-denominated note issuances and loans. We expect that these sources will continue to be our principal sources of cash in the future.
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 debt or equity offerings, bank financings or otherwise.
As of December 31, 2014,2016, our outstanding indebtedness consisted of the following notes and bank loans:
Notes
As of December 31, 2014,2016, our notes consisted of the following:
| Currency | Annual interest rate (actual rate at December 31, 2014) | Amount | ||||||
---|---|---|---|---|---|---|---|---|---|
MTS International Notes due 2020 | USD | 8.625 | % | 35,057 | |||||
MTS International Notes due 2023 | USD | 5.00 | % | 26,920 | |||||
MTS OJSC Notes due 2020 | RUB | 8.15 | % | 15,000 | |||||
MTS OJSC Notes due 2014 | RUB | 7.60 | % | — | |||||
MTS OJSC Notes due 2017 | RUB | 8.70 | % | 10,000 | |||||
MTS OJSC Notes due 2023 | RUB | 8.25 | % | 10,000 | |||||
MTS OJSC Notes due 2015 | RUB | 7.75 | % | 7,537 | |||||
MTS OJSC Notes due 2018 | RUB | 8.75 | % | 1,788 | |||||
MTS OJSC Notes due 2016 | RUB | 12.00 | % | 136 | |||||
MTS OJSC Notes due 2015 (A series) | RUB | 0.67 | % | 12 | |||||
MTS OJSC Notes due 2015 - 2016 (B series) | RUB | 0.54 | % | 12 | |||||
MTS OJSC Notes due 2021 - 2022 (V series) | RUB | 0.25 | % | 12 | |||||
Plus: unamortized premium | 3 | ||||||||
| | | | | | | | | |
Total notes | 106,477 | ||||||||
Less: current portion | (22,701 | ) | |||||||
| | | | | | | | | |
Total notes, long-term | 83,776 | ||||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Currency | Annual interest rate (actual rate at December 31, 2016) | Amount | ||||||
---|---|---|---|---|---|---|---|---|---|
MTS International Notes due 2020 | USD | 8.625 | % | 18,537 | |||||
MTS International Notes due 2023 | USD | 5.00 | % | 28,218 | |||||
MTS PJSC Notes due 2017 | RUB | 8.70 | % | 9,995 | |||||
MTS PJSC Notes due 2023 | RUB | 8.25 | % | 9,984 | |||||
MTS PJSC Notes due 2020 | RUB | 9.25 | % | 1,448 | |||||
MTS PJSC Notes due 2018 | RUB | 10.00 | % | 6 | |||||
MTS PJSC Notes due 2021 - 2022 (V series) | RUB | 0.25 | % | 12 | |||||
MTS PJSC Notes due 2031 | RUB | 9.40 | % | 9,986 | |||||
| | | | | | | | | |
Total notes | 78,186 | ||||||||
Less: current portion | (11,389 | ) | |||||||
| | | | | | | | | |
Total notes, long-term | 66,797 | ||||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The Group has an unconditional obligation to repurchase certain MTS OJSCPJSC Notes at par value if claimed by the noteholders subsequent to the announcement of the sequential coupon. The dates of the announcement for each particular note issue are as follows:
MTS | ||
| November | |
MTS | March 2018 | |
MTS PJSC Notes due 2031 | August 2018 |
Subject to certain exceptions and qualifications, the indentures governing our U.S. dollar-denominated notes due 2020 contain covenants limiting our ability to incur debt, create liens, sell or transfer lease properties, enter into loan transactions with affiliates, merge or consolidate or convey our properties and assets to another person, as well as our ability to sell or transfer any of our GSM licenses for the Moscow, St. Petersburg, Krasnodar and Ukraine license areas. In addition, if we
experience a change in control, noteholders will have the right to require us to redeem the notes at 101% of their principal amount, plus accrued interest. We are also prohibited from having any judgment, decree or order for payment of money in an amount of $15.0$75.0 million (RUB 843.94,549.3 million as of December 31, 2014) for MTS International Notes 2020 and $75.0 million (RUB 4,219.4 million as of December 31, 2014)2016) for MTS International Notes due 2023 and MTS International Notes due 2020 unsatisfied for more than 60 days without being appealed, discharged or waived. If we fail to comply with these and the other covenants contained in the indentures, after certain notice and cure periods, the noteholders can accelerate the debt to be immediately due and payable.
Our ruble-denominated notes contain certain covenants limiting our ability to delist the notes from the quotation lists and delay coupon payments. We may from time to time seek to repurchase or redeem our outstanding notes through cash purchases and/or exchanges for new debt securities in open
market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on market conditions, our liquidity requirements, contractual restrictions and other factors.
We were in compliance with all our note covenants as of December 31, 2014.2016.
Bank loans
As of December 31, 2014,2016, our loans from banks and other financial institutions consisted of the following:
| Maturity | Interest rate (actual at December 31, 2014) | December 31, 2014 | Maturity | Interest rate (actual at December 31, 2016) | December 31, 2016 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
USD-denominated: | ||||||||||||||||||
Calyon, ING Bank N.V, Nordea Bank AB, Raiffeisen Zentralbank Osterreich AG | 2015 - 2020 | LIBOR + 1.15% (1.51%) | 37,901 | 2017 - 2020 | LIBOR + 1.15% (2.468%) | 25,394 | ||||||||||||
Citibank | 2017 - 2024 | LIBOR + 0.9% (2.218%) | 12,812 | |||||||||||||||
Skandinavska Enskilda Banken AB | 2015 - 2017 | LIBOR + 0.23% - 1.8% (0.59% - 2.16%) | 5,175 | 2017 | LIBOR + 0.23% - 1.8% (1.543% - 3.118%) | 1,163 | ||||||||||||
HSBC Bank plc and ING BHF Bank AG | 2015 | LIBOR + 0.3% (0.66%) | — | |||||||||||||||
Other | 2015 | 15% | 164 | |||||||||||||||
| | | | | | | | | | | | | | | | | ||
43,240 | 39,369 | |||||||||||||||||
EUR-denominated: |
|
| ||||||||||||||||
Bank of China | 2015 | EURIBOR + 1.95% (2.12%) | — | |||||||||||||||
LBBW | 2017 | EURIBOR + 1.52% (1.30%) | 296 | |||||||||||||||
Credit Agricole Corporate Bank and BNP Paribas | 2015 - 2018 | EURIBOR + 1.65% (1.82%) | 1,893 | 2017 - 2018 | EURIBOR + 1.65% (1.43%) | 876 | ||||||||||||
LBBW | 2015 - 2017 | EURIBOR +1.52% (1.69%) | 956 | |||||||||||||||
| | | | | | | | | | | | | | | | | ||
2,849 | 1,172 | |||||||||||||||||
RUB-denominated: |
|
| ||||||||||||||||
Sberbank(1) | 2015 - 2021 | 8.45% - 12.05% | 125,000 | 2017 - 2021 | 8.45% - Central Bank key rate + 0.90% (10.90%) | 144,813 | ||||||||||||
Citibank | 2017 | 9.9% | 2,400 | |||||||||||||||
Gasprombank | 2017 | 10.9% | 4,000 | |||||||||||||||
KB Platina | 2017 | 8% | 250 | |||||||||||||||
Notes in REPO | 2015 | 19.36% | 3,425 | 2017 | 10.24% - 10.39% | 2,588 | ||||||||||||
SMM | 2015 | 0% - 15% | 556 | |||||||||||||||
Other | 2015 - 2023 | Various | 456 | 2017 - 2025 | Various | 283 | ||||||||||||
| | | | | | | | | | | | | | | | | ||
129,437 | 154,334 | |||||||||||||||||
AMD-denominated: |
| |||||||||||||||||
ASHIB | 2015 | 13% | 176 | |||||||||||||||
| | | | | | | | |||||||||||
176 | ||||||||||||||||||
UZS-denominated: |
| |||||||||||||||||
Aloqabank | 2019 - 2022 | 12% | 759 | |||||||||||||||
Uzbektelecom | 2015 | 10% | 58 | |||||||||||||||
Other currencies: |
| |||||||||||||||||
Various financial institutions | 2017-2020 | Various | 213 | |||||||||||||||
| | | | | | | | | | | | | | | | | ||
817 | 213 | |||||||||||||||||
Total bank loans | 176,519 | 195,088 | ||||||||||||||||
Less: current portion | (19,435 | ) | (35,188 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | ||
Total bank loans, long-term | 157,084 | 159,900 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
See also Note 1715 to our audited consolidated financial statements.
Our loans are subject to certain restrictive covenants, including, but not limited to, negative pledges, certain financial ratios, limitations on dispositions of assets and limitations on transactions with
associates, requirements to maintain ownership in certain subsidiaries, maintain certain contracts or licenses, maintain assets of certain value and to maintain a certain level of deposits in accounts at our creditor banks. In addition, there are restrictions on the granting of loans and guarantees and the incurrence of debt the purpose of which is to facilitate us paying or making any dividend or other payment or distribution of any kind on or in respect of any of our shares or to undertake any form of
capital reduction. Most of the loans also include an event of default involving an unsatisfied judgment against us in excess of $10.0$75.0 million (RUB 5634,549 million as of December 31, 2014)2016) for a period of over 60 consecutive calendar days. We were in compliance with our loan covenants as of December 31, 2014.2016.
The following table presents the aggregate scheduled maturities of debt principal outstanding as of December 31, 2014:2016:
| Notes | Bank loans | Notes | Bank loans | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Payments due in the year ending December 31, | ||||||||||||||
2015 | 22,701 | 19,435 | ||||||||||||
2016 | 1,788 | 33,821 | ||||||||||||
2017 | 10,000 | 39,937 | 11,448 | 35,632 | ||||||||||
2018 | 10,000 | 28,527 | 20,006 | 46,927 | ||||||||||
2019 | — | 31,695 | — | 69,963 | ||||||||||
2020 | 18,614 | 23,396 | ||||||||||||
2021 | 12 | 15,844 | ||||||||||||
Thereafter | 61,988 | 23,104 | 28,301 | 4,620 | ||||||||||
| | | | | | |||||||||
Total | 106,477 | 176,519 | 78,381 | 196,382 | ||||||||||
Less: unamortized debt issuance costs | (195 | ) | (1,294 | ) | ||||||||||
Total debt | 78,186 | 195,088 |
In addition, we had capital lease obligations in the amount of RUB 9,39511,046 million and RUB 4811,795 million as of December 31, 20142016 and 2013,2015, respectively. The terms of our material debt obligations are described in Note 1815 to our audited consolidated financial statements.
Subsequent to December 31, 2014,2016, we repaid approximately RUB 6,812 million17.4 billion (based on USD and Euroeuro exchange rates as of the payment dates) in short-term indebtedness.
In addition, Sistema, which currently controls 51.46%48.94% of our total charter capital (53.46%(50.03% excluding treasury shares) and consolidates our results in its financial statements, is subject to various covenants in certain of its credit facilities which impose restrictions on Sistema and its restricted subsidiaries, including us, with respect to, among others, incurrence of indebtedness and liens. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Ourour Financial Condition—Indentures relating to some of our notes contain, and some of our loan agreements and Sistema's loan agreements contain, restrictive covenants, which limit our ability to incur debt and to engage in various activities."
Consolidated Cash Flow Summary
A summary of our cash flows and cash outlays for capital expenditures and acquisitions of subsidiaries follows:
| Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2013 | 2014 | |||||||
| (in millions of RUB) | |||||||||
Cash flows from: | ||||||||||
Net cash provided by operating activities—continuing operations | 134,856 | 159,924 | 159,518 | |||||||
Net cash used in operating activities—discontinued operations | (2,733 | ) | (547 | ) | — | |||||
Net cash used in investing activities—continuing operations | (91,322 | ) | (96,786 | ) | (105,588 | ) | ||||
Net cash (used in)/provided by investing activities—discontinued operations | (2,045 | ) | 115 | — | ||||||
Net cash used in financing activities—continuing operations(1) | (75,346 | ) | (55,145 | ) | (33,171 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (985 | ) | 1,037 | 10,195 | ||||||
| | | | | | | | | | |
Net (decrease)/increase in cash and cash equivalents | (37,575 | ) | 8,598 | 30,954 | ||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Cash outlays from continuing operations for: | ||||||||||
Capital expenditures(2) | (87,783 | ) | (81,575 | ) | (92,599 | ) | ||||
Acquisition of subsidiaries, net of cash acquired | (1,937 | ) | — | (2,755 | ) | |||||
Cash payments for the acquisition of subsidiaries from related party and non-controlling interests | (261 | ) | — | (26 | ) |
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | |||||||
| (amounts in million RUB) | |||||||||
Cash flows from: | ||||||||||
Net cash provided by operating activities | 158,979 | 144,088 | 130,565 | |||||||
Net cash used in investing activities | (105,008 | ) | (145,356 | ) | (57,302 | ) | ||||
Net cash used in financing activities | (33,212 | ) | (27,595 | ) | (83,038 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 10,195 | 761 | (5,219 | ) | ||||||
| | | | | | | | | | |
Net increase/(decrease) in cash and cash equivalents | 30,954 | (28,102 | ) | (14,994 | ) | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Cash outlays for: | ||||||||||
Capital expenditures(1) | (91,929 | ) | (106,537 | ) | (86,149 | ) | ||||
Acquisition of subsidiaries, net of cash acquired | (2,755 | ) | — | (5 | ) | |||||
Cash payments for the acquisition of subsidiaries under common control and non-controlling interests | (26 | ) | (9,501 | ) | (17 | ) | ||||
Cash inflow from sale of subsidiaries under common control | — | 4,625 | 3,063 |
For the year, ended December 31, 2014,2016, net cash provided by operating activities from continuing operations totaled towas RUB 159,518130,565 million, and remained stable compared toa deacrease of 10.3% from the year ended December 31, 2013. However, in 2013 net cash from operating activities from continuing operations contained cash inflow recognized on settlement2015. The decrease was mainly attributable to increase of Bitel litigation in the amountincome tax payments (by RUB 2,044 million due to growth of taxable profit), increase of interest payments (by RUB 4,093 million. In 2014, cash inflow1,577 million, therof RUB 3,045 million related to Bitel litigationEurobond repurchase in June 2016), lower interest received (by RUB 1,416 million due to decreased investing in deposits), as well as changes in timing of settlements with our customers and suppliers (change in cash outflow related to trade and other receivables and trade and other payables was RUB 11,691 million).
Net cash used in investing activities for the year ended December 31, 2016 totaled to RUB 816 milllion.57,302 million, a reduction of 60.6% in comparison with 2015. In 2016 we reduced our capital expendures by RUB 20,388 million, as well as investing in deposits and loans by RUB 63,746 million. Positive effect of RUB 7,344 million was also attributable to cash inflows from deposits opened in prior year and closed in 2016, furthermore we received more cash from sales of property, plant and equipment and intangible assets (increase by RUB 1,054 million, thereof RUB 848 million for radiofrequences won by other operators). The only growing investing cash outflow related to investment in associates, we spent RUB 4,094 million for additional share issuance of MTS Bank.
Net cash used in financing activities for the year ended December 31, 2016 increased by RUB 55,443 million or 200.9%, and totaled to RUB 83,038 million. The growth was mainly due to increased debt repayment (change by RUB 49,746 million) and repayment under credit guarantee agreement related to foreigh currency hedge (change by RUB 9,690 million due to appreciation of Russian Ruble). Cash flows from transactions under common control had a positive effect on net cash used in financiang activities (change by RUB 7,884) as there were no new transaction on sale or purchase of subsidiaries under common control. In 2016 proceeds from loans and notes reduced by RUB 2,471 million. The amount of dividends paid by the Bitel effectGroup in 2016 increased by RUB 2,019 million in comparison with the financial year, ended December 31, 2015.
For the year, ended December 31, 2015, net cash provided by operating activities totaled to RUB 144,088 million, a decrease of 9.4% from continuing operations increased by RUB 2,871 million or 1.8% compared to 2013.the year ended December 31, 2014. The increase decrease
resulted mainly from the increase in dividends received (by RUB 819 million), decreasethe amount of income taxesinterest paid (by RUB 1,7588,613 million), higher inventory purchases (by RUB 6,729 million) as well as changes in timing of settlements with customers and suppliers.
Net cash from continuing operations used in investing activities infor the year ended December 31, 20142015 was RUB 105,588145,356 million, an increase of 9.1%38.4% from the year ended December 31, 2013.2014. Net cash used on purchases of property, plant and equipment and intangible assets in the year ended December 31, 20142015 increased by RUB 11,024 million.14,608 million (thereof due to acquisition of 3G and 4G licenses in Russia and Ukraine in the amount of RUB 10,426 million). In 2014,2015, the cash outflow relating to short term and other investments in the form of deposits and loans totaled to RUB 3,08641,807 million, compared to cash outflow of RUB 10,5413,176 million for 20132014 (effect year on year increase in cash flow from investing activities RUB 7,45538,631 million). Cash spent in 2014 on the acquisition of subsidiaries, amounted to RUB 2,755 million, no subsidiaries from third parties were acquired in 2013.2015. Investments in associates increaseddecreased by RUB 2,6797,767 million to RUB 200 thousand for the year ended December 31, 2015, from RUB 7,767 million for the year ended December, 31, 2014 from RUB 5,088 million for the year ended December, 2013 (mainly as a result of(in 2014 we acquired share acquisition in OZON for RUB 2,702 million in 2014; investments in MTS Bank remained relatively stable,and invested additional RUB 4,905 million in 2014 againstMTS Bank). In addition, in 2015 we increased cash inflow from sale of property, plant and equipment and assets held for sale by RUB 5,0882,370 million through sale of assets of MTS Ukraine in 2013).Crimea and copper cable by MGTS.
Net cash from continuing operations used in financing activities in the year ended December 31, 20142015 was RUB 33,17127,595 million, compared to RUB 55,14533,212 million used in the year ended December 31, 2013.2014. The decrease was mainly attributable to the higherlower amount of funds raised in 2014 (increase of RUB 43,419 million compared to 2013) partially offset by higher repayments of debt and notes (increase in amount of RUB 7,398 million) and higher dividend repayments (increase by
RUB 10,215 million). In addition, in 2013 we received additional cash from the sale of Business-Nedvizhimost to Sistemarepayment (decrease in the amount of RUB 3,215 million.
For the year ended December 31, 2013, net12,238 million) offset by higher cash provided by operating activities from continuing operations was RUB 159,924 million, an increaseoutflow related to purchases/sales of 18.6% from the year ended December 31, 2012. This increase was primarily attributable to an increase in total revenues due to the increased usage of value added services by our subscribers as well as one off cash inflow recognized on settlement of Bitel litigationsubsidiaries under common control (increase in the amount of RUB 4,093 million.
Net5,329 million). Major cash flows under such transactions related to acquisition of NVision Group (RUB 10,181 million) and to sale of Business- and Rent Nedvizhimost to Sistema (RUB 4,281 million). In addition, our proceeds from continuing operations used in investing activities in the year ended December 31, 2013 was RUB 96,786 million, an increaseissue of 6.0% from the year ended December 31, 2012. Net cash used on purchases of property, plantnotes and equipment and intangible assets in the year ended December 31, 2013,loans decreased by RUB 6,208 million. The cash outflow relating to short term and other investments6,014 million in the form of deposits and loans increased bycomparison with 2014, however we received RUB 8,544 million. The amount of cash paid for acquisition of subsidiaries, net of cash acquired, decreased by RUB 1,937 million. At the same time investments in associates increased by RUB 5,088 million due to acquisition of 25.0945% stake in MTS Bank.
Net cash from continuing operations used in financing activities in the year ended December 31, 2013 was RUB 55,145 million, compared to RUB 75,346 million used in the year ended December 31, 2012. The decrease was mainly attributable to our repayments of loans and debt, which were RUB 17,764 million lower than in 2013. In addition, the amount of funds raised by us in the year ended December 31, 2013 increased by RUB 8,0496,706 million as compared to the year ended December 31, 2012. The effect of change in cash flowsa collateral payment related to debt activities was partially offset by an increase in dividends paid (by RUB 10,080 million) resulting from change in our dividend policy (starting from 2013 our policy is to pay dividends on a semi-annual basis). Additional cash inflows were generated from the sale of MGTS's subsidiary—Business-Nedvizhimost—to Sistema for RUB 3,215 million (RUB 3,068 million net of cash disposed), as well as reimbursement of debt issuance costs paid for insurance premium of not used credit facilities in amount of RUB 959 million.cross-currency swap agreement with Barclay.
Liquidity
As of December 31, 2014,2016, we had total cash and cash equivalents of RUB 61,41018,470 million (RUB 29,0398,161 million in rubles, RUB 18,8163,954 million in U.S. dollars, RUB 6,4441,173 million in euros, RUB 3,528 million in Ukrainian hryvnias, RUB 5,480 million in euros, RUB 1,1621,252 million in Turkmenistan manat and RUB 341402 million in Uzbek som, RUB 128 million in Armenian dram)other currencies). In addition, as of December 31, 2014,2016, we had short-term investments of RUB 9,8498,657 million, mostly in form of deposits in various banks as well as loan receivables.debt securities (assets in Sistema-Capital trust management). We also had RUB 44,37840,858 million available under existing credit facilities as of December 31, 2014.2016. For a description of our outstanding external financing, see Note 1715 to our audited consolidated financial statements.
As of December 31, 2014,2016, we had a working capital surplusdeficit of RUB 14,68439,632 million compared to a surplus of RUB 14,8141,107 million as of December 31, 2013.2015. The slight decrease in working capital surplusdeficit was mainly attributable to increasedecline in current borrowingsshort-term investments by RUB 17,11041,183 million, and trade accounts payable by RUB 13,832 million offset by increase in cash and cash equivalents by RUB 30,79814,994 million and current income tax assets by RUB 3,589 million offset by decrease in trade and other payables by RUB 16,283 million, other financial liabilities by RUB 6,729 million as well as current borrowings by RUB 6,494 million. 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, together with our plans for external financing, will provide us with sufficient funds for our present requirements.
Russian law requires that dividends can only be paid in an amount not exceeding net profits as determined under Russian accounting standards, denominated in rubles, after certain deductions. 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. Our net income under Russian accounting standards for the years ended December 31, 2012, 20132015 and 20142016 that was distributable under Russian legislation amounted to RUB 28,3767,255 million RUB 55,999 and RUB 42,949 million 34,267, respectively.
Our credit ratings impact our ability to obtain short- and long-term financing, and the cost of such financing, and credit rating downgrades may require us to prepay certain loans. 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 and the strategy, activity and/or credit rating of Sistema. 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. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Our controlling shareholder has the ability to take actions that may conflict with the interests of other holders of our securities."
Critical Accounting Policies and Estimates
Our significant accounting policies are disclosedPlease refer to note 2 in Note 2 to our audited consolidated financial statements. 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 our most critical accounting policies and estimates are those discussed below.
Management estimates
The preparation of our audited consolidated financial statements included elsewhere 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. Our significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence, valuation of assets acquired and liabilities assumed in business combinations, income tax benefits, the recoverability of goodwill, intangible assets and other long- lived assets, certain accrued liabilities and valuation of financial instruments.this document.
Useful Lives of Property Plant and EquipmentRecent Accounting Pronouncements
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 usedPlease refer to note 2 in the determination of useful lives of property, plant and equipment at least on an annual basis. With regard to certain equipment, we cannot predict with certainty how and when developing technology will require us to replace such equipment.
Impairment of Long-lived Assets
We periodically evaluate the recoverability of the carrying amount of our long-lived assets. Whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable, we 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, we 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. None of the Group's long-lived assets were impaired in 2013 and 2014. An impairment loss in the amount of RUB 16,514 million for the year ended December 31, 2012 was recognized by our subsidiaries in Uzbekistan and included net loss from discontinued operations. See also Note 2 and Note 4 to our audited consolidated financial statements.
Impairment of Goodwill
Goodwill represents an excess of the consideration paid over the fair market value of net identifiable assets acquiredstatements included elsewhere in a purchase business combination and is not amortized. Goodwill is reviewed for impairment at least annually or whenever it is determined that one or more impairment indicators exist. We determine whether impairment has occurred by assigning goodwill to the reporting unit identified in accordance with the authoritative guidance on intangibles, and comparing the carrying amount of the reporting unit to the fair value of the reporting unit. If an impairment of goodwill has occurred, we recognize a loss for the difference between the carrying amount and the implied fair value of goodwill. As of December 31, 2012, we recognized goodwill impairment in the amount of RUB 3,523 million related to Uzdunrobita Litigation, which is included in the net loss from discontinued operations. Please see "Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations" regarding the recent suspension of our services in Uzbekistan, "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Uzbekistan" and Note 4 to our audited consolidated financial statements.
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 30 to our audited consolidated financial statements.
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- 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 likely that these assets will not be realized.
Other investments and loans
Long-term financial instruments consist primarily of long-term deposits, which are repayable in more than ayear, as well as investments and loans. Deposits and loans are classified as held to maturity and carried at amortized cost. The Group reviews these investments for indicators of impairment on a regular basis. The investments in shares of companies over which the Group has no significant influence are carried at cost. The Group does not evaluate cost-method investments for impairment unless there is an indicator of impairment.
In May 2014, the Financial Accounting Standards Board ("FASB") amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Group is required to adopt the amendments in the reporting period starting after December 15, 2016. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The management of the Group is currently evaluating the impact of these amendments and the transition alternatives on the Group consolidated financial statements.
See Note 2 to our audited consolidated financial statements.this document.
C. Research and Development, Patents and Licenses, etc.
Not applicable.
D. Trend Information
Sales
In 2014,2016, our revenues in Russia increased by 6.1%2.4% and in Ukraine decreasedincreased by 17.5%3.5%. Our mobile subscriber base increased to 98.8104.6 million subscribers as of December 31, 20142016 from 94.7102.5 million subscribers as of December 31, 2013.2015. We expect our consolidated subscriber base to remain stable in 20152017 as a result of continued marketing and advertising activity. We anticipate our consolidated revenues will increase in 20152017 mainly based on growth in data usage, and the development of our broadband business in the regions.regions and growth in sales of handsets and accessories.
Average monthly service revenue per subscriber in Russia remained relatively stable and amounted to RUB 339.1312.9 for the year ended December 31, 20142016 as compared to RUB 338.6325.7 for the year ended December 31, 2013.2015. Average monthly minutes of use per subscriber in Russia increasedremained stable and amounted to 372380 minutes in 2014 from 3592016 as compared to 381 minutes in 2013 mainly due to decrease in tariffs for on-net traffic and various roaming-related offers.2015. We expect average monthly service revenue per subscriber in Russia to remain stable in 20152017 as we plan to decrease prices and stimulate growth in usage of data services. We also believe that average monthly minutes of use per subscriber will remain stable with an increase in megabytes of use per subscriber due to our efforts aimed at stimulating data usage and on-net traffic.
In Ukraine, our subscriber base decreasedincreased to approximately 20.220.9 million subscribers as of December 31, 2014,2016, from 21.520.4 million subscribers as of December 31, 2013.2015. The launch of 3G services under the Vodafone brand in Ukraine was the most significant event in 2015. During 2016, company expanded actively its network and now a high-speed mobile internet is available for more than 54% of Ukrainians. In 2015,2017, we expect revenues to remain stable under the impact of the weaker macroeconomic environment. We expect the average monthly minutes of use per subscriber will decrease slightly in 2015.
Our subscriber base in Armenia remained stable and amounted to 2.1 million subscribers in 2014.2016. The average monthly service revenue per subscriber in Armenia decreased to 2,9892,189 dram (RUB 275)305) from 3,2072,706 dram (RUB 249.9)343). We expect the average monthly service revenue per subscriber in Armenia to decline mainly due to the growth of competition in these markets which may, in turn, lead to decreasing tariffs, the addition of lower-value mass market subscribers as well as increasing market penetration and multiple SIM card usage per person.macroeconomic trends calling for "save mode".
Our primary operating license in Turkmenistan was resumed, and all of our operations in the country fully recommenced since October 1, 2012. Our subscriber base in Turkmenistan amountedremained stable last 5 years and slightly increased to approximately 1.7 million subscribers as of December 31, 2014.2016 from 1.6 million subscribers as of December 31, 2015. We expect our subscriber base and revenues to increase and our market to enhanceremain stable in 2015.2017.
After reentrance we started operations in Uzbekistan in December 2014. Our subscriber base in Uzbekistan amounteddeveloped rapidly, increased to approximately
0.21.4 million subscribers as of DecemberJuly 31, 2014. We expect our subscriber base2016. On August 2016, PJSC MTS announced that it has sold its 50.01% stake in the telecommunications operator Universal Mobile Systems (UMS) to the State Unitary Enterprise Centre of Radio Communication, Radio Broadcasting and revenues to increaseTelevision of The Ministry of Development of Information Technologies and our market position to enhance in 2015.Communications of the Republic of Uzbekistan.
Russia and Ukraine are the two largest markets for us, both in terms of subscribers and revenue. In 2014,2016, the underlying developments within these markets remained generally positive and included high mobile penetration, strong demand for mobile services, generally positive usage trends and increased consumption of data services and value-added services. We expect growth of business activity in Russia to continue throughout 2015.2017. We also expect that the stabilizing of the political situation in Ukraine will allow us to retain our operating indicators.
We expect a challenging operating environment in 20152017 due to continued macroeconomic and market volatility in the countries where we operate, increasing competition and significant changes in the mobile retail market in Russia. We also experienced significant exchange rate volatility and depreciation of local currencies in the countries where we operate against the U.S. dollar. The volatility and devaluation of local currencies against the U.S. dollar and/or euro may adversely affect our costs, including our non-cash foreign exchange loss due to the translation of our U.S. dollar- and euro-denominated debt. For further information on these risks, see "—A. Operating Results—Certain Factors Affecting our Financial Position and Results of Operations—Currency Fluctuations,"fluctuations" and "Item 3. Key Information—D. Risk Factors—Risks Relating to Ourour Financial Condition—Inflation could increase our costs and adversely affect our results of operations."
However, considering current macroeconomic conditions, our management believes that we will experience medium- and long-term growth and efficiency. Due to the fact that the Russian and the Ukrainian markets are highly penetrated, we believe the next wave of revenue growth for the overall market is likely to come from customers' increasing use of data, content and other value-added services.
Churn
We define churn as the total number of subscribers who cease to be a subscriber during the period (whether involuntarily due to non-payment or voluntarily), expressed as a percentage of the average number of our subscribers during that period.
A vast majority of our subscribers are prepaid subscribers with no contractual commitment to us. As a result, these subscribers have unfettered freedom to migrate between operators at their convenience. This freedom, combined with the relative ease with which subscribers can obtain SIM cards, contributes to churn and increasing penetration levels in the markets where we operate.
The churn rate is highly dependent on competition in our license areas and those subscribers who migrate as a result of such competition. Our churn rate in Russia slightly increaseddecreased to 41.0%39.0% during the year ended December 31, 2014,2016, as compared to 38.1%39.6% for the year ended December 31, 2013,2015, due to growth in the number of new connections. We continued to offer our popular tariff planplans "Super MTS" (free calls to all subscribers of MTS Russia) and "Smart" (integrated voice and data bundles), updated options for unlimited mobile Internet, further improved network quality and enhanced data rate by expandingthrough the expansion of our 3G and LTE capabilities. We expect that the extension of the MTS-Bonus loyalty program and further development of our mono-brand retail network will allow us to keep churn rate under control in 2015,2017, stimulate value-added servicesdata usage and promote subscriber loyalty through superior customer service.
The churn rate in Ukraine slightly increased to 34.2%25.0% for the year ended December 31, 2014,2016, from 27.2%24.5% for the year ended December 31, 20132015. In 2017, we expect subscriber loyalty to grow due to the fact that MTS Ukraine terminated its operations in Crimea in October 2014.
Tablelaunch of Contents3G-enabled data services with the support of our brand partnership with Vodafone.
E. Off-balance Sheet Arrangements
We believe that our existing off-balance sheet arrangements do not have and are not reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Obligations under derivative contracts
We regularly enter into variable-to-fixedfixed -to-variable interest rate swap agreements to manage the exposure of changes in variable interest rate related to its debt obligations. The instruments qualify for cash flow hedge accounting under U.S. GAAPIFRS requirements. Each interest rate swap matches the exact maturity dates of the underlying debt allowing for highly-effective hedges. Interest rate swap contracts outstanding December 31, 20142016 mature in 2015, 2018 and 2020.
In addition to the above, we have also entered into several cross-currency interest rate swap agreements. These contracts hedged the risk of both interest rate and currency fluctuations and assumed periodic exchanges of both principal and interest payments from RUB-denominated amounts to USD- and euro- denominatedeuro-denominated amounts to be exchanged at a specified rate. The rate was determined by the market spot rate upon issuance. Each interest rate swap matches the exact maturity dates of the underlying debt allowing for highly-effective hedges. Cross-currency interest rate swap contracts mature in 2019-2020.
F. Tabular Disclosure of Contractual Obligations
We have various contractual obligations and commercial commitments to make future payments, including debt agreements, capital lease obligations (including interest) and certain committed
obligations. The following table summarizes our future obligations under these contracts due by the periods indicated as of December 31, 2014:2016:
| Payments due by period | Payments due by period | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | Total | ||||||||||||||||||||||
| (amounts in millions of RUB) | (amounts in millions of RUB) | ||||||||||||||||||||||||||||||
Contractual Obligations:(1) | ||||||||||||||||||||||||||||||||
Long-Term Principal Debt Obligations | 42,135 | 85,545 | 70,223 | 85,093 | 282,996 | 47,081 | 136,895 | 57,867 | 32,920 | 274,763 | ||||||||||||||||||||||
Interest Payments(2) | 21,469 | 38,290 | 25,587 | 13,428 | 98,774 | 22,413 | 32,149 | 12,377 | 12,945 | 79,884 | ||||||||||||||||||||||
Capital Lease Obligations | 1 | 2 | 2 | 8 | 13 | 1,432 | 2,971 | 3,108 | 11,061 | 18,572 | ||||||||||||||||||||||
Operating Lease Obligations | 5,172 | 1,075 | 491 | 1,700 | 8,438 | 9,491 | 1,434 | 466 | 3,659 | 15,050 | ||||||||||||||||||||||
Purchase Obligations(3) | 41,881 | 6,158 | 175 | 84 | 48,298 | 23,833 | 7,961 | 712 | 94 | 32,600 | ||||||||||||||||||||||
Asset retirement obligation | — | — | — | 3,022 | 3,022 | |||||||||||||||||||||||||||
Provision for decommissioning and restoration | — | — | — | 1,191 | 1,191 | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retirement and post-retirement obligation | 216 | 113 | 110 | 633 | 1,072 | 169 | 176 | 121 | 692 | 1,158 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payments related to business acquisitions | — | 100 | — | — | 100 | — | 3 | — | — | 3 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Uncertain Income Tax Position | 342 | — | — | — | 342 | 756 | — | — | — | 756 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | 111,216 | 131,283 | 96,588 | 103,968 | 443,055 | 105,175 | 181,589 | 74,651 | 62,562 | 423,977 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Our directors and executive officers, their dates of birth and positions as of the date of this document were as follows:
Name | Year of Birth | Position | |||
---|---|---|---|---|---|
Ron Sommer | 1949 | ||||
| |||||
Vsevolod Rozanov | 1971 | Non-Executive Director | |||
Stanley P. Miller(1)(2) | 1958 | Non-Executive Independent Director | |||
Alexander E. Gorbunov | 1967 | Non-Executive Director | |||
Michel Combes(1)(2) | 1962 | Non-Executive Independent Director | |||
Thomas Holtrop(1)(2) | 1954 | Non-Executive Independent Director | |||
Regina von Flemming(1) | 1965 | Non-Executive Independent Director | |||
Mikhail V. Shamolin | 1970 | Non-Executive Director | |||
Andrey A. Dubovskov(3) | 1966 | Executive Director, President and Chief Executive Officer ("CEO") | |||
| |||||
Alexey V. Kornya(3)(4) | 1975 | Vice President—Member of Management Board—Chief Financial Officer ("CFO") (Finance, Investments, Mergers & Acquisitions) | |||
Andrey E. Ushatskiy(3) | 1974 | Vice President—Member of Management Board—Chief Technology and Information Officer | |||
Vasil I. Latsanych(3) | 1972 | Vice President—Member of Management Board—Strategy and Marketing | |||
Ruslan S. Ibragimov(3)(4) | 1963 | Vice President—Member of Management Board—Corporate and Legal Matters | |||
| Vice President— | ||||
| |||||
Mikhail A. Arkhipov(3) | 1982 | Vice President—Member of Management Board—HR | |||
Andrey G. Smelkov(3) | 1976 | Vice President—Member of Management Board—Director of "MTS Foreign Subsidiaries" Business Unit | |||
| |||||
Valery V. Shorzhin(3) | 1963 | Vice-President—Member of Management Board—Procurement Management and Administrative Matters | |||
Kirill A. Dmitriev(3) | 1978 | Vice President—Member of Management Board—Sales and Customer Service | |||
Igor A. Yegorov(3) | 1968 | Member of Management Board—Head of Moscow |
Ron Sommer has servedserves as Chairman of our Board of Directors since June 2009. He is now the Chairman of the Strategy Committee and a member of the Budget Committee. He also was the Chairman of our Strategy Committee until 2013 and is nowthen served as a member of the Strategy Committee until 2015. Mr. Sommer is also the Chairman of the Supervisory Board of MTS Ukraine. He is also a member of the Board of Directors of Tata Consultancy Services and a member of the Budget Committee.Supervisory Board of Munich Reinsurance. Mr. Sommer has served as First Vice President—Head of Telecommunications Assets Operating Unit of Sistema from May 2009 until 2011. He served aswas a member of the Board of Directors of Sistema from 2005 until 2012 and he served as Chairman of the Board of Directors of various Sistema—affiliated companies. Currently Mr. Sommer iswas a Chairman of the Board of Directors of SSTL. He is also a member of the Board of Directors of Tata Consultancy Services, a member of the Supervisory Board of Munich Reinsurance.SSTL until 2015. He was also a member of the International Advisory Board of The Blackstone Group until 2012. In 2009, he served as Chairman of the Board of Directors of Comstar. Between May 1995 and July 2002, he was CEO of Deutsche Telekom AG. From 1980 to 1995, he held a number of positions with Sony Corporation, including as CEO of Sony Deutschland, COO of Sony Corporation of America and COO of Sony Europe.
Anton V. AbugovVsevolod Rozanov has servedserves as one of our Directors since June 20082012, and in 2015 he was elected as the Deputy Chairman of the Board of Directors since June 2012. He is also the Chairman of our Strategy Committee. In addition, Mr. Abugov serves on the Board of Directors of various other companies affiliated with Sistema, including SSTL, MTS Bank and SMM. Since 2006, Mr. Abugov has served as First Vice President and Head of Strategy and Development at Sistema. Between 2003 and 2006, he was Managing Director of AKB Rosbank and head of its Corporate Finance Department. Between 1997 and 2006, he was a Strategy Consultant at the TAIF Group of Companies. From 1995 to 2002, he worked for the United Financial Group in different positions, including head of corporate finance from 1999 to 2002.
Vsevolod Rozanov has served as one of our Directors since June 2012.Directors. He is also the Chairman of our Budget Committee,Committee. Until 2015 he was a member of the Corporate Conduct and Ethics Committee (renamed Corporate Governance Committee sinceon February 25, 2015). He has served and now he is the Chairman of the Corporate Governance Committee. Since 2013 he serves as the Vice President—Head of Finance and InvestementsInvestments Complex in Sistema since 2013 and since 2014Sistema. Currently he is also a Chairman of the MTS Bank' Board of Directors, Deputy Chairman of the Board of Directors in SSTL, member of the Boards of Directors in EAST-WEST UNITED BANK S.A., "Landshaft" CJSC, "Lider Invest" OJSC, "UK Segezha Group" LLC, Sistema Finance S.A., Sistema-Capital trust management, "Mikron" PJSC, Insitel, member of Management Board in Charity Fund Sistema. Since 2014 until 2015 he was a member of "SG-Trans" CJSC MTS Bank and "Landshaft" CJSC' BoardBoards of Directors and the Chairman of the Board of Directors in "DIK" LLC. Since 2014 until 2015 Mr. Rozanov was also a member of and since 2015 is the Chairman of the Board of Directors of MTS Bank. From 2008 until 2013 he served as the president of SSTL.SSTL and since 2015 serves as the Deputy Chairman of the SSTL's Board of Directors. From 2006 until 2008 served as Vice President and Chief Financial Officer of MTS. In 2004 he was appointed Deputy General Director for Economics and Finance of Comstar UTS, coordinating the preparation of the company's IPO on the London Stock Exchange. From 2002 until 2004 served as Deputy General Director and Chief Financial Officer of MTU-Inform. From 1993 until 2001 held various consulting positions at the Moscow, London and Stockholm offices of Bain & Company.
Stanley P. Miller has servedserves as one of our Directors since June 24, 2010. He also is the Chairman of our Remuneration and Appointment Committee, and a member of our Audit Committee,Strategy Committee the Special Committee and BudgetCorporate Governance Committee. From 1998 to 2010, Mr. Miller served as CEO at KPN, Netherlands (since 2005, KPN Mobile International). From 2006 to 2010, he served as CEO and Chairman of the Supervisory Board at E-Plus, a subsidiary of KPN and the third largest provider of mobile telephony services in Germany. From 2001 to 2010, Mr. Miller was CEO and Chairman of the Board at BASE, Belgium, a subsidiary of KPN and the third largest provider of mobile telephony services in Belgium operating under the Simyo and Ortel Mobile brands. From 1998 to 2010, he served as a member of the Board of Directors of Hutchison 3G UK Ltd, IP Global Net NV and VESTA Technologies. Mr. Miller also serves as the Chairman of the Board of Directors of AINMT (AB) Sweden, andmember of the Board of Directors in Arrow Creek Investments 75 (PTY) LTD South Africa.Africa and MTN Group limited.
Alexander E. Gorbunov has servedserves as one of our Directors since February 2013.2013, and in 2015 he was elected as the Deputy Chairman of the Board of Directors. He also is a member of our Strategy Committee and Budget Committee. In addition, Mr. Gorbunov serves on the Board of Directors of various other companies such as SSTL and OZON Holdings Limited.Limited, he is also serves as
Vice-President managing telecom assets of Sistema. From 2010 until 2011, Mr. Gorbunov served as Executive Vice President for development of telecommunication assets at Basic Assets Business Unit of Sistema and from 2011 — until 2015—as Executive Vice-President. From
2006 until 2010, he served as Vice President for Strategy and Development at Comstar. Prior to that, from 2005 to 2006, Mr. Gorbunov headed Corporate Development Department at Sistema.
Michel Combes has servedserves as one of our Directors since February 2013. He also is a member of the Remuneration and Appointment Committee, Audit Committee and SpecialStrategy Committee. Currently he serves as Non-executive director of HDL Development, Chief Operating Officer and Board of Directors member in ALTICE NV, Chief Operating Officer of SFR Group and Management Board member of CVC 2 BV, CVC 3 BV.. Until 2015 Mr. Combes servesserved as Chief Executive Officer of Alcatel-Lucent SA and a non-executive director and member of Audit Committee of ALTICE. Mr. Combes also served as Chairman of the Supervisory Board at Assystem until 2014 and as Non-Executive Director and a member of the Board of Directors of ISS until 2014.2013. From 2008 until 2012, he served as Main Executive Director for Europe at Vodafone London and as Non-Executive Director at Vodafone PLC. From 2006 to 2008, Mr. Combes served as Main Executive Director at Telediffusion de France. Prior to that, from 2003 to 2006, he served as Senior Vice President and Financial Director at France telecom. Mr. Combes has also served as a Director of Vodafone, Weather (Orascom Wind), Atari, TDF, Eurotunnel, Atos and Procapital.
Thomas Holtrop has servedserves as one of our Directors since February 2013. From 2009 until 2011, he served as a member of the Board of Directors at Comstar. He is also the Chairman of our Audit Committee, a member of the Special Committee and member of Remuneration and Appointment Committee, Corporate GovernanceBudget Committee and Committee of Independent Directors.. From 2005 to 2011, Mr. Holtrop served as a member of the Supervisory Board at Gruner & Jahr (Hamburg). Prior to that, from 2001 to 2004, he served as the President of T-Online International AG. Mr. Holtrop also served as a member of the Board of Directors at Deutsche Telecom AG from 2002 to 2004. Prior to that, he served as Vice President at American Express International Inc. and was a member of the Board of Directors at Bank 24 AG and Deutsche Bank 24 AG.
Regina von Flemming serves as one of our Directors since June 2015. Ms. von Flemming served as the CEO and Publisher of Axel Springer Russia from 2009 to 2015. Prior to that, she was the founder and owner of Flemming & Partner GmbH Berlin—Moscow, a consultancy providing services in the areas of crisis management, start up, interim management and restructuring, interim CEO in Russia mainly for German and Russian entities. From 2000 to 2003, she worked as Vice President of the "US Russia Investment Fund" at Delta Capital, one of the first private equity funds in Russia. Prior to joining Delta Capital, she held various management roles in German companies.
Mikhail V. Shamolin serves as one of our Directors since June 2015, and earlier since October 2008 till March 2011. Since March 2011, Mr. Shamolin also serves as President and Chairman of Management Board of Sistema. He served as our President and Chief Executive Officer from May 2008 to March 2011. Mr. Shamolin serves on the board of the GSM Association since July 2008. From August 2006 to May 2008, Mr. Shamolin served as our Vice President—Director of MTS Russia Business Unit. From July 2005 to August 2006, he served as our Vice President—Sales and Customer Service. From 2004 to 2005, Mr. Shamolin worked at Interpipe Corp. (Ukraine) as Managing Director of the Ferroalloys Division. From 1998 to 2004, he held various consulting positions at McKinsey & Co.
Andrey A. Dubovskov has servedserves as our President and CEO since March 2011. Mr. Dubovskov also serves as as a member of the Board of Directors at Sistema since 2015, the Chairman of the Board of Directors of RTK, a member of Supervisory Board of MTS-Ukraine and as a Chairman of the Board of Directors of MTS-Belarus since 2016. He serves as a member of the Board of Directors at SSTL until 2015 and the Chairman of the Board of Directors at MGTS since 2012. Since June 2011 he has also servedserves as our President and a member of our Corporate Governance Committee, Strategy Committee. Since 2011 he has also serves as a member of the Board of Directors at MTS-Belarus and International Cell
Holding LTD until 2016. From April 2008 to March 2011, he served as the General Director of MTS Ukraine. From March 2006 to December 2007, Mr. Dubovskov served as Director of Ural Macro-region. From January 2004 to March 2006, he served as the Director of one of our subsidiaries in Nizhniy Novgorod. Prior to joining us, Mr. Dubovskov served as the General Director of various telecommunications companies from 1998 to 2005.
Sergey A. Drozdov has served as one of our Directors and the Chairman of Corporate Conduct and Ethics Committee (renamed Corporate Governance Committee since February 25, 2015) since June 2013. He has also served as Senior Vice-President and head of Corporate Governance Complex at Sistema since 2011. From 2002 to 2011, Mr. Drozdov served as First Vice-President and Head of Property Complex of Sistema. He served as Vice-President performing duties of the President of OJSC Sistema- Invest, from 1998 to 2002. Prior to that, from 1995 to 1998, he served as head of Development and Investments Department. From 1994 to 1995 Mr. Drozdov served as head of Financial Innovations and Marketing of the Moscow City Property Fund.
Alexey V. Kornya hasserves as our Vice President for Finance, Investments, Mergers & Acquisitions—CFO since June 2016. Since June 2010,he served as our Vice President—CFO since June 2010.CFO. Prior to that, he served as our Acting Vice President—Finance and Investments from August 2008. Mr. Kornya serves as our Chief Financial Officer and is the Chairman of our Disclosure Committee and a member of the Budget Committee. He is a member of the Board of Directors of RTC, a member of the Board of Directors of MTS Bank and a member of the Board of Directors of SOOO CJSC.CJSC, Sistema-Capital trust management. He is also a member of the Supervisory Board at MTS Ukraine. From March 2007 to December 2009,2008, he served as our Chief Financial Controller. He served as our Financial Planning and Analysis Director from November 2004 to March 2007 and as CFO of our Urals Macro-region branch from July 2004 to November 2004.
Andrey E. Ushatsky has servedserves as our Vice President—Chief Technology and Information Officer since April 2014.2013. Prior to that Mr. Ushatsky has served as our Vice President—Chief Technology Officer since April 2009. Mr. Ushatsky joined us in 1996 and has servedandserved in various technology-related positions, most recently as the Deputy Head of MTS Russia for Technology.
Vasil I. Latsanych has servedserves as our Vice President—Strategy and Marketing since June 2016. Since September 2011.2011, heserved as our Vice President for Marketing. He served as Acting Head—MTS Ukraine since March 2011 until September 2011. From October 2007 to March 2011, Mr. Latsanych served as Marketing Director of MTS Ukraine. Prior to joining us, Mr. Latsanych served as Marketing Director at Coca-Cola Bottlers Siberia and Coca-Cola Krasnoyarsk. From 1996 to 1999,2001, Mr. Latsanych held various management positions at Coca-Cola Amatil Ukraine Ltd and Coca-Cola Beverages Ukraine.
Ruslan S. Ibragimov has servedserves as our Vice President—Corporate and Legal MattersAffairs since January 2008. Since 2015 he is also a member of our Corporate Governance Committee. From February 2007 to January 2008, Mr. Ibragimov served as our Director—Chief Legal Counsel. He joined us in June 2006 and initially served as the Director for legal matters, as well as headed our Legal Department. Prior to joining us, Mr. Ibragimov was a member of the law firm Ibragimov, Kagan and Partners from July 2002 to June 2006. From 19971996 to 2002, he served as Deputy General Director and Senior Partner at RSM Top-Audit, a tax and legal consulting firm. From 1992 to 1996, Mr. Ibragimov headed legal departments at various commercial banks.
Vadim E. Savchenko has served as our Vice President—Sales and Customer Service since July 2011. In November 2008, Mr. Savchenko became the Director of Sales at MTS Ukraine. Mr. Savchenko first joined MTS in 2005, when he assumed the position of the director of the department in charge of partner relations at Macro-region "Ural" until 2007. From 2007 to 2008 he was the director of the Urals branch of OJSC "HARDWARE-Retail." Mr. Savchenko has over 15 years of operational experience in sales — from the coordinator of the sales department to the director of a branch in such companies as Pepsi International Bottlers LLC, Joint Stock Company "JTI" and OJSC "Vienna."
OlegIvan A. KorovitskiyGaychenya was appointed MTS Vice President for Corporate Security and Regime in June 2014. From February 2013 to June 2014, Mr. Korovitskiy served as our Director—Economical Security.December 2015. Prior to joining MTS, from 20122011 to 2013,2015, Mr. Korovitskiy worked at CJSC Region (Sistema) as Head of liaison with law enforcement agencies. Prior to that, heGaychenya served as HeadDirector for Security of Department in General Administration for Economic SecurityPJSC "Russian Grids" and Combatting the Corruption of Ministry of Internal Affairs from 2011 to 2012, Head of Internal Affairs Department of Tax Crimes Prevention in Republic of Bashkortostan from 2008 to 2011, Head of Internal Affairs Department of Tax Crimes Prevention in Karelia Republic from 2006 to 2008.PJSC "FSK UES." Prior to that, from 20021995 to 20062011, he has served as Deputy Headin the military and state security forces of Internal Affairs Department of Economical Crimes Prevention in Omsk region. Since 1997 until 2002 Mr. Korovitskiy worked in Directorate of Internal Affairs of Omsk Region, taking various positions related to economicRussian Federation, holding operational and tax crimes prevention.executive positions.
Mikhail A. Arkhipov has servedserves as our Vice President—HR starting April 2013. Prior to joining us, from 2009 to 2013, he worked at SIBUR, where he took several positions, from Head of Compensations and Benefits to HR Director. From 2008 to 2009, he held various positions at SUN Interbrew and KPMG.
Andrey G. Smelkov has servedserves as our Vice President—Director of "MTS Foreign Subsidiaries" Business Unit since October 2013. Prior to that, since 2010, he has served as a Chairman of the Board in TOO "Mobile Telekom Service," Kazakhstan. Since 2008 Mr. Smelkov has worked as a Head of OOO "Sky Mobile," Kyrgyztan. Prior to that, he worked as a Head of branch in OJSC VimpelCom.
Ivan A. Zolochevsky has served as memberTable of Management Board since October 2011. He has served as General Director of MTS Ukraine since 2011. From 2005 to 2011, Mr. Zolochevsky served as Director of OJSC MTS Macro-region North-West branch. From 2001 to 2005, he served as sales Director at VVS. Prior to that he served as head of Sales and Marketing Department at Tranzas.Contents
Valery V. Shorzhin has servedserves as our Vice President-Procurement Management and Administrative Matters, Member of the Management Board since March 2014. Prior to that he served at MTS as Director-Procurement Management since 2011. He had also beenwas a Member of the MTS Management Board between 2009 and 2010.2011. From 2008 to 2011, he served as Director of Information Technology.
Prior to joining MTS, Mr. Shorzhin held the positions of Technical Director and Director for IT and Information Management of Farlep-Invest in Ukraine from December 2006. From 20031996 to 2006, he held various information technology management positions at Sovintel.
Kirill A. Dmitriev has servedserves as our Vice President—Sales and Customer Service, Member of the Management Board since May 2016. He was a Member of Management Board- Head of Moscow Macro-region since April 2014. Prior to thatSince 2011 he has served asheld a position of Director of North-West Macro-region since 2011.Macro-region. Mr. Dmitriev joined MTS in 2009 as Director of Western branch of MTS Ukraine. Prior to joining MTS he served at various management positions at Baltic Beverages Holding Ukraine.
Our directorsIgor A. Yegorov serves as our Head of Moscow region, Member of the Management Board since May 2016. Prior to that, he headed the MTS business in the regions of Central Russia since May 2014. He joined us in 2003 and held senior positions in the MTS operations in the Irkutsk Region and the Trans-Baikal Territory, served as Marketing Director and Commercial Director for retail markets at the MTS operation in the Far East and Eastern Siberia and was appointed Director of the Far East macroregion in October 2011.
All members of our Board of Directors were elected at the annual shareholders' meeting on June 24, 201423, 2016 and will serve until their terms expire at the next annual shareholders' meeting, which will take place on June 25, 2015.29, 2017. The business address of each of our directors is 4 Marksistkaya Street, Moscow 109147, Russian Federation.
B. Compensation of Directors and Senior Management
Our officers and directors were paid during 20142016 an aggregate amount of approximately RUB 703760 million for services in all capacities provided to us; this amount comprised RUB 350470 million in base salaries and RUB 353290 million in bonuses paid pursuant to a bonus plan and in other monetary compensations for the management and directors. Bonuses are awarded annually based on our financial performance.
Our management and directors are also entitled to monetary remuneration based on the quoted prices of our ADSs on the NYSE.cash-settled and equity-settled share-based payments. Related compensation accrued in 20142016 amounted to RUB 1,017481 million. For additional information, see Note 221 to our audited consolidated financial statements.
In 2009, we amended our Regulation on Remuneration and Compensation of the Members of the Board of Directors to provide that only independent non-executive directors receive compensation. Members of the Board of Directors who are independent non-executive directors receive annual base compensation of $250,000 (RUB 1415 million) (oror $275,000 (RUB 1516.5 million) in the case of an independent non-executive director who serves as Chairman of the Board of Directors).Directors.
Independent non-executive directors who also serve on Board committees receive additional compensation as follows. Members of the Strategy Committee, Remuneration and Nomination Committee, Audit Committee and Committee for Corporate Conduct and Ethics receive additional annual compensation of $15,000 (RUB 0.80.9 million), and a director serving as Chairman of the foregoing committees receives additional annual compensation of $25,000 (RUB 1.41.5 million). Members of special committees of the Board of Directors, which are committees established for undertaking preliminary consideration and making recommendations to the full Board in relation to certain assigned matters, receive additional annual compensation of $20,000 (RUB 1.11.2 million), and a director serving as Chairman of a special committee receives additional annual compensation of $25,000 (RUB 1.41.5 million). Members of all other Board committees receive additional annual compensation of $5,000 (RUB 0.3 million) and a director serving as Chairman of any other Board committee receives additional annual compensation of $10,000 (RUB 0.6 million).
Independent non-executive members of the Board of Directors are also eligible for an annual bonus of up to a maximum of $200,000 (RUB 1112 million) based on our performance and average ADS price over a specified period.
The aggregate amount of compensation received by an independent non-executive director (including annual base compensation, bonus and additional compensation for serving as a Board committee member) should not exceed $500,000 (RUB 2830 million). In the event of early termination of a director, such director receives a pro rata share of the base, committee and bonus compensation based on the amount of time the director served on our Board.
We provide all of our directors with professional liability insurance and reimburse them for all documented expenses incurred in connection with their attendance at Board meetings and other expenses of up to $200,000 (RUB 1112 million).
C. Board Practices
Members of our Board of Directors are elected by a majority vote of shareholders at the annual shareholders' meeting using a cumulative voting system. Directors are typically elected by the annual meeting of shareholders for one year until the next annual meeting of shareholders and may be re-elected an unlimited number of times. The Joint Stock Companies Law requires that companies with more than 10,000 holders of voting shares have a board of directors consisting of not less than nine members. Our Board of Directors currently consists of nine members. The Board of Directors has the authority to make overall management decisions for us, except those matters reserved to the shareholders. Planned meetings of the Board of Directors shall be held periodically when needed, but at least 2 (two) times a quarter. See "—B. Compensation of Directors and Senior Management" for a description of the pro rata payments.compensations for the members of our Board of Directors.
Our Audit Committee consists of three members appointed by the Board of Directors. The current members are Thomas Holtrop, Stanley Miller and Michel Combes, all of whom are independent members of the Board of Directors. Mr. Thomas Holtrop serves as the Chairman of the Audit Committee. The Audit Committee is primarily responsible for the integrity of our financial statements; overseeing our internal control system; overseeing our accounting and financial reporting processes and the internal and external audits of our financial statements; recommending the appointment and compensation of the independent auditors to the Board of Directors; overseeing the performance of the auditors; reviewing issues raised by the auditors, management and/or Board of Directors and, as required, making recommendations to the Board of Directors; and resolving matters arising during the course of audits.audits; and since February 25, 2015 exercises functions related to ethics matters.
According to the bylaws, the Audit Committee shall convene with our external auditors at least four times a year, but may convene more frequently if the Audit Committee chooses to do so.
Remuneration and Nomination Committee
Our Remuneration and Nomination Committee consists of threefour members appointed by the Board of Directors. The current members are Michel Combes, Thomas Holtrop, Regina von Flemming and Stanley Miller, who serves as the Chairman of the Remuneration and Nomination Committee. The Remuneration and Nomination Committee is primarily responsible for developing a remuneration structure and compensation levels for management executives.
According to the bylaws, the Remuneration and Nomination Committee shall be convened by the Chairman of the Remuneration and Nomination Committee, at his sole discretion, or at the suggestion of any member of this committee, a member of the Board of Directors or our President.
Our President is elected by the Board of Directors for a term of three years and can be reelected for an unlimited number of terms. 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 and the Management Board. The President reports to the shareholders' meeting and to the Board of Directors and is responsible for carrying out decisions made by the shareholders and by the Board of Directors and the Management Board. On March 4, 2011, Andrey A. Dubovskov was elected as our President and CEO, starting from March 5, 2011, by the Board of Directors for a term of three years, in March 2014 and in March 2017 his contract was extended for three more years.
In October 2006, we revised our charter to establish a new governing body called the Management Board. The Management Board is an executive body which oversees certain aspects of our ongoing activities. The overall number of the Management Board members is approved by the Board of Directors at the proposal of the President with each member being elected by the Board upon nomination by the President. Each Board member is elected for a three year period and can be reelected an unlimited number of times.
The President is the Chairman of the Management Board. Currently our Management Board consists of 1110 members.
In April 2007, we established an advisory body called the Disclosure Committee. The Disclosure Committee supervises our compliance with disclosure standards in connection with all public information regarding us. These disclosure standards are based on principles of timeliness, accuracy and completeness. Members of the Disclosure Committee may be nominated by various divisions of MTS, willing to have representatives in the Disclosure Committee. Members are appointed by the President. Alexey Kornya, our CFO, is the Chairman of the Disclosure Committee. Currently, our Disclosure Committee consists of seven members, two of whom are officers of the company.
Information Security Committee
In July 2010, we created a new advisory body called the Information Security Committee. The Information Security Committee coordinates our activities in respect of trade secrets and data privacy protection. The Committee also supervises the compliance of our information systems and internal procedures with applicable legal requirements concerning data privacy protection. The Information Security Committee consists of 11 members. The Chairman of the Information Security Committee is the Vice President—Chief Security Officer.
Our ReviewAuditing Commission supervises our financial and operational activities. Members of the ReviewAuditing Commission are nominated and elected by our shareholders at annual meetings of shareholders. A director may not simultaneously be a member of the ReviewAuditing Commission. As of the date of this document, our ReviewAuditing Commission has three members:
The members of our ReviewAuditing Commission serve until their terms expire at the next annual shareholders' meeting, which will take place in June 2015.2017.
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.mtsgsm.com/information/about/corporate_governance/). See also "Item 16G. Corporate Governance."
D. Employees
At December 31, 2014,2016, we had 66,87069,470 employees. Of our 61,30863,971 employees in Russia, we estimate that 515526 were executives; 15,25813,897 were technical and maintenance employees; 35,51338,095 were sales, marketing and customer service staff; and 10,02211,453 were administration and finance staff. In addition, of the 61,30863,971 employees in Russia, we estimate that 20,73924,538 were employed in our retail unit.
As of December 31, 2014, 2,9102016, 3,166 of our employees worked in Ukraine. Of these employees, we estimate that 1320 were executives; 840864 were technical and maintenance employees; 1,3621,508 were sales, marketing and customer service staff; and 695774 were administration and finance staff.
As of December 31, 2014, 6822016, 698 of our employees worked in Turkmenistan. Of these employees, we estimate that 1716 were executives; 107156 were technical and maintenance employees; 403354 were sales, marketing and customer service staff; and 155172 were administration and finance staff.
As of December 31, 2014, 1,2002016, 1,169 of our employees worked in Armenia. Of these employees, we estimate that 910 were executives; 151139 were technical and maintenance employees; 659678 were sales, marketing and customer service staff; and 381342 were administration and finance staff.
As of December 31, 2014, 7702016, 466 of our employees worked in Uzbekistan.other countries, such as Czech Republic and Belarus (employees of NVision Group subsidiaries). Of these employees, we estimate that 917 were executives; 104386 were technical and maintenance employees; 2175 were sales, marketing and customer service staff; and 44058 were administration and finance staff.
The following chart sets forth the number of our employees at December 31, 2012, 20132015 and 2014:2016:
| At December 31, | Years ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||
Russia | 56,617 | 62,642 | 61,308 | 64,952 | 63,971 | ||||||||||||
Ukraine | 3,096 | 3,240 | 2,910 | 2,942 | 3,166 | ||||||||||||
Uzbekistan | 618 | — | 770 | 1,074 | — | ||||||||||||
Turkmenistan | 565 | 608 | 682 | 711 | 698 | ||||||||||||
Armenia | 1,181 | 1,225 | 1,200 | 1,170 | 1,169 | ||||||||||||
Other | 427 | 466 | |||||||||||||||
| | | | | | | | | | | | | | | | | |
Total | 62,077 | 67,715 | 66,870 | 71,276 | 69,470 | ||||||||||||
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| | | | | | | | | | | | | | | | | |
Our employees are not unionized, except for 4,3333,450 employees of MGTS, who are members of trade unions. We have not experienced any work stoppages and we consider our relations with employees to be strong.
E. Share Ownership
As of April 1, 2015,2017, our directors, senior management and employees owned less than 1% of our outstanding common stock.
The following table sets forth information with respect to the beneficial ownership of our common stock as of April 1, 2015,2017, by our current directors and executive officers. All shares of common stock have the same voting rights.
| Beneficial ownership as of April 1, 2015 | | Beneficial ownership as of April 1, 2017 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Directors and Executive officers | Number | %(1) | Number | %(1) | ||||||||||
Andrey A. Dubovskov, Executive Director, President and CEO | 202,410 | 0.01018% | 350,718 | 0.01794 | % | |||||||||
Ron Sommer, Chairman of the Board, Non-Executive Director | 101,352 | 0,00518 | % | |||||||||||
Alexey V. Kornya, Vice President—Chief Financial Officer | 86,525 | 0,00443 | % | |||||||||||
Ruslan S. Ibragimov, Vice President—Corporate and Legal Matters | 19,824 | 0.00100% | 72,383 | 0.00370 | % | |||||||||
Andrey E. Ushatsky, Vice President—Chief Technology and Information Officer | 14,000 | 0.00070% | 65,256 | 0.00334 | % | |||||||||
Vsevolod V Rozanov, Non-Executive Director | 72,792 | 0,00366% | 79,792 | 0.00408 | % | |||||||||
Valery V. Shorzhin, Vice-President—Procurement Management and Administrative Matters | 47,624 | 0,00244 | % | |||||||||||
Kirill A. Dmitriev, Vice President—Sales and Customer Service | 29,135 | 0,00149 | % | |||||||||||
Igor A. Egorov, Member of Management Board, Head of Moscow Macro-region | 29,135 | 0,00149 | % | |||||||||||
Mikhail A. Arkhipov, Vice President—HR | 50,043 | 0.00256 | % | |||||||||||
Vasil I. Latsanych, Vice President—Marketing | 2 | 0,00000 | % | |||||||||||
| | | | | | | | | | | | | | |
Total | 309,026 | 0.01554% | 911,965 | 0.04665 | % | |||||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Our management are entitled to remuneration in the form of options granted to them for MTS ordinary shares, which will expire in a weighted average term of approximately 1.5 years. The transfer of such shares is probable and is subject to certain employment conditions. In 2014,2016, options related compensation accrued in the amount of RUB 168259 million.
The following table sets forth information with respect to our ordinary shares in the form of share options granted to our current directors and executive officers as of April 1, 2015.2017. All shares of common stock have the same voting rights.
| Number of ordinary shares as of April 1, 2015 | Number of ordinary shares as of April 1, 2017 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Directors and Executive officers | Number | %(1) | Number | %(1) | ||||||||||
Andrey A. Dubovskov, Executive Director, President and CEO | 272,668 | 0,01371% | 445 671 | 0,02280 | % | |||||||||
Ron Sommer, Chairman of the Board, Non Executive Director | 154 579 | 0,00791 | % | |||||||||||
Mikhail A. Arkhipov, Vice President—HR | 110 766 | 0,00567 | % | |||||||||||
Kirill A. Dmitriev, Vice President—Sales and Customer Service | 108 784 | 0,00556 | % | |||||||||||
Igor A. Egorov, Member of Management Board, Head of Moscow Macro-region | 80 921 | 0,00414 | % | |||||||||||
Ruslan S. Ibragimov, Vice President—Corporate and Legal Matters | 134 422 | 0,00688 | % | |||||||||||
Alexey V. Kornya, Vice President—Chief Financial Officer | 140,103 | 0,00704% | 207 559 | 0,01062 | % | |||||||||
Ruslan S. Ibragimov, Vice President—Corporate and Legal Matters | 89,569 | 0,00450% | ||||||||||||
Vasil I. Latsanych, Vice President—Marketing | 211 090 | 0,01080 | % | |||||||||||
Andrey G. Smelkov, Vice President—Director of "MTS Foreign Subsidiaries" Business Unit | 112 430 | 0,00575 | % | |||||||||||
Andrey E. Ushatsky, Vice President—Chief Technology and Information Officer | 99,248 | 0,00499% | 162 507 | 0,00831 | % | |||||||||
Vadim E. Savchenko, Vice President—Sales and Customer Service | 115,057 | 0,00578% | ||||||||||||
Vasil I. Latsanych, Vice President—Marketing | 124,074 | 0,00624% | ||||||||||||
Valery V. Shorzhin, Vice-President—Procurement Management and Administrative Matters | 86,286 | 0,00434% | ||||||||||||
Oleg A. Korovitskiy, Vice President—Security | 26,780 | 0,00135% | ||||||||||||
Mikhail A. Arkhipov, Vice President—HR | 67,914 | 0,00341% | ||||||||||||
Kirill A. Dmitriev, Head of Moscow Macro-region | 57,717 | 0,00290% | ||||||||||||
Andrey G. Smelkov, Vice President—Director of "MTS Foreign Subsidiaries" Business Unit | 50,191 | 0,00252% | ||||||||||||
Ivan A. Zolochevsky, General Director of MTS Ukraine | 69,398 | 0,00349% | ||||||||||||
Oleg A. Atamanov, General Director of MTS Turkmenistan | 87,412 | 0,00439% | ||||||||||||
Valery V. Shorzhin, Vice President—Procurement Management and Administrative Matters | 133 090 | 0,00681 | % | |||||||||||
Andrey V. Ershov, General Director of MGTS | 135 141 | 0,00691 | % | |||||||||||
Ralph S. Yirikian, General Director of MTS Armenia | 104,092 | 0,00523% | 212 018 | 0,01085 | % | |||||||||
Andrey V. Ershov, General Director of MGTS | 77,242 | 0,00388% | ||||||||||||
Arvidas K. Alutis, General Director of RTC | 46,632 | 0,00234% | ||||||||||||
| | | | | | | ||||||||
Dmitriy G. Nagorniy, General Director of UMS | 21,157 | 0,00106% | ||||||||||||
| | | | | | | ||||||||
Ron Sommer, Chairman of the Board, Non-Executive Director | 120,323 | 0,00605% | ||||||||||||
Sergey Y. Kuzmin, President of NVision Group | 93 170 | 0,00477 | % | |||||||||||
Alexander A. Mosyakin, General Director of RTK | 27 711 | 0,00142 | % | |||||||||||
Sergey V. Rubtsov, General Director of MTS Turkmenistan | 46 066 | 0,00236 | % | |||||||||||
Olga V. Ustinova, General Director of MTS Ukraine | 62 824 | 0,00321 | % | |||||||||||
| | | | | | | | | | | | | | |
Total | 1,655,863 | 0,08325% | 2,438,749 | 0,12475 | % | |||||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth, as of April 1, 2015,2017, certain information regarding the beneficial ownership of our outstanding common stock. All shares of common stock have the same voting rights.
| Beneficial ownership as of April 1, 2015 | Beneficial ownership as of April 1, 2017 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number | Percentage | Number | Percentage | ||||||||||
Sistema(1) | 636,224,752 | 31.99 | % | 634,674,257 | 32.47 | % | ||||||||
Sistema Finance S.A. | 206,643,900 | 10.39 | % | 122,781,534 | 6.28 | % | ||||||||
STA(2) | 220,467,234 | 11.08 | % | 220,467,234 | 11.28 | % | ||||||||
ADS holders(3) | 709,401,170 | 35.67 | % | 796,092,028 | 40,72 | % | ||||||||
Other Public Float (including our directors and executive officers)(4) | 216,175,073 | 10.87 | % | 180,823,219 | 9.25 | % | ||||||||
| | | | | | | | | | | | | | |
Total(5) | 1,988,912,129 | 100.0 | % | 1,954,838,272 | 100.0 | % | ||||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
As a result of our merger with Comstar, our subsidiary, MGTS, owned 9,496,1637,584,563 of our ordinary shares as of April 1, 2015.2017. Also Stream Digital LLC owned 35,121,665 of our ordinary shares as of 1 April, 2017.
As of April 1, 2015,2017, we held a total of 77,501,43343,543,303 shares, none of which approximately 87.7% were held in the form of ADSs. These shares are excluded from the total number of shares presented in the table above.
As of December 31, 2014,April 1, 2017, Sistema's effective ownership in us was 53.46%50.03%.
B. Related Party Transactions
Transactions with Sistema and its Affiliates
Sistema
In November 2009, Sistema issuedthe Group accepted a promissory note, to usissued by Sistema, as repayment of the loan principal and interest accrued interest and principalto date under a loan we had provided to Sistema-Hals, an affiliate of Sistema.agreement with Sistema-Hals. The promissory note is an interest free and is repayable in 2017. As of December 31, 20142016 and 2013December 31, 2015 the amount receivable from Sistema under the promissory note wasof RUB 618574 million and RUB 618528 million, and such amountrespectively, was included under the line item "other investments" in our audited consolidated financial statements.
In June 2010, we accepted a promissory note from Sistema in exchange for a promissory note of Sky Link. The note is interest free and was repaid upon demandshort-term investments in the year ended December 31, 2011.accompanying consolidated statements of financial position.
In April 2014, we sold a 49% stake in Business-Nedvizhimost to Sistema for a price of RUB 3.1 billion to be paid by the end of July 2015 in accordance with Addendum to the sale agreement. As of December 31, 2014, the accounts receivable in our audited consolidated statements of financial position amounted to RUB 3.2 billion. Interest was accrued on the balance of unpaid accounts receivable. The amount of interest accrued as of December 31, 2014 and 2015 was RUB 125 million and RUB 106 million respectively and it was included as a component of interest income in our consolidated statements of operations and comprehensive income. In May 2015, accounts receivable were fully repaid.
In October 2014 wethe Group acquired 2,501,350 Sistema EurobondsNotes due in 2016 (series 04) and 1,000 Sistema International Fund SA EurobondsFunding S.A. Bonds due in 2019 for RUB 519 million and RUB 32 million, respectively. The purchasedacquired bonds were classified as available for sale and accounted for at fair value with changes recognized in accumulated other comprehensive income. ForIn March 2015 and May 2015 upon scheduled redemption, the year ended December 31, 2014,Group received principal and coupon in the unrealized gain for changeamount of RUB 409 million. In March 2016 the Group received principal and coupon of Sistema Notes due 2016 (series 04) in fair valuethe amount of the bonds totaled to RUB 6201 million. The interest income recognized on the bonds for the year ended December 31, 2014 amounted to RUB 9 million and was included as a component of interest income in our consolidated statements of operations and comprehensive income.
Doveritelnaja Investizionnaja Kompanija "DIK"("DIK")
In April and May 2013, we invested RUB 4.0 billion in Investment fund "Reservnyi" managed by "DIK," a subsidiary of Sistema. The investment was sold in April 2014 for RUB 4,165 million. The realized gain of RUB 165 million was recognized as a component of other expenses (net) in our consolidated statements of operations and comprehensive income.
Maxima Advertising Agency
We have contracts for advertising services with Maxima, a subsidiary of Sistema, pursuant to which we incurred expenses of RUB 1,9021,575 million, RUB 1,7571,351 million and RUB 1,5751,018 million and for services provided in the years ended December 31, 2012, 20132014, 2015 and 2014,2016, respectively.
During the years ended December 31, 2012, 20132014 and 2014,2015, we acquired from NVision Group, a subsidiary of Sistema, telecommunications equipment, software and billing systems (FORIS) for approximately RUB 12,898 million, RUB 13,3949,819 million and RUB 9,8195,469 million, respectively, and incurred expenses of RUB 1,115 million, RUB 1,083846 million, and RUB 846710 million, respectively, under an IT consulting agreement.
As of December 31, 2013 and 2014, the advances given to NVision Group, a subsidiary of Sistema, amounted to RUB 496 million and RUB 274 million, respectively. These amountsmillion. The advances were included into property, plant and equipment and intangible assets in the accompanying consolidated statements of financial position.
As of the end of December 2015, we acquired 100% stake in NVision Group, accordingly as of December 31, 2015, NVision Group was our subsidiary. As we and the acquired NVision Group subsidiaries were under common control with Sistema, the assets and liabilities acquired were recognized at the carrying amounts recorded previously in the counterparty's financial statements with the resulting gain or loss recognized directly in equity. The comparative information was not restated.
Smart Cards Group
During the years ended December 31, 2012, 20132014, 2015 and 2014,2016, we purchased SIM cards and prepaid phone cards for approximately RUB 842267 million,RUB 765160 million and RUB 26739 million, respectively.
AB Safety
During the years ended December 31, 2012, 20132014, 2015 and 2014,2016, we purchased security services from AB Safety, an affiliate of Sistema, for the amount of RUB 344292 million, RUB 354212 million and RUB 292271 million, respectively.
Investments in certain subsidiaries and affiliates of Sistema
As of December 31, 2012, 20132014, 2015 and 2014,2016, we held investments in the share capital of certain subsidiaries and affiliates of Sistema amounting to RUB 306125 million, RUB 125157 million and RUB 125149 million, respectively, which, individually, were and are immaterial. Our main investments are in SMM,Sistema Venture Capital (former Sistema Mass Media (SMM)), in which we hold 2.356%, and the value of such investments as of December 31, 2012, 20132014, 2015 and 2014,2016, amounted to RUB 117 million, RUB 117 million and RUB 117 million.
Liabilities to related parties
As of December 31, 2014, we had several bills of exchange and loans issued by Sistema Mass-Media, a subsidiary of Sistema, amounted to RUB 867 million. The amount of interest accrued for the year ended December 31, 2014 was RUB 41 million and was included as a component of interest income in our consolidated statements of operations and comprehensive income.
Transactions with equity investees
Stream LLC
In July 2012 our share in the company Stream LLC decreased to 45% and therefore it has become the related party for the group. In the years ended December 31, 20132014 and 2014,2015, we signed contracts for content services and expenses amounting to RUB 7111,395 million and RUB 1,395 million.2,132 million, respectively.
On of December 29, 2015, we increased our share in Stream LLC to 100%.
MTS Bank
We maintainThe Group has loan agreement and maintains certain number of deposit and loan agreements,bank accounts with MTS Bank, a subsidiaryan associate of Sistema.the Group. As of December 31, 2012, 20132015 and 2014, we hadDecember 31, 2016, the Group's cash positionsposition at MTS Bank in the amount of RUB 8,161amounted to RUB2,564 million and RUB 11,297 and RUB 11,6875,638 million, in current accounts,respectively, including short-term deposits in the amount of RUB 101 million, RUB 5,081323 million and RUB 3,482532 million, respectively. The interest accrued on the deposits and cash on current accounts for the years ended December 31, 2012, 2013,2014, 2015 and 2014,2016, amounted to RUB 172654 million, RUB 742447 million and RUB 654285 million, respectively, and was included as a component of the line item "interest income" in our audited consolidated financial statements.
Interest expense on the funds raised from In January 2017 MTS Bank duringfully repaid its 10-year subordinated loan, received from the years ended December 31,Group in September 2012 2013 and 2014 amounted toin amount of RUB 363 million, RUB nil and RUB nil, respectively, was included as a component of interest expense in the accompanying consolidated statements of operations and comprehensive income.2,100 million.
During the years ended December 31, 2014, 20132015 and 2012,2016, we received revenues from mobile and call center services with MTS Bank amounting to RUB 787 million, RUB 378588 million and RUB 88900 million, respectively. In addition, during the year ended December 31, 2014, 2015 and 2016 we received revenues from processing documents for bank cards issue and granting of consumer credits amounting to RUB541 million, RUB 541117 million and RUB 372 million, respectively (agency fees after deduction of cross-fines). At the same time, during the year ended December 31, 2013 we incurred expenses under the same contract (in the amount of fines exceeding the agency fees) with MTS Bank amounting to RUB 331 million. Moreover, during the years ended December 31, 2014, 20132015 and 2012,2016 we incurred commission expenses (bank commission and commission for cash collection from subscribers) amounting to RUB 135 million, RUB 82147 million and RUB 55354 million, respectively.
MTS Belarus
During the years ended December 31, 2012, 20132014, 2015 and 2014,2016, we accrued revenues from roaming agreements with MTS Belarus, our associate company, amounting to RUB 209269 million, RUB 149266 million and RUB 269,276 million, respectively. At the same time, during the years ended December 31, 2012, 20132014, 2015 and 20142016 we incurred roaming expenses with MTS Belarus amounting to RUB 424395 million, RUB 278394 million and RUB 395161 million, respectively.
Accounts receivable and accounts payable
We had total accounts receivable of RUB 3364,525 million, RUB 9659,661 million and RUB 4,5258,094 million, from, and total accounts payable of RUB 2,3384,674 million, RUB 3,3151,809 million and RUB 4,6741,014 million to, related parties as of December 31, 2012, 20132014, 2015 and 2014,2016, respectively. We do not have the intent or ability to offset the outstanding accounts payable and/or accounts receivable with related parties under the term of existing agreements with them. See Note 2521 to our audited consolidated financial statements for details of our accounts payable and accounts receivable.
C. Interests of Experts and Counsel
Not applicable.
A. Consolidated Statements and Other Financial Information
8.A.1-3. See Item 18.
8.A.4-6. Not applicable.
In June 2012, the authorities of the Republic of Uzbekistan commenced repeat audits of previously auditedthe financial and operating activities of MTS' wholly ownedwholly-owned subsidiary Uzdunrobita. On July 17, 2012, Uzdunrobita suspended its services in Uzbekistan pursuant to the order of the State AgencyFurther various claims for Communications and Information of Uzbekistan (the "SACI") temporarily suspending the operating license of Uzdunrobita for a period of ten business days. This suspension was subsequently extended to three months due to a decision of the Tashkent Economic Court of July 30, 2012.
On August 6 and 7, 2012, fourteen regional antimonopoly departments of the Republic of Uzbekistan simultaneously held hearings and declared that Uzdunrobita had violated antimonopoly laws, consumer protection laws and laws governing advertisements. In total, the claims of the regional antimonopoly departments against Uzdunrobita amounted to approximately RUB 2,558 million. This amount was subsequently reduced by the superior antimonopoly regulator to RUB 416 million in the aggregate. The disputes with the antimonopoly authorities were dismissed after payments were made by Uzdunrobita pursuant to the Appeal Decision (as defined below).
On August 13, 2012, the Tashkent Economic Court granted the petition of the SACI to terminate all operating licenses of Uzdunrobita permanently. This decision was subsequently upheld by the appeals and cassation instance courts on August 27, 2012 and April 4, 2013, respectively.
Notwithstanding the fact that a tax audit of Uzdunrobita's operations for the period of 2007-2010 was completed in February 2012 and did not reveal any serious violations, further tax audits were conducted and purported to find alleged violations of licensing regulations as well as income and otherviolation
of tax, antimonopoly and industry legislation resulting in the imposition of additional taxes and fines totaling approximately RUB 28,776 million. This amount was subsequently reduced to RUB 21,390 million in the aggregate.
During September-October of 2012, RUB 201 million were seized from Uzdunrobita's bank accounts by the Uzbek State and applied to settle its alleged liabilities under these claims.
On September 17, 2012, the Tashkent City Criminal Court issued a ruling in favor of the Uzbek state authorities authorizing the confiscation of all assets of Uzdunrobita based on a criminal court's verdict which the Tashkent City Criminal Court issued against four employees of Uzdunrobita. Previously, Uzbek law enforcement agencies arrested all of Uzdunrobita's assets, including cash held in local bank accounts.
On November 8, 2012, the Appellate Instance of the Tashkent City Criminal Court allowed Uzdunrobita's appeal challenging the decision of the Tashkent City Criminal Court dated September 17, 2012.
The appeals court found that all damages (taxes, sanctions, unpaid licenses duties and damages to customers) incurred by the State were to be compensated by Uzdunrobita. The amount of damages was calculated on the basis of all of the aforementioned claimsmade against Uzdunrobita, which resulted in significant amounts of fines and penalties, revocation of all licenses and suspension of services. Fines and penalties amounted to approximately RUB 18,375 million to be paidpayable in equal installments over eight equal monthly instalments (the "Appeal Decision").months.
In accordance with applicable Uzbek laws, Uzdunrobita petitioned the Deputy General Prosecutor to challenge the Appeal Decision before the Supreme Court of Uzbekistan and grant a stay of enforcement of the Appeal Decision. However, such petitions were rejected by the General Prosecutor's Office on January 8, 2013.
Following this rejection, Uzdunrobita immediately filed a further petition to appeal to the Supreme Court of Uzbekistan with the Chairman of the Supreme Court of Uzbekistan. On January 23, 2013, the Company was notified that the matter had been submitted by the Supreme Court for consideration by the Chairman of the Tashkent City Court. On May 2, 2013, the Chairman of the Tashkent City Court rejected Uzdunrobita's petition.
In order to comply with the Appeal Decision, Uzdunrobita paid two scheduled installments in November and December 2012 totaling approximately RUB 4,5844,583.4 million. On January 14, 2013, subsequentfurther to theits partial payment of a portion (RUB 242 million) of the third installment due in January 2013 with alltotaling approximately RUB 481 million and constituting the remaining amount of cash remainingheld in Uzdunrobita'sits bank accounts, Uzdunrobita filed a petition for voluntary bankruptcy withto the Tashkent Economic Court due toon the grounds of its inability to meet its further obligations arising out of the Appeal Decision. On January 18, 2013, the Court initiated bankruptcy proceedings and appointed an external temporary supervisor over Uzdunrobita, and scheduled a further bankruptcy hearing which took place on April 22, 2013.obligations.
Considering the adverse impact of such circumstances on the Group's ability to conduct operations in Uzbekistan, the Group tested goodwill and other long-lived assets attributable to Uzbekistan for impairment upon first receiving notification of the investigations. As a result, an impairment loss on the long-lived assets in the amount of RUB 20,037 million on the long-lived assets was recorded in the consolidated statements of operations and comprehensive incomeprofit or loss for the year ended December 31, 2012. In 2013 these losses were assigned to discontinued operations.
On April 22, 2013, the Tashkent Economic Court declared Uzdunrobita bankrupt and initiated six-montha liquidation procedures. In accordance with the terms of local liquidation procedures, Uzdunrobita's CEO was relieved of his duties and all of the oversight and governance overprocess. Uzdunrobita was transferred to the liquidation administrator.later liquidated. As a result the Group lost control over the subsidiary and deconsolidated Uzdunrobita.
In July 2013, two rounds of auctions were set and held in relation to2012, the sale of assets of Uzdunrobita and all of its branches. All auctions were recognized as having failed due to the absence of any applications by interested bidders.
MTSGroup filed a claim against the Republic of Uzbekistan in the International Center for Settlement of Investment Disputes ("ICSID"), which is part of the World Bank Group, in Washington, D.C. The claim was registered on November 15, 2012. A tribunal was formed on August 29, 2013 and the first procedural hearings took place in November 2013.
In July 2014 the dispute between MTS and the Republic of Uzbekistan was resolved. The parties signed a settlement agreement (the "Settlement Agreement") and according to its terms all mutual claims were eliminated. The Settlement Agreement is governed by English law and provides for resolution of any disputes arising out of the Settlement Agreement in the International Court of Arbitration under the International Chamber of Commerce in Paris.Paris ("ICSID"). ICSID has discontinued international arbitration proceedings between the Groupus and the Republic of Uzbekistan following the submission of a joint application by both parties.
Furthermore, theThe Republic of Uzbekistan established a legal entity, UMS, with such entity having no legal connection to the previously liquidated entity, Uzdunrobita. UMS was granted 2G, 3G and LTE licenses valid tilluntil 2029, and received frequencies, numbering capacity and other permits required for the launch of operations.
On September 24, 2014, a 50.01% ownership interest in UMS was transferred to MTS by the State Unitary Enterprise Center of Radio Communications, Radio Broadcasting and Television on behalf of the Republic of Uzbekistan. We have also received certain guaranties in relation to the protection of any future investment in the Republic of Uzbekistan.
In March 2014, we received requests for the provision of information from the SEC and the United States Department of Justice ("DOJ") relating to a currently conducted investigation of the our former subsidiary in Uzbekistan.
In July 2015, activities related to our operations in Uzbekistan have been referenced in a civil forfeiture complaints ("The Complaints"), filed by DOJ in the U.S. District Court, Southern District of New York (Manhattan), directed at certain assets of an unnamed Uzbek government official. The Complaints allege among other things that we and certain other parties made corrupt payments to the unnamed Uzbek official to assist their entering and operating in the Uzbekistan telecommunications market. The Complaints are solely directed towards assets held by the unnamed Uzbek official and none of our assets are affected by the Complaints.
We continue to cooperate with these investigations. We cannot predict the outcome of the investigations, including any fines or penalties that may be imposed, and such fines or penalties could be significant.
For additional information please refer to Note 426 and 28 to our audited consolidated financial statements.
In August 2012, we received a claim regarding dismissal of international registration of four of the Group trademarks in the territory of Ukraine from an entity named MTS LLC. The claim was fully dismissed by Economic Appeal Court of Kiev in December 2013. However, in the end of 2015, following claims of MTS LLC, two regional courts of Ukraine dismissed international registration of our trademarks in the territory of Ukraine. In March 2016, we appealed the decisions of two regional courts. Our appeals were fully satisfied. In May 2016 MTS LLC submitted a claim regarding dismissal of international registration of eight of the Group trademarks in the territory of Ukraine to the Economic Court of Kiev. We submitted to the Economic Court of Kiev counterclaim regarding dismissal of registration of MTS LLC trademark and the Economic Court of Kiev suspended processing MTS LLC claim till consideration of our counterclaim. In March 2017 our counterclaim was satisfied in the court of cassation.
Tax Audits and Claims
In the ordinary course of business, we may be party to various tax proceedings, and subject to tax claims, some of which relate to the developing markets and evolving fiscal and regulatory environments in which we operate. In the opinion of management, our liability, if any, in all pending tax proceedings or tax claims will not have a material effect on our financial condition, results of operations or liquidity. We believe that we have adequately provided for tax liabilities in the accompanying 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. See also Note 3028 to our audited consolidated financial statements.
In December 2010, the Russian tax authorities completed a tax audit of MTS OJSC for the years ended December 31, 2007 and 2008. Based on the results of this audit, the Russian tax authorities determined that RUB 353.9 million in additional taxes, penalties and fines were payable by us. The resolution did not come into force as we prepared and filed a petition with the Federal Tax Service to declare the tax authorities' resolution to be invalid. In September 2011, the Federal Tax Service partially satisfied our petition, decreasing the amount of additional taxes, penalties and fines payable by us by RUB 173.9 million. The whole amount of taxes, fines and penalties were paid by us. Based on the verdict of the Federal Tax Service we did not submit any appeal in respect of RUB 95.8 million. We filed an appeal for RUB 84.2 million of the remaining RUB 180.0 million with the Moscow Arbitrate Court. In August 2013, the Moscow Arbitrate Court issued a ruling to grant our claim partly, which was subsequently confirmed by the Arbitrate Appeal Court in November 2013. However, we appealed the decision of the Arbitrate Appeal Court in the Federal Arbitrate Court of Moscow District, which issued a ruling to partly grant our claim in March 2014. Based on the verdicts of the courts, no further legal actions were taken by us in respect of remaining RUB 41.3 million.
In February 2012, the Russian tax authorities completed a tax audit of MGTS for the years ended December 31, 2008 and 2009. Based on the results of their audit, the Russian tax authorities assessed RUB 258.1 million in additional taxes, penalties and fines payable by us. In February 2012, MGTS
challenged the tax authorities' decision with higher authorities within the Federal Tax Service. In May 2012, the Federal Tax Service refused to satisfy MGTS' claim and MGTS appealed the decision in Moscow Arbitrate Court. The court has ruled in our favor on February 20, 2013, dismissing the Russian tax authorities' claims in their entirety.
In June 2013, the Russian tax authorities completed a tax audit of MTS OJSC for the years ended December 31, 2009, 2010 and 2011. Based on the results of this audit, the Russian tax authorities determined that RUB 253.38 million in additional taxes, penalties and fines were payable by us. In December 2013, we appealed the resolution of this assessment to the Federal Tax Service, and, further to its refusal to grant the appeal, we did not appeal to the Moscow Arbitrate Court.
In January 2014, the Russian tax authorities completed a tax audit of MGTS for the years ended December 31, 2010 and 2011. Based on the results of this audit, the Russian tax authorities determined that RUB 91.0 million in additional taxes and penalties were payable by us. MGTS appealed the resolution of this assessment to the Federal Tax Service in May 2014. The Federal Tax Service partially satisfied our petition, decreasing the amount of additional taxes, penalties and fines payable by us by RUB 61.12 million. We filed an appeal for RUB 14.94 million with the Moscow ArbitrateArbitrazh Court. In February 2015, the Moscow ArbitrateArbitrazh Court issued a ruling to partly grant our claim.claim, which was subsequently confirmed by the Arbitrazh Appeal Court in April 2015.
In July 2014,2015, the Federal Customs Service of Russia initiatedcompleted audit of MTS for the period from January 1, 2012 to July 22, 2014. Based on the results of this audit, no amounts were accrued in addition to the voluntary declaration we made.
In November 2015, the Russian tax authorities completed a tax audit of RTC for the years ended December 31, 2012 and 2013. Based on the results of this audit, the Russian tax authorities determined that RUB 12.72 million in additional taxes and penalties were payable by us. No appeal was submitted.
In December 2015, the Russian tax authorities completed a tax audit of Nvision Group for the years ended December 31, 2013 and 2014. Based on the results of this audit, the Russian tax authorities determined that RUB 28.43 million in additional taxes and penalties were payable by us. No appeal was submitted.
In November 2015, the Russian tax authorities completed a tax audit of Stream for the years ended December 31, 2012 and 2013. Based on the results of this audit, the Russian tax authorities determined that RUB 3.1 million in additional taxes and penalties were payable by us. Stream appealed the resolution of this assessment. Following the appeal, tax authorities decided to perform additional tax control procedures. As a result, the assessment of RUB 3.1 million wasn't confirmed.
In October 2015, the Russian tax authorities completed a tax audit of Comstar Regions for the years ended December 31, 2012 and 2013. Based on the results of this audit, the Russian tax authorities determined that RUB 17.3 in additional taxes and penalties were payable by us. In January 2016, we appealed the resolution of this assessment to the Federal Tax Service. In April 2016, the Federal Tax Service didn't satisfy our claim. In July 2016, we filed an appeal with the Moscow Arbitrazh Court. The appeal is being processed by the Moscow Arbitrazh Court (court of first instance).
In August 2016, the Russian tax authorities completed a tax audit of Sitronics Telecom Solutions for the years ended December 31, 2012, 2013 and 2014. Based on the result of this audit, the Russian tax authorities determined that RUB 13.46 in additional taxes, fines and penalties were payable by us. No appeal was submitted.
In December 2016, the Russian tax authorities completed a tax audit of MTS for the years ended December 31, 2012 and 2013. Based on the results of this audit, the Russian tax authorities determined that RUB 586.2 million in additional taxes, fines and penalties were payable by us. We are preparing an appeal to the Federal Tax Service.
Generally, according to Russian tax legislation, tax declarations remain open and subject to inspection for a period of three years following the tax year. As of December 31, 2014,2016, the tax declarations of MTS OJSC and its Russian subsidiaries for the preceding three fiscal years were open for further review. In December 2014,2016, tax authorities commenced review of tax declarationsdeclaration of MTS and Comstar-regions for the years ended December 31, 20132014, 2015 and 2012.2016 and Sitronics Telecom Solutions for the years ended December 31, 2014, 2015 and 2016.
In October 2013, the FAS subdivision in the Pskov region began an investigation into our, Vimpelcom's and MegaFon's GPRS pricing in the Pskov Region. In December 2013 the investigation was closed as no violation of the antimonopoly laws was identified.
In November 2013, the FAS subdivision in the Rostov region charged us and LLC "I-CUBE" with a violation of antimonopoly laws by entering into an agreement to tie in the services of LLC "I-CUBE." FAS issued an order to cease the violation and imposed a fine of RUB 0.1 million on MTS. We do not intend to appeal this decision of the FAS subdivision in the Rostov Region.
In January 2014, the FAS subdivision in the Khanty Mansiysk Autonomous region-Yugra charged Comstar-regionsComstar-Regions with violation of antimonopoly legislation by abusing its dominant position on the Internet access market by setting different prices in different municipalities of the region. FAS also issued an order to cease the violations. On January 17, 2014, the arbitrazh court of Khanty Mansiysk Autonomous region-Yugra cancelled the decisions and the order of the FAS subdivision in the Khanty Mansiysk Autonomous region- Yugra.
In January 2014, the FAS subdivision in the Rostov region charged MTS with violation of antimonopoly laws by setting a monopoly tariff on cable TV tariffs services in the Rostov-on-Don city. The investigation was ceased as no violation had been found in MTS actions.
In December 2015, the FAS subdivision in Moscow issued an instruction to MGTS to cease violations of antimonopoly laws by different pricing of network equipment lease for different consumers, which was fulfilled. In May 2016 MGTS was fined for violations for RUB 0.5 million. MGTS appealed the decision and ruling of FAS subdivision in Moscow in the arbitrazh court in Moscow, and withdrew the appeal in June 2016.
In December 2015, FAS has charged MTS, MegaFon,VimpelCom and Tele2 with violation of antimonopoly laws in respect to pricing of SMS dispatching. In April 2017 FAS found us, MegaFon and VimpelCom responsible for the aforementioned violation.
In November 2016, the FAS subdivision in Yaroslavl has charged MTS, MegaFon and VimpelCom with violation of antimonopoly laws in respect to 4G modems pricing. The investigation is currently in progress and the next meeting is scheduled on April 28, 2017.
In January 2017, the FAS subdivision of Nizhny Novgorod charged MTS with violation of antimonopoly laws in respect to infringement of public interests—transfer of subscribers to another price plan without their consent.
Please see also "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—A finding by the AMC that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operations" for details of the AMC of Ukraine investigations.
8.A.8. Dividend Distribution Policy
On April 29, 2013, the Board of Directors approved aOur dividend policy whereby we will aimfor the years 2013, 2014 and 2015 was aimed to make dividend payments to our shareholders for 2013, 2014 and 2015 in the amount of at least 75% of MTS OJSC'sMTS' free cash flow, but not less than RUB 40 billion. For the purposes of our dividend calculation we utilizeutilized a simplified form of free cash flow—flow which we define as Operating Cash Flow less capital expenditures. In case
On April 8, 2016, our Board of fluctuations in the amountDirectors approved new dividend policy which sets a target payout of dividends payable from the set up goals,RUB 25.0 - 26.0 per ordinary MTS OJSC should provide the reasonsshare (RUB 50.0 - 52.0 per ADR) per calendar year. The policy guarantees a minimum payout of that fluctuations.RUB 20.0 per ordinary MTS share (or RUB 40.0 per ADR). The new policy will cover 2016 - 2018. Payments will continue to be made on a semi-annual basis.
Annual and semi-annual dividend payments, if any, must be recommended by our Board of Directors and approved by the Annual General Meeting of Shareholders (AGM)(GM). 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.
At a meeting held on April 14, 2015,12, 2017, the Board of Directors recommended that an AGM approves annual dividends of RUB 19.5615.6 per ordinary MTS share (RUB 39.1231.2 per ADS), or a total of approximately RUB 40.431.2 billion, based on the full-year 20142016 financial results. Upon acceptance by the AGM and completion of this payment, we will have paid out up to RUB 53.255.1 billion based on our fiscal year 20142016 financial results.
The Board of Directors set the date for our AGM for June 25, 2015.29, 2017. The record date for the Company's shareholders and ADS holders entitled to participate in the AGM has been set for May 7, 2015.26, 2017. The Board of Directors recommended that the AGM sets the record date for shareholders and ADS holders entitled to receive dividends for the 20142016 fiscal year for July 7, 2015.10, 2017.
B. Significant Changes
Tender Offer announcement Disposal—On January 17, 2017, the Group announced details of Intellect Telecom
a tender offer (the "Tender Offer") to repurchase its ordinary shares (including shares represented by ADSs) for up to RUB 4,647 million and completed the repurchase in March 2017. Under the Tender Offer, the Group purchased a total of 16,022,364 shares at a price per share of RUB 290.00, for a total cost of RUB 4,646 million. Simultaneously, the Group purchased 16,038,892 shares from Sistema Finance under the Sistema Purchase Agreement for an aggregate purchase price of RUB 4,651 million.
Early repayment of MTS Bank subordinated debt—In January 2015, we sold2017 MTS Bank, an investmentassociate of the Group, fully repaid its 10-year subordinated loan, received from the Group in IntellectTelecom to Sistema for a cash considerationSeptember 2012 in the amount of RUB 3442,100 million.
In February 2015, we sold 51% stake in Rent-Nedvizhimost to Sistema for RUB 4.3 billion. We classified the associated assets and liabilities as "held for sale" as of December 31, 2014.
Acquisition of Navigation Information Systems
In January 2015, we acquired 89.53% of Navigation Information Systems from Sistema for RUB 44 million. NIS is the leading systems integrator for GLONASS satellite projects. The acquisition allows us to develop our proprietary technological platform for machine-to-machine solutions.
Acquisition of 3G license in Ukraine
In February 2015, MTS Ukraine won a tender to acquire a nationwide license for the provision of 3G telecommunications services. The license with the cost of 2,715 million hryvnias (RUB 6,015 million at the acquisition date) has been granted for 15 years. In accordance with the terms of the license MTS Ukraine is required to launch provision of 3G services in all of the regional centers across Ukraine within 18 months upon allocation of the license.
Notes issuance Insolvency—In February 2017 the Group issued Notes due 2022 at par value of Kyivska Rus Bank in Ukraine
OnRUB 10,000 million and coupon rate of 9.00%. In March 19, 2015, The National Bank2017 the Group also issued Notes due 2021 at par value of Ukraine adopted a resolution declaring Kyivska Rus Bank to be insolvent. AsRUB 10,000 million and coupon rate of December 31, 2014, we held RUB 1,170 million in deposits in the bank. Management determined that this announcement did not provide evidence related to conditions existing as of December 31, 2014, and therefore consider the announcement to be a nonrecognized subsequent event.8.85% per annum.
Item 9. Offer and Listing Details
(Only Items 9.A.4 and 9.C are applicable.)
Our ADS, each representing two ordinary shares, have been listed on the NYSE since July 6, 2000 under the symbol "MBT." Our ordinary shares have been listed on MICEX (currently Moscow Exchnage) since December 2003. In addition, we issued additional ordinary shares in connection with our merger with Comstar, which have been listed on MICEX (currently Moscow Exchange) since May 2011. The shares of the additional issuance became fully fungible with our previously issued ordinary shares in July 2011. Set forth below, for the periods indicated, are the high and low closing prices per ADS as reported by the NYSE and the high and low closing prices per ordinary share as reported by the MICEX.Moscow Exchange.
| ADS High | ADS Low | Ordinary Share High | Ordinary Share Low | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Monthly High and Low | |||||||||||||
March 2015 | $ | 10.10 | $ | 8.95 | 257.3 RUB | 220.4 RUB | |||||||
February 2015 | $ | 10.36 | $ | 8.34 | 257.4 RUB | 227.3 RUB | |||||||
January 2015 | $ | 8.66 | $ | 6.87 | 228.0 RUB | 174.7 RUB | |||||||
December 2014 | $ | 11.95 | $ | 6.17 | 253.0 RUB | 158.5 RUB | |||||||
November 2014 | $ | 14.38 | $ | 12.22 | 262.0 RUB | 251.0 RUB | |||||||
October 2014 | $ | 14.85 | $ | 12.96 | 274.0 RUB | 219.8 RUB | |||||||
Quarterly High and Low | |||||||||||||
First Quarter 2015 | $ | 10.36 | $ | 6.87 | 257.4 RUB | 174.7 RUB | |||||||
Fourth Quarter 2014 | $ | 14.85 | $ | 6.17 | 274.0 RUB | 158.5 RUB | |||||||
Third Quarter 2014 | $ | 19.94 | $ | 14.94 | 324.0 RUB | 260.5 RUB | |||||||
Second Quarter 2014 | $ | 20.03 | $ | 15.42 | 316.0 RUB | 240.0 RUB | |||||||
First Quarter 2014 | $ | 21.38 | $ | 15.79 | 318.0 RUB | 235.0 RUB | |||||||
Fourth Quarter 2013 | $ | 23.92 | $ | 19.82 | 351.5 RUB | 305.0 RUB | |||||||
Third Quarter 2013 | $ | 22.66 | $ | 18.52 | 323.0 RUB | 258.0 RUB | |||||||
Second Quarter 2013 | $ | 20.87 | $ | 15.69 | 279.9 RUB | 248.2 RUB | |||||||
First Quarter 2013 | $ | 21.58 | $ | 14.94 | 283.7 RUB | 246.7 RUB | |||||||
Annual High and Low(1) | |||||||||||||
2014 | $ | 21.38 | $ | 6.17 | 324.0 RUB | 158.5 RUB | |||||||
2013 | $ | 23.96 | $ | 17.66 | 351.5 RUB | 246.7 RUB | |||||||
2012 | $ | 20.07 | $ | 14.94 | 254.7 RUB | 186.0 RUB | |||||||
2011 | $ | 21.54 | $ | 11.91 | 263.0 RUB | 169.5 RUB | |||||||
2010 | $ | 23.55 | $ | 17.84 | 273.5 RUB | 217.6 RUB |
| ADS High | ADS Low | Ordinary Share High | Ordinary Share Low | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Monthly High and Low | |||||||||||||
March 2017 | $ | 11.51 | $ | 9.76 | 290.00 RUB | 255.20 RUB | |||||||
February 2017 | $ | 10.82 | $ | 10.27 | 281.00 RUB | 267.60 RUB | |||||||
January 2017 | $ | 10.78 | $ | 9.28 | 277.5. RUB | 255.70 RUB | |||||||
December 2016 | $ | 9.64 | $ | 8.26 | 266.60 RUB | 239.00 RUB | |||||||
November 2016 | $ | 7.83 | $ | 7.14 | 230.25 RUB | 219.20 RUB | |||||||
October 2016 | $ | 8.03 | $ | 7.17 | 232.55 RUB | 213.30 RUB | |||||||
Quarterly High and Low | |||||||||||||
First Quarter 2017 | $ | 11.51 | $ | 9.28 | 290.00 RUB | 255.20 RUB | |||||||
Fourth Quarter 2016 | $ | 9.64 | $ | 7.14 | 266.60 RUB | 213.30 RUB | |||||||
Third Quarter 2016 | $ | 9.21 | $ | 7.58 | 252.40 RUB | 227.50 RUB | |||||||
Second Quarter 2016 | $ | 9.38 | $ | 7.79 | 268.30 RUB | 231.90 RUB | |||||||
First Quarter 2016 | $ | 8.18 | $ | 5.15 | 240.10 RUB | 197.75 RUB | |||||||
Fourth Quarter 2015 | $ | 7.82 | $ | 6.11 | 221.70 RUB | 193.55 RUB | |||||||
Third Quarter 2015 | $ | 9.83 | $ | 6.48 | 245.85 RUB | 207.65 RUB | |||||||
Second Quarter 2015 | $ | 12.77 | $ | 9.33 | 271.00 RUB | 238.25 RUB | |||||||
First Quarter 2015 | $ | 10.36 | $ | 6.87 | 257.4 RUB | 174.7 RUB | |||||||
Annual High and Low(1) | |||||||||||||
2016 | $ | 9.64 | $ | 5.22 | 268.30 RUB | 200.55 RUB | |||||||
2015 | $ | 12.77 | $ | 6.11 | 271.00 RUB | 174.70 RUB | |||||||
2014 | $ | 21.38 | $ | 6.17 | 324.0 RUB | 158.5 RUB | |||||||
2013 | $ | 23.96 | $ | 17.66 | 351.5 RUB | 246.7 RUB | |||||||
2012 | $ | 20.07 | $ | 14.94 | 254.7 RUB | 186.0 RUB |
C. Markets
Our common stock has been listed on the Moscow Interbank Currency Exchange (currently Moscow Exchange) since December 2003. ADSs, each representing two shares of our common stock, have been listed on the New York Stock Exchange under the symbol "MBT" since July 6, 2000. Our
U.S. dollar-denominated notes due in 2020 and 2023 are listed on the Irish Stock Exchange. Our ruble-denominated notes are listed on the Moscow 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 and certain requirements of Russian legislation. In addition to this description, we urge you to review our charter to learn its complete terms.
Article 2.1 of our charter provides that our principal purpose is to obtain profits through the planning, marketing, establishing and operating communications network and facilities, to provide access to Internet and to render communications services on our license territories.
We are registered with the Ministry of Taxes and Duties of the Russian Federation under the state registration number 1027700149124.
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 2,066,413,5621,998,381,575 common shares, each with a nominalpar value of 0.10 rubles, all of which are issued and fully paid. Under Russian legislation, charter capital refers to the aggregate nominalpar value of the issued and outstanding shares. We are also authorized to issue an additional 100,000,000 common shares with a nominalpar value of 0.10 rubles each. We have issued only common stock. No preferred shares are authorized or outstanding. Preferred stock may only be issued if 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 Joint Stock Companies Law 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. Any of our shares that are owned by our subsidiaries are not considered treasury shares under Russian law (i.e., they are considered outstanding shares), and our subsidiaries holding such shares are able to vote and dispose of such shares without any further corporate actions by our shareholders or Board of Directors.
In March 2016, in the course of liquidation of our wholly owned subsidiary, MTS Bermuda, we obtained 67,995,335 shares. As of AprilJune 1, 2015,2016, we had 9,93536,652 treasury shares repurchased in August 2014 pursuant to our shareholders' right to demand buy-out following our decision on merger of our subsidiaries into MTS in accordance with applicable laws. 90,881 of treasury shares which we repurchased in March 2013 in connection with the merger of our subsidiaries into MTS during 2015 and 2016 in accordance with applicable laws. In June 2016, our shareholders decided to decrease our charter capital by cancellation of all outstanding 68,031,987 treasury shares (approximately 3.29% of our share capital at that time). In August 2016, we cancelled these shares, and as such our capital stock decreased from 2,066,413,562 to 1,998,381,575 shares. As of April 1, 2017, we did not have any treasury shares.
As of April 1, 2016, our subsidiaries held 9,496,163 of our shares. In April 2016, our wholly owned subsidiary Bastion LLC sold 954,386 shares to our management pursuant to the requirementsour management long-term motivation program. In December 2016, our wholly owned subsidiary Stream Digital LLC purchased
Table of applicable law were soldContents
3,060,409 shares (including shares represented by ADSs) as a result of a tender offer announced in March 2014October 2016.
A second tender offer was announced in order to comply with the relevant legal requirements. Together withJanuary 2017, as a result of which Stream Digital LLC purchased additional 32,061,256 shares. Thus, as of April 1, 2017, our subsidiaries we held a total of 77,501,433 shares,43 543 303 of which approximately 87.7% were held in form of ADSs.our shares. See "Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders." In our consolidated financial statements prepared in
accordance with U.S. GAAP,IFRS, these shares are considered treasury shares (i.e., they are considered not outstanding).
As of the date of this document, we had more than ten thousand shareholders for purposes of the Joint Stock Companies Law.
Holders of our common stock have the right to vote at all shareholders' meetings. As required by the Joint Stock Companies Law and our charter, all shares of our common stock have the same nominalpar value and grant identical rights to their holders. Each fully paid share of common stock, except for treasury shares, gives its holder the right to:
The Joint Stock Companies Law and our charter provide existing shareholders with a pre-emptive right to purchase shares or securities convertible into shares during an open subscription in the amount proportionate to their existing shareholdings. In addition, the Joint Stock Companies Law provides shareholders with a pre-emptive right to purchase shares or securities convertible into shares, in an amount proportionate to their existing shareholdings, during a closedprivate subscription if the shareholders voted against or did not participate in the voting on the decision approving such subscription. The pre-emptive right does not apply to a closedprivate subscription to the existing shareholders provided that such shareholders may each acquire a whole number of shares or securities convertible into shares being placed in an amount proportionate to their existing shareholdings. We must provide shareholders with written notice of their pre-emptive right to purchase shares and the period during which shareholders can exercise their pre-emptive rights. Such periodrights may not be less than 2045 or, under certain circumstances, 4520 or even eight business days. We cannot sell the shares or securities convertible into shares which are subject to the pre- emptivepre-emptive rights during this period.
The Joint Stock Companies Law and our charter set forth the procedure for determining the quarterly and annual dividends that we may distribute to our shareholders. 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 boardBoard of directorsDirectors and approved by the shareholders 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 extraordinary 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 boardBoard of directors.Directors.
The Joint Stock Companies Law allows dividends to be declared only out of net profits calculated under RAS as long as the following conditions have been met:
The Joint Stock Companies Law and the Securities Market Law have been amended on December 29, 2012 to adopt new dividend payment rules that came into force January 1, 2014. These amendments include new rules on determining the shareholders entitled to dividend distribution whereby the list of such shareholders is fixed at date determined in the decision of the General shareholders' meeting on the distribution of dividends. The date shall be not earlier than 10 days and not later than 20 days following the date of such decision. The dividends are to be paid within 25 days from such date to private shareholders registered in the share register of the company and within 1025 days and to nominal holders and professional managers.managers within 10 days from the date on which persons entitled to receive dividends are determined. If shares are held on a depo account with a depository, dividends will be transferred to such shareholders by such depositary within 7seven business days of receipt of funds by the depositary.
Distributions to Shareholders on Liquidation
Under Russian legislation, liquidation of a company results in its termination without the transfer of rights and obligations to other persons as legal successors. The Joint Stock Companies Law and our charter allow us to be liquidated:
Following a decision to liquidate us, the right to manage our affairs would pass to a liquidation commission appointed by a shareholders' meeting. In the event of an involuntary liquidation, the court may assign the duty to liquidate the company to its shareholders. Creditors may file claims within a period to be determined by the liquidation commission, but such 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 gives creditors the following order of priority during liquidation:
Claims of creditors in obligations secured by a pledge of the company's property ("secured claims") are satisfied out of the proceeds of sale of the pledged property prior to claims of any other
creditors except for the creditors of the first and second priorities described above, provided that claims of such creditors arose before the pledge agreements in respect of the company's property were made. To the extent that the proceeds of sale of the pledged property are not sufficient to satisfy secured claims, the latter are satisfied simultaneously with claims of the fourth priority creditors as described above.
The Federal Law on Insolvency (Bankruptcy), however, provides for a different order of priority for creditors' claims in the event of bankruptcy.
The remaining assets of a company are distributed among shareholders in the following order of priority:
The Civil Code of the Russian Federation and the Joint Stock Companies Law generally provide that shareholders in a Russian joint stock company are not liable for the obligations of a joint stock company and bear only the risk of loss of their investments. 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:
Thus, a shareholder of an effective parent is not itself liablesubsidiary (except for the debtsvoting of the effective parent'sparent in a shareholders' meeting of its effective subsidiary unless that shareholderand approval by the effective parent's governing body of a transaction if such approval is itself an effective parentrequired under the charter of the effective parent. Accordingly, a shareholder will not be personally liable for our debtsparent or those of ourthe effective subsidiaries unless such shareholder controls our business and the conditions set forth above are met.
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 actionact or omission 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 actionact or omission would be insolvency of this effective subsidiary. 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.
Charter Capital Increase
We may increase our charter capital by:
A decision on any issuance of shares or securities convertible into shares by closedprivate 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 of a shareholders' meeting. Otherwise, a decision to increase the charter capital by increasing the nominalpar 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 boardBoard of directors.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 Joint Stock Companies Law requires that the value of newly issued shares be determined by the board of directors based on their market value but not less than their nominalpar value. The price of newly issued shares for existing shareholders exercising their pre-emptive right to purchase shares could be less than the price paid by third parties, but not less than 90% of the price paid by third parties. Fees paid to intermediaries may not exceed 10% of the shares placement price. The board of directors
shall value any in-kind contributions for 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:
Charter Capital Decrease; Share Buy-Backs
The Joint Stock Companies Law 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 opena public joint stock company. The Joint Stock Companies Law and our charter require that any decision to reduce our charter capital through the repurchase and cancellation of shares, be made by a majority vote of a shareholders' meeting and through reduction of the nominalpar value of shares, by a three-quarter majority vote of a shareholders' meeting. Additionally, within three business days of a decision to reduce our charter capital, we must notify the federal executive body in charge of the state registration of legal entities on the decision taken and publish within the same 3-daythree-day period a notice regarding the charter capital reduction, as well as a second notice one month after the first notice is published. Our creditors, whose claims arose before the decision on the charter capital decrease was taken, would then have the right to demand, in court, within 30 days of the second publication of the notice, early termination or settlement of relevant obligations by us, as well as compensation for damages.
The Joint Stock Companies Law and our charter allow our shareholders or the boardBoard of directorsDirectors 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. Repurchased shares do not bear voting rights.
Shares repurchased pursuant to a decision of our shareholders' meeting to decrease the overall number of shares are cancelled at their redemption.
The Joint Stock Companies Law allows us to repurchase our shares only if, at the time of repurchase:
Our subsidiaries are not restricted from purchasing our shares, and our subsidiaries can vote these shares.
The Joint Stock Companies Law 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:
We may spend up to 10% of our net assets calculated under RAS 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-rata basis. Repurchase of the shares is made at a price agreed on by the board of directors, but shallit should not be less than the market price.
Registration and Transfer of Shares
Russian legislation requires that a joint stock company ensures maintenance of a register of its shareholders. Ownership of our registered shares is evidenced solelyshareholders, which for a public joint stock company, shall be maintained 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.a registrar. Registrar NIKoil OJSC had maintained our register of shareholders since May 10, 2000. In July 2014, it has been merged into Independent Registration Company JSC (known as Computershare Registrar CJSCJSC prior to October 6, 2015) which now maintains our register of shareholders by way of universal succession.
The Federal Law No. 414-FZ "On the Central Depositary" dated December 7, 2011 (the "Central Depositary Law"), which came into force on January 1, 2012, set out a legal framework for establishment and operation of the central depositary. On November 6, 2012, the Russian Federal Financial Markets Service granted the JSC National Settlement Depositary the status of central depositary which opened its nominee holder accounts in, among others, all securities registers of the issuers which are obliged to disclose information in accordance with Russian securities law. As we are
required to make public disclosures, the above requirement is applicable to us, which means that the central depositary became the only person having a nominee holder account in our share register. Also, the Central Depositary Law prohibits persons maintaining securities registers from opening and depositing securities (save for limited exceptions) to other nominee holder accounts from the date of the opening of a nominee holder account with the central depositary.
Ownership of our registered shares is evidenced by entries made in the register of shareholders, on the books of the central depositary or a Russian licensed depositary. Any of our shareholders may obtain an extract from the register of our shareholders maintained by the registrar or from their respective depositary, as the case may be, certifying the number of shares that such shareholder holds. We are also entitled to obtain an extract from our shareholders' register which sets out all of our shareholders registered directly therein. In addition, we are entitled to obtain a list of nominal holders that opened depo accounts with the central depository, as well as a list of entities that have accounts opened with the nominal holders, given that such list is provided by the relevant nominal holder. However, we are unable to monitor transfers of our shares that are held on the books of depositaries registered with the central depository because underlying shareholders have no obligation to reveal and such depositaries have no obligation to notify us about such transfers. As a result, we can currently only identify our actual shareholders in a limited number of cases provided for by Russian law, including when requesting our registrar and the central depository to compile a list of shareholders of record for the General Shareholders' Meeting and when shareholders and ADS holders provide voting instructions together with disclosure of information, including ownership information, in accordance with Russian securities regulations.
The purchase, sale or other transfer of shares is accomplished through the registration of the transfer in the shareholder 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 those 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, except in certain instances provided for by Russian legislation, and may be challenged in court.
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.
Russian securities regulations require us to make the following periodic public disclosures and filings:
any material claim against us, obtainment or revocation of material licenses, entry into certain transactions, as well as shareholders' and certain board of directors' resolutions and certain information regarding our material subsidiaries;
General Shareholders' Meetings
Procedure
The powers of a shareholders' meeting are set forth in the Joint Stock Companies Law and in our charter. AIn a public joint stock company a shareholders' meeting may not decide on issues that are not included in the list of its competence by the Joint Stock Companies Law. Among the issues which theour shareholders have the power to decide are:
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, for public joint stock companies Russian law requires a three-quarters majority vote of the voting shares present at a shareholders' meeting to approve the following:
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:
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 and reviewauditing commission. Any agenda proposals or nominations must be provided to the company no later than 100 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 reviewauditing 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 made by the board of directors within five days from the receipt date of the request and 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:
Notice and Participation
AllPursuant to the Joint Stock Companies Law, persons registered in the register of shareholders and entitled to participate in a general shareholders' meeting must be notified of the meeting, whether the meeting is to be held in the form of a meeting or by absentee ballot, no less than 20 days (or 30 days if the agenda includes an item on reorganization) 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, persons registered in the register of shareholders and entitled to participate in the general shareholder's meeting must be notified at least 7050 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.Theclient. The list of shareholderspersons 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 10 days after the date of adoption of the board resolution to hold a general shareholders' meeting nor more than 5025 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 8055 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:
The decision of the Board of Directors to convene the General meeting of shareholders may provide for the possibility to fill the electronic voting ballots online at website on the Internet.
Our charter provides that our entire boardBoard of directors is up for election at each annual general shareholders' meeting. Our board of directorsDirectors 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 to be elected to our boardBoard of directors,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 Joint Stock Companies Law 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 shares, and at least a nine-member board of directors for a joint stock company with more than 10,000 holders of voting shares. 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 boardBoard of directorsDirectors consists of at least seven members, which number may be increased pursuant to a decision of the general meeting of shareholders. Currently, our boardBoard of directorsDirectors consists of nine members.
The Joint Stock Companies Law prohibits a board of directors from acting on issues that fall within the competence of the general shareholders' meeting. Our boardBoard of directorsDirectors has the power to perform the general management of the company, and to decide, among others, the following issues:
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 a majority of elected directors is present.
Our internal regulation "On the Board of Directors of OJSC Mobile TeleSystems"TeleSystems Public Joint Stock Company" (the "Regulation") was approved by the annual shareholders' meeting on June 25, 2013.23, 2016. In accordance with clause 2.2.2 of the Regulation, the members of the boardBoard of directorsDirectors have the right to:
In accordance with clause 2.3.2 of the Regulation, the members of the boardBoard of directorsDirectors must:
Under the Joint Stock Companies Law, certain transactions are defined as "interested party transactions" require approval by disinterested directors or shareholders of the company. "Interested party transactions". Such transactions include transactions involving a member of the board of directors, orthe company's CEO, a member of any executive body of the company (including the company's chief executive office and/or the company's managing organization)management board), any person that owns, together with any affiliates, at least 20% of a company's issued voting sharescontrolling the company, or any person who is able to direct the actions ofgive binding instructions to the company, if that person and/or that person's spouse, parents, children, adoptive parents or children, full and half brothers or sisters and/or their affiliates,controlled entities, is/are:
ThePursuant to the Joint Stock Companies Law requires that an interested party transaction by a company with more than 1,000 shareholders (holders of voting shares)"controlling person" is deemed to be approved by a majority voteperson (i) directly or indirectly controlling over 50% of the independent directorsvoting shares in another legal entity (on the basis of an instruction, a shareholders' agreement or other agreements); or (ii) having the company who are not interested inright to appoint 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 anysole executive body or an affiliatemore than half of the governing body of a controlled entity. A controlled entity is understood to be a legal entity directly or indirectly controlled by the controlling entity.
Pursuant to the changes to the Joint Stock Companies Law, which entered into force on January 1, 2017, transactions defined as "interested party transactions" do not require a mandatory prior approval by disinterested directors or shareholders of the company. However, a company shall notify members of a board of directors, management board or a membershareholders (if all members of the board of directors are deemed interested or anya board of directors is not formed in a company) of a contemplated interested party transaction not later than 15 days prior to execution of such transaction, and the company's sole executive body, members of its board of directors and management board or a shareholder owning at least 1% of the company's voting shares may request consent for such interested party transaction.
In public joint stock companies consent or subsequent approval of the transaction shall be granted by a majority of disinterested directors of the company which within one year prior to the decision:
ApprovalConsent or subsequent approval by a majority of shareholders who are not interested in the transaction is requiredshall be granted if:
Approval by a majority of shareholders who are not interested in the transaction may not be required, until the next annual shareholders' meeting, 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.
TheConsent or subsequent approval of interested party transactions is not required nor can be requested in the following instances:
The Joint Stock Companies Law defines a "major transaction" as a transaction, or a number of interrelated transactions involvingentered into beyond the ordinary course of business connected with the direct or indirect acquisition or disposal, or a possibility of disposal (whether directly or indirectly) of property (including intellectual property) having a value of 25% or more of the balance sheet value of the assets of a company determined under RAS, withas well as in other cases provided by the exceptionJoint Stock Company Law.
Consent or subsequent approval of major transactions conductedis not required nor can be requested in the ordinary coursefollowing instances:
Major transactions involving assets having a value ranging from 25% to 50% of the balance sheet value of the assets of a company determined under RAS 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 having a value in excess of 50% of the balance sheet value of the assets of a company determined under RAS require a three-quarters majority vote of a shareholders' meeting.
Anti-takeover Protection
Russian legislation requires the following:
register for quorum purposes and vote only 30% of the company's ordinary shares and voting preferred shares (regardless of the size of their actual holdings). These rules also apply to acquisitions resulting in a person or a group of persons owning more than 50% and 75% of a company's issued ordinary shares and voting preferred shares.
securities, and may require such holders to sell such shares and other securities, at the price determined in the manner described in the preceding paragraph but not less than (i) the highest price of the preceding acquisitions byacquisition of the offeror.
company's relevant securities under an offer described in either of the preceding paragraphs as a result of which the offeror and its affiliates acquired over 95% of the company's ordinary shares and voting preferred shares; or (ii) the highest price at which after the expiration date of an offer described in either of the preceding paragraphs the offeror or its affiliates purchased or undertook to purchase the relevant securities.
The above rules may be supplemented through CBR rulemaking, which may result in a wider, narrower or more specific interpretation of these rules by the government and judicial authorities, as well as by market participants.
Pursuant to the Federal Law on Competition, until January 5, 2016, FAS musthad to approve in advance acquisitions of voting shares in a company involving (1) companies with a combined value of assets or combined annual revenues calculated under RAS exceeding a certain threshold, or (2) companies registered asincluded in a register of business entities having more than a 35% share of a certain commodity market or otherwise occupying a dominant position on the market, and which would result in acquisition by a person (or a group of affiliates) of more than 25%, 50% or 75% of voting shares of a joint stock company, or a participation interest according 1/3, 50%, 2/2/3 of voting rights in a limited liability company, or in a transfer between such companies of assets or rights to assets, the value of which exceeds a certain amount.
According to the amendments made by the Federal law No. 275-FZ dated October 5, 2015 starting from January 5, 2016 the regulations in relation to the abovementioned register were repealed and only the combined value of assets or combined annual revenues of the companies involved in the transaction is taken in account. See also "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we are found to have a dominant position in the markets where we operate and are determined to have abused this position, the governmentFAS may regulateinfluence our subscriber tariffs and restrictimpose certain restrictions on our operations."
Pursuant to the Strategic Foreign Investment Law investments resulting in a foreign entity or a group of entities receiving control over a company with strategic importance for the national defense and security of the Russian Federation (a "Strategic Company""strategic company") or acquisition of fixed production assets of a Strategic Companystrategic company having value of at least 25% of its assets calculated under RAS require prior approval from the state authorities. The procedure for issuing such consent involves a special governmental commission on control of foreign investments, ("Governmental Commission"), which was established by the Resolution of
the Government of Russia dated July 6, 2008 as the body responsible
for granting such consents, and FAS, which is authorized to process applications for consent from foreign investors. "Control" means an ability to determine, directly or indirectly, decisions taken by a Strategic Company,strategic company, whether through voting at the general shareholders' (participants') meeting of the Strategic Company,strategic company, participating in the board of directors or management bodies of the Strategic Company,strategic company, or acting as the external management organization of the Strategic Company,strategic company, or otherwise. As a result, "control" will generally be deemed to exist if an entity or a group of entities acquires more than 50% of the shares (or participation interest in share capital) of a Strategic Company,strategic company, or if through contract or securities with voting rights it is able to appoint more than 50% of the members of the board of directors or of the management board of a Strategic Company.strategic company.
Furthermore, if a foreign entity or group of entities holding securities of a Strategic Companystrategic company or other entity that exercises control over this company becomes a direct or indirect holder of voting shares in an amount that is considered to give it direct or indirect control over this company in accordance with the Strategic Foreign Investment Law due to a change in allocation of voting shares pursuant to the procedures provided by Russian law (e.g., as a result of a buy-back of its shares by the relevant company), then such entity or group of entities will have to apply for state approval of its control within three months after it received such control.
In addition, foreign investors are required to notify this authorized governmental agency about any transactions undertaken by them resulting in the acquisition of 5% or more of the charter capital of a Strategic Companystrategic company and other transactions or other actions preapproved in accordance with the Strategic Foreign Investment Law.
On April 8, 2009, MTS OJSC and two of our subsidiaries, Dagtelecom LLC (Dagtelecom LLC has since been merged into MTS) and Sibintertelecom CJSC, were added to the register of companies occupying a dominant position on the market with a market share exceeding 25% for the purpose of the Strategic Foreign Investment Law.
See also "Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—The Strategic Foreign Investment Law imposes certain restrictions on us and our existing and potential foreign shareholders, which could have a material adverse effect on our business, financial condition, results of operations and prospects."
Under Russian law, a person acquiring, directly or indirectly, 5% or more of our common shares is required to notify us and the CBR of, and we must then publicly disclose, such acquisition, as well as any subsequent acquisitions or disposals resulting in the crossing of 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% or 95% thresholds of our outstanding common shares by such person.
A holder of more than 5% of our common shares is required to file with us and the CBR information about its controlling shareholder (if any) or notify us and the CBR about the absence of any such controlling shareholders.
Our subsidiaries are required to notify us and the CBR about the acquisition of our common shares. We are required to publicly disclose the acquisition of our common shares by our subsidiaries.
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. However, the procedure for notifying the Russian tax authorities by foreign companies that are not registered with such tax authorities at the time of their share acquisition remains unclear.
C. Material Contracts
The following is a description of contracts that we and/or our subsidiaries are a party to and that are or may be material to our business.
Eurobonds
On May 28, 2013, we issued U.S. dollar-denominated Loan Participation Notes in the amount of $500 million (RUB 16.4 billion as of December 31, 2013) with an annual interest rate of 5.00% and a maturity in June 2023. The proceeds will be used for general corporate purposes. The notes were issued by MTS International Funding Limited, a private company organized and existing as a private limited company under the laws of Ireland, and are listed on the Irish Stock Exchange. Proceeds were on-lent to us pursuant to a loan agreement between us and MTS International Funding Limited.
The loan agreements relating to our notes due 2023 sets forth various occurrences, each of which would constitute an event of default. If an event of default, other than an event of default arising from events of bankruptcy, insolvency or bankruptcy-related reorganization, occurs and is continuing, either the lender, the trustee or the holders of at least 25% in principal amount of the outstanding notes may accelerate the maturity of all of the notes. If an event of default arising from events of our bankruptcy, insolvency or bankruptcy-related reorganization occurs and is continuing, then the principal of, and accrued interest on, all of the notes will automatically become immediately due and payable without any declaration or other act on the part of the lender, holders of notes or the trustee.
Covenants in the loan agreement relating to our notes due 2023 limit our ability to create liens on our properties, merge or consolidate with another person or convey our properties and assets to another person. In addition, if we experience certain types of mergers, consolidations or other changes in control, noteholders will have the right to require us to redeem the notes at 101% of their principal amount, plus accrued interest. We are also required to take all commercially reasonable steps necessary to maintain a rating of the notes from Moody's or Standard & Poor's. If we fail to meet these covenants, after certain notice and cure periods, the noteholders can accelerate the debt to be immediately due and payable.
On April 3, 2013, we issued exchange-traded Series 1 ruble bond on Moscow Exchange. The bond is worth RUB 10 billion and has a maturity of ten years. Coupons are to be paid semiannually at the rate of 8.25%. Bond holders will have the right under a five-year put option to sell the bonds to us. The proceeds from the bond replacementplacement will be used for general corporate needs.
On September 2, 2016, we issued a RUB 10 billion exchange-traded Series 2 bonds with a maturity of 15 years and a two year put option on Moscow Exchange. Coupons are to be paid semiannually at the rate of 9.4%. The proceeds from bonds will be used for general corporate needs.
D. Exchange Controls
The Federal Law on Currency Regulation and Currency Control which came into effect on June 18, 2004 sets forth certain restrictions on settlements between residents of Russia with respect to operations involving foreign securities (including ADSs), including requirements for settlement in Russian rubles.
Repatriation of Export Proceeds
Russian companies must repatriate 100% of their receivables from the export of goods and services (with a limited number of exceptions concerning, in particular, certain types of secured financing).
Restrictions on the remittance of dividends, interest or other payments to non-residents
The Federal Law on Foreign Investments in the Russian Federation of July 9, 1999 specifically guarantees foreign investors the right to repatriate their earnings from Russian investments. However, the evolving Russian exchange control regime may materially affect your ability to do so.
Currently, ruble dividends on common shares may be converted into U.S. dollars without restriction. However, the ability to convert rubles into U.S. dollars is also subject to the availability of U.S. dollars in Russia's currency markets. Although there is an existing market within Russia for the conversion of rubles into U.S. dollars, including the interbank currency exchange and over-the-counter and currency futures markets, the further development of this market is uncertain.
E. Taxation
Certain Russian Tax Consequences
The following discussion describes the material Russian corporate income tax and personal income tax consequences to you if you are a U.S. holder of ADSs and a resident of the United States for purposes of the United States—Russia income tax treaty and are fully eligible for benefits under the United States—Russia income tax treaty. Subject to certain provisions of the United States—Russia income tax treaty relating to limitations on benefits, a U.S. resident under the treaty is generally defined as a person liable, under the laws of the United States, to U.S. tax (other than taxes with respect to only of income from sources in the United States or capital situated therein) by reason of your domicile, residence, citizenship, place of incorporation, or any other similar criterion (and, for income derived by a partnership, trust or estate, residence is determined in accordance with the residence of the person liable to tax with respect to such income). The treaty provides for a procedure to resolve matters where a resident of the United States qualifies as a Russian tax resident under Russian domestic rules. The treaty also provides for the non-application of treaty benefits to certain types of entities.
Additionally, the benefits under the United States—Russia income tax treaty discussed in this document generally are not available to U.S. persons who hold ADSs in connection with the conduct of a business in the Russian Federation through a permanent establishment as defined in the United States—Russia income tax treaty. Subject to certain exceptions, a U.S. person's permanent establishment under the United States—Russia income tax treaty is a fixed place of business through which such person carries on business activities in the Russian Federation (generally including, but not limited to, a place of management, a branch, an office and a factory). Under certain circumstances, a U.S. person may be deemed to have a permanent establishment in the Russian Federation as a result of activities carried on in the Russian Federation through agents of the U.S. person. This summary does not address the treatment of holders described in this paragraph.
Treaty benefits may be potentially available to U.S. tax residents that are not subject to limitations on treaty benefits under the treaty, do not operate through a permanent establishment in Russia and are foreign legal entities (i.e., a legal entity or organization in each case not organized under Russian law) or individuals not considered Russian tax residents under Russian law. Under current Russian law, the Russian tax residency for individuals is generally determined based on the number of days a person spends in Russia in a 12-month rolling period. Law specifies that an individual present in Russia for an aggregate period of 183 days in any consecutive 12-month period will be considered as a tax resident. Since tax year in Russia is a calendar year the final tax residency status of an individual taxpayer shall still be defined for a whole calendar year by counting the days spent in Russia within that relevant calendar year. Accordingly, to be considered a Russian tax resident, the taxpayer should spend at least 183 days in Russia in a calendar year.Theyear. The following discussion is based on:
All of the foregoing tax consequences are based on information in effect as of the date of this document and are subject to change, possibly on a retroactive basis, after the date of this document.
This discussion is also based, in part, on representations of the depositary, and assumes that each obligation in the deposit agreement and any related agreements will be performed in accordance with its terms. The discussion with respect to Russian legislation is based on our understanding of current Russian law and Russian tax rules, which are subject to frequent change and varying interpretations.
The following discussion is not intended as tax advice to any particular investor. It is also not a complete analysis or listing of all potential Russian corporate income and personal income tax consequences to you of ownership of ADSs. We urge you to consult your own tax adviser regarding the specific Russian tax consequences of the ownership and disposition of ADSs under your own particular factual circumstances.
Specific uncertainties associated with the tax treatment of ADS holders
The Russian tax rules in relation to ADS holders (that would affect U.S. holders) are characterized by significant uncertainties and limited interpretive guidance. Recent amendments to the tax rules have clarified the status of the ADS holders as beneficial owners of the income from the underlying shares by establishing that the custodian holding the depo account with the shares underlying the ADSs acting as the tax agent and determines amounts of the withholding tax based on the information about the ADS holders and their tax residency status as provided by the program depositary. However, the application of the baseline tax rate for ADS holders and any double tax treaty relief is available only if the tax treaty residence of the holder is provided to the custodian along with the other information prescribed by the Tax code. In relation to ADS holders such information is to be provided by the ADS holders to the depositary, who relays it to the custodian, who acts as the tax agent and withholds the taxes when making transferring the dividends to the depositary. It is currently unclear how the depositary will collect the necessary information from ADS holders. Thus, while a U.S. holder may technically be entitled to benefit from the provisions of the United States—Russia income tax treaty, in practice such relief may be difficult or impossible to obtain.
Russian tax law and procedures are also not well developed, and local tax inspectors have considerable autonomy and often interpret tax rules without regard to the rule of law. Both the substantive provisions of Russian tax law and the interpretation and application of those provisions by the Russian tax authorities may be subject to more rapid and unpredictable change than in jurisdictions with more developed capital markets.
Taxation of Dividends
Dividends paid to U.S. holders generally will be subject to Russian withholding tax at a 15% rate. The tax burden may be reduced to 5% or 10% under the United States—Russia income tax treaty for eligible U.S. holders; a 5% rate may potentially apply for U.S. holders who are legal entities owning 10% or more of the company's voting shares, and a 10% rate applies to dividends paid to eligible U.S. holders in other cases, including dividend payments to individuals and legal entities owning less than 10% of the company's voting shares. However, according to the recent amendments to the Tax Code, U.S. holders will only be able to utilize the 5% reduced rate through tax reimbursement procedures, as the tax agent is required to use the baseline tax rate established by the code or the applicable tax treaty, whichever is appropriate. See also "—United States—Russia Income Tax Treaty Procedures."
Provisions of the Tax Code which were effective in 20142015 have introduced 30% withholding tax rate to be applied to the dividends paid out in relation to shares underlying an ADS program where the information regarding the holders of the ADSs including the overall number of securities held in a
specific tax jurisdiction is not provided by the depositary to the custodian holding the depo account with the underlying shares and acting as the tax agent.
From a practical perspective, it may have not been possible for the depositary to collect the necessary information from all ADS holders and submit the relevant information to the custodian. Therefore, with respect to legal entities or organizations who are U.S. holders, the custodian may be obligated to withhold income tax at a rate of 30% from dividend payments made to the trustee, unless the information on the ADS holder, the respective amount of ADS held and its tax residency is provided to the depositary and thereafter to the custodian within 7 days of the date on which the shareholders entitled to dividend payout are determined according the relevant decision of the general shareholders meeting. The same amendments have also introduced an expedited refund process whereby the information regarding the ADSs not provided to the custodian can be submitted within 25 days of the date of the payment of the dividends to the depositary in order for the custodian to refund the difference between the increased 30% tax rate used and the tax rate the respective ADS holders are entitled to according to their tax residency, however this process is new and not tested and it is unclear how it will work in practice. Although non-resident holders of ADSs may apply for a refund of a portion of the tax withheld under an applicable tax treaty, the procedure to do so may be time consuming and no assurance can be given that the Russian tax authorities will grant a refund. See "—United States—Russia Income Tax Treaty Procedures."
With respect to individuals who are U.S. holders of ADSs and who are Russian tax non-residents, the custodian may also be obligated to withhold income tax at the rate of 30% from dividend payments made to the depositary. Where withholding of personal income tax is not performed, individuals who are U.S. holders of ADSs will then be required to submit an annual personal tax return to the Russian tax authorities and pay Russian income tax at a rate of 15% as under Russian law an individual should report on his or her tax liabilities in case the relevant tax was due but not withheld by a tax agent from the relevant payment. When submitting the tax return, individuals who are U.S. holders may claim an application of the reduced rates of withholding tax established by the relevant treaty, provided that the procedures described in "—United States—Russia Income Tax Treaty Procedures" are complied with. Obtaining the respective approvals from the tax authorities may be time-consuming and burdensome.
If the appropriate information is not provided to the depositary for transfer to the custodian in a timely manner, the custodian may have to withhold tax at the 30% rate, and U.S. holders that are legal entities qualifying for a reduced rate under the United States—Russia income tax treaty then may file claims for a refund within three years with the Russian tax authorities.
For individuals claiming treaty relief, the documents substantiating the right for treaty benefits should be submitted to the Russian tax authorities within one year after the end of the year to which these benefits relate. In practice, where withholding is performed, the tax authorities may refuse to refund or credit the 15% tax withheld from payment of dividends to the depositary and, therefore, it is possible that individuals who are U.S. holders may be subject to up to a 30% effective tax rate (general tax rate for Russian tax non-residents) on their share of dividends.
The amendments to the Russian Tax Code, which came into effect from January 1, 2015, exclude dividends from the scope of payments subject to 30% withholding tax rate.
Taxation of Capital Gains
Legal entities and Organizations
Income received by a foreign company from the sale, exchange or other disposal (assuming that such income is not related to a permanent establishment of a foreign company in Russia) of shares (participation interest) in an organization in which over 50% of the assets consist of immovable property located in Russia, as well as financial instruments derived from such shares, is treated as
income derived from a source in the Russian Federation and is subject to withholding tax at a rate of 20%. However, gains arising from the disposition of the securities which are traded on an organised organized
stock exchange are not treated as Russian-source income, and should not be subject to taxation in Russia.
The amount of such income is typically determined as the sales price of shares (participation interest). However, if documentary support for the acquisition cost of the shares (participation interest) is available, the tax may instead be assessed on the basis of the difference between the sales price and the acquisition cost (including other related costs) if documentary evidence of such costs is submitted to the tax agent. The Russian Tax Code also establishes special rules for calculating the tax base for the purposes of transactions with securities. However, an exemption applies if immovable property located in Russia constitutes more than 50% of our assets and the securities are traded on a foreign stock exchange. The determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an on-going basis and the relevant Russian legislation and regulations in this respect are not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia does not currently and will not constitute more than 50% of our assets as at the date of the sale of ADSs by non-residents.
Where the ADSs are sold by legal entities or organizations to persons other than a Russian company or a foreign company or an organization with a registered permanent establishment in Russia, even if the resulting capital gain is considered taxable in Russia, there is currently no mechanism under which the purchaser will be able to withhold the tax and remit it to the Russian budget.
Under the United States—Russia income tax treaty, capital gains from the sale of shares and/or ADSs by eligible U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (the term "fixed assets" is used in the Russian version of the treaty) were to consist of immovable property located in Russia.
Individuals
The taxation of the income of tax non-resident individuals depends on whether this income is received from Russian or non-Russian sources. Russian tax law considers the place of sale as an indicator of source. Accordingly, the sale of securities outside of Russia by individuals who are non-resident holders should not be considered Russian source income and, therefore, should not be taxable in Russia. However, Russian tax law gives no clear indication as to how the place of sale of securities should be defined in this respect. Therefore, the Russian tax authorities may have a certain amount of flexibility in concluding whether a transaction is in Russia or out of Russia.
The sale, exchange or other disposal of the shares and ADSs by non-resident individual holders in Russia will be considered Russian source income and will be subject to tax at a rate of 30% on the difference between the sales price and the acquisition costs of such securities, as well as other documented expenses, such as depositary expenses and broker fees, among others, defined by the tax rules.
Under Russian law, the acquisition costs and related expenses can be deducted at the source of payment if the sale was made by a non-resident holder through a licensed Russian broker, trust manager or other person that carries out operations under agency or commission agreements, or other agreements in favor of a taxpayer. Such party (as defined above) should also act as a tax agent and withhold the applicable tax. Such tax agent will be required to report to the Russian tax authorities the amount of income realized by the non-resident individual and tax withheld upon the sale of the securities.
Otherwise, if the sale is made to individuals but not through a tax agent, generally no withholding needs to be made and the non-resident holder will have an obligation to file a tax return, report his income realized and apply for a deduction of acquisition expenses (which includes filing of support documentation). Although Russian tax law imposes tax agent responsibility only on professional
trustees, brokers or dealers, in practice, the tax authorities may require Russian legal entities and organizations or foreign companies with any registered presence in Russia that are not professional trustees, dealers or brokers to act as tax agents and withhold the applicable tax when purchasing securities from non-resident individuals.
Under the United States—Russia income tax treaty, capital gains from the sale of the ADSs by eligible U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (the term "fixed assets" is used in the Russian version of the United States—Russia Tax Treaty) were to consist of immovable property located in Russia. If this 50% threshold is not met, individuals who are U.S. holders may seek to obtain the benefit of the United States—Russia income tax treaty in relation to capital gains resulting from the sale, exchange or other disposition of the ADSs.
In order to apply the provisions of relevant double tax treaties, the individual holders should receive clearance from the Russian tax authorities as described below. See "—United States—Russia Income Tax Treaty Procedures" below.
United States—Russia Income Tax Treaty Procedures
The Russian Tax Code does not contain a requirement that a non-resident holder that is a legal entity or organization must obtain tax treaty clearance from the Russian tax authorities prior to receiving any income in order to qualify for benefits under an applicable tax treaty. However, a non-resident legal entity or organization seeking to obtain relief from or reduction of Russian withholding tax under a tax treaty must provide to a Russian company or foreign company or organization acting through its Russian registered presence, which is a tax agent (i.e., the entity paying income to a non-resident) a confirmation of its tax treaty residence that complies with the applicable requirements and a Russian translation attached to it in advance of receiving the relevant income. The tax residency confirmation needs to be renewed on an annual basis and provided to the payer of income before the first payment of income in each calendar year.
A U.S. holder may obtain the appropriate certification by mailing completed forms, together with the holder's name, taxpayer identification number, the tax period for which certification is required, and other applicable information, to the United States Internal Revenue Service. The procedures for obtaining certification are described in greater detail in the instructions to Internal Revenue Service Form 8802. As obtaining the required certification from the Internal Revenue Service may take at least six to eight weeks, U.S. holders should apply for such certification as soon as possible.
In accordance with the Russian Tax Code, to rely on tax treaty benefits, a non-resident holder who is an individual must present to the tax authorities an official document confirming his residency in the home country issued by the competent authorities in his/her country of residence and also other supporting documentation including a statement confirming the income received and the tax paid in the home country, also confirmed by the relevant foreign tax authorities, duly translated and apostilled or pass through a consular legalization. Technically, such a requirement means that an individual cannot rely on the tax treaty until he or she pays the tax in the jurisdiction of his or her residence. Therefore, advance relief from or reduction of withholding taxes for individuals will generally be impossible as it is very unlikely that the supporting documentation for the treaty relief can be provided to the tax authorities and approval from the latter obtained before any payments are made to individuals. A non-resident holder which is an individual may apply for treaty-based benefits within one year following the end of the tax period in which the relevant income was received and the tax was withheld.
If a non-resident holder which is a legal entity or organization does not obtain double tax treaty relief at the time that income or gains are realized and tax is withheld by a Russian tax agent, the non-resident holder may apply for a refund within three years from the end of the tax period (a calendar year) in which the tax was withheld. To process a claim for a refund, the Russian tax authorities require (i) apostilled or legalized confirmation of the tax treaty residence of the
non-resident at the time the income was paid, (ii) an application for the refund of the tax withheld in a format provided by the Russian tax authorities and (iii) copies of the relevant contracts under which the foreign entity received income, as well as payment documents confirming the payment of the tax withheld to the Russian budget (Form 1012DT for dividends and interest and Form 1011DT for other income are designed by the Russian tax authorities to combine requirements (i) and (ii) specified above). The Russian tax authorities may require a Russian translation of the above documents if they are prepared in a foreign language. The refund of the tax withheld should be granted within one month of the filing of the above set of documents with the Russian tax authorities. However, procedures for processing such claims have not been clearly established and there is significant uncertainty regarding the availability and timing of such refunds.
Recent amendments to the Tax Code have established additional requirements to the reimbursement procedure referred to above, identifying further documents that need to be provided to the tax authorities. These include: 1) a document confirming the rights of the ADS holder to the ADS as of the date on which the shareholders entitled to the dividend payout are set according to the relevant decision of the General shareholders meeting, 2) a document evidencing the actual amount of income received by the ADS holder, 3) a document with information about the custodian that transferred the dividend amounts to the depositary, and 4) documents confirming the ADS holder's compliance with the requirements of the Tax Code and/or the relevant income tax treaty provisions necessary for application of a reduced rate. The procedures referred to above are new and no assurance can be given that the custodian will be able to apply the respective double tax treaties when paying dividends to non-resident holders or that ADS holders would be successful in receiving relevant tax refunds.
Neither the depositary nor us has or will have any obligation to assist an ADS holder with the completion and filing of any tax forms.
Stamp Duties
No Russian stamp duty will be payable by the holders of ADSs upon carrying out of transactions with the securities as discussed above (i.e., on a purchase of the securities, sale of the securities, etc.).
Certain United States Federal Income Tax Consequences
The following is a general description of certain material United States federal income tax consequences that apply to you if you are, for United States federal income tax purposes, a beneficial owner of ADSs that is an individual who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia, an estate the income of which is subject to U.S. federal income tax regardless of its source, or a trust, if a United States court can exercise primary supervision over the administration of the trust and one or more United States persons can control all substantial trust decisions, or if the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person (in each case, a "U.S. Holder"). This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the Internal Revenue Service ("IRS"), all as publicly available and in effect as of the date of this document. These authorities are subject to differing interpretations and may change, possibly retroactively, resulting in U.S. federal income tax consequences different from those discussed below. No ruling has been or will be sought from the IRS
with respect to the matters discussed below, and there can be no assurance that the IRS will not take a contrary position regarding the tax consequences of the acquisition, ownership or disposition of ADSs, or that any such contrary position would not be sustained by a court. If a partnership (including anyan entity treated as a partnership for United States federal income tax purposes)purposes is an owner of ADSs, the United States federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Accordingly, partnerships that hold ADSs and partners in such partnerships are urged to consult their tax advisors regarding the specific U.S. federal income tax consequences to them. The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations such as:
In addition, this summary is limited to U.S. Holders holding ADSs as "capital assets" within the meaning of Section 1221 of the Code and whose functional currency is the U.S. dollar. The discussion below does not address the effect of the recently effective Medicare tax on "net investment income" or of any United States state or local tax law or foreign tax law. This discussion also does not address any tax consequences relating to the direct ownership of ordinary shares.
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with their terms. For purposes of applying United States federal income tax law, we believe, and the following discussion assumes, that a holder of anADSan ADS should be treated as the owner of the underlying shares of common stock represented by that ADS, although this matter is not free from doubt.
The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the shares underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the underlying shares. Accordingly, the analysis of the creditability of Russian withholding taxes described below and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders (discussed below) could be affected by actions taken by intermediaries in the chain of ownership between the holder of ADSs and our company if as a result of such actions the holders of ADSs are not properly treated as beneficial owners of underlying shares and future actions that may be taken by the U.S. Treasury. The remainder of this discussion assumes that a holder of an ADS will be treated as the beneficial owner of the underlying shares of common stock represented by such ADS for United States federal income tax purposes.
Taxation of Distributions on ADSs
Subject to the passive foreign investment company rules described below, for United States federal income tax purposes, the gross amount of a distribution, including any Russian withholding taxes, paid by us with respect to ADSs will be treated as a taxable foreign source dividend on the date of actual or constructive receipt by the depositary to the extent of our current and accumulated earnings and profits, computed in accordance with United States federal income tax principles. If you are a non-corporate U.S. Holder such dividends may be "qualified dividend income" that is taxed at the lower applicable capital gains rate provided that certain conditions are satisfied, including (1) certain holding period requirements are satisfied, (2) either (a) our ADSs continue to be listed on the New York Stock Exchange (or other national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934, as amended, or the Nasdaq Stock Market) or (b) we are eligible for the benefits of the United States—Russia income tax treaty, and (3) we are not, for the taxable year
in which the dividend was paid, or in the preceding taxable year, a "passive foreign investment company" with respect to your ADSs (as discussed below). Distributions with respect to ADSs in excess of our current and accumulated earnings and profits will be applied against and will reduce your tax basis in such ADSs and, to the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such ADSs. You should be aware that we do not intend to calculate our earnings and profits for United States federal income tax purposes and, unless we make such calculations, you should assume that any distributions with respect to ADSs generally will be treated as a dividend, even if such distributions would otherwise be treated as a return of capital or as capital gain pursuant to the rules described above. If you are a corporation, you will not be allowed a deduction for dividends received in respect of distributions on ADSs, which is generally available for dividends paid by U.S. corporations. U.S. Holders are strongly urged to consult their tax advisors as to the U.S. federal income tax treatment of any distribution received with respect to ADSs.
The amount of any distribution paid in rubles will equal the U.S. dollar value of such rubles, calculated using the exchange rate in effect on the date of actual or constructive receipt by the depositary, regardless of whether the payment is actually converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange rate fluctuations during the period from the date of receipt by the depositary to the date the rubles are converted into U.S. dollars will be treated as ordinary income or loss from sources within the United States for foreign tax credit limitation purposes. Additionally, you may be required to recognize foreign currency gain or loss on the receipt of a refund of Russian withholding tax pursuant to the United States—Russia income tax treaty to the extent the United States dollar value of the refund differs from the dollar equivalent of that amount on the date of receipt of the underlying distribution.
Russian withholding tax at the rate applicable to you under the United States—Russia income tax treaty should be treated as a foreign income tax that, subject to generally applicable limitations and conditions, may be eligible for credit against your U.S. federal income tax liability or, at your election, may be deducted in computing taxable income. If Russian tax is withheld at a rate in excess of the rate applicable to you under the United States—Russia income tax treaty, you may not be entitled to credits for the excess amount, even though the procedures for claiming refunds and the practical likelihood that refunds will be made available in a timely fashion are uncertain. If the dividends are qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will generally be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends.
The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For United States foreign tax credit purposes, a dividend distribution with respect to the ADSs will be treated as foreign source "passive category income" but could, in the case of certain U.S. Holders, constitute "general category income." The rules relating to the determination of the
foreign tax credit, or deduction in lieu of the foreign tax credit, are complex and you should consult your tax advisors with respect to those rules.
Taxation on Sale or Other Taxable Disposition of ADSs
Subject to the passive foreign investment company rules described below, the sale or other taxable disposition of ADSs will generally result in the recognition of gain or loss in an amount equal to the difference between the amount realized on the sale or other taxable disposition and your adjusted basis in such ADSs. That gain or loss will be capital gain or loss and will be long-term capital gain or loss if you have held the ADSs for more than one year. If you are a non-corporate U.S. Holder, such recognized long-term capital gain is generally subject to a reduced rate of United States federal income tax. Limitations may apply to your ability to offset capital losses against ordinary income.
Gain or loss recognized on the sale of ADSs will generally be treated as U.S. source income or loss for foreign tax credit purposes. The use of any foreign tax credits relating to any Russian taxes imposed upon such sale may be limited. You are strongly urged to consult your tax advisors as to the availability of tax credits for any Russian taxes withheld on the sale of ADSs.
Passive Foreign Investment Company Considerations
A non-U.S. corporation generally will be a passive foreign investment company (a "PFIC"), in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable "look-through" rules, either (i) at least 75% of its gross income is "passive income" or (ii) at least 50% of the average value of its assets is attributable to assets which produce passive income or are held for the production of passive income.
We do not believe that we were a PFIC for the year ended December 31, 2012.2016. However, our possible status as a PFIC must be determined annually and may be dependent in part on the market price of our ADSs, which may be volatile. Therefore, our possible status as a PFIC may be subject to change. Thus there can be no assurance that we will not be treated as a PFIC in our current taxable year or in the future. If we were to be treated as a PFIC, U.S. Holders generally would be required to pay additional taxes on certain distributions and gains on sales or other dispositions (including pledges) of the ADSs, at tax rates that may be higher than those otherwise applicable. You should consult your tax advisors regarding the application of the PFIC rules to your investment in the ADSs.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs and proceeds from the sale or exchange of ADSs may be subject to information reporting to the IRS and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on IRS Form W-9. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.
Additional Reporting Requirements
Certain U.S. Holders who are individuals may be required to report information relating to an interest in the ADSs, subject to certain exceptions (including an exception for ADSs held in accounts
maintained by certain financial institutions). U.S. Holders should consult their tax advisors regarding the effect, if any, of this requirement on their ownership and disposition of the ADSs.
FATCA
Provisions under Sections 1471 through 1474 of the Code and applicable U.S. Treasury Regulations commonly referred to as "FATCA" generally impose 30% withholding on certain "withholdable payments" and, in the future, may impose such withholding on "foreign passthru payments" made by a "foreign financial institution" (each as defined in the Code) that has entered into an agreement with the IRS to perform certain diligence and reporting obligations with respect to the foreign financial institution's U.S.-owned accounts. Prospective investors should consult their tax advisors regarding the potential impact of FATCA and any non-U.S. legislation implementing FATCA on the investment in ADSs.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The documents that are exhibits to or incorporated by reference in this document can be read at the U.S. Securities and Exchange Commission's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1- 800-SEC-03301-800-SEC-0330 or, from outside the United States, at 1-202- 942-8090.1-202-942-8090. Copies may also be obtained from the SEC website at www.sec.gov. Information about Mobile TeleSystems OJSCPJSC is also available on the Internet at www.mtsgsm.com. Information included in our website does not form part of this document.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates and foreign currency exchange rates. We are subject to market risk deriving from changes in interest rates, which may affect the cost of our financing. Foreign exchange risks exist to the extent our revenues, costs and debt obligations are denominated in currencies other than the functional currency in the countries of our operations.
Interest Rate Risk
We are exposed to variability in cash flow risk related to our variable interest rate debt and exposed to fair value risk related to our fixed-rate notes. As of December 31, 2014,2016, RUB 45,92591,650 million, or 16.2%33.36% of our total indebtedness, includingexcluding capital leases, was variable interest rate debt, while RUB 237,070183,113 million, or 83.8%66.64% of our total indebtedness, includingexcluding capital leases, was fixed interest rate debt.
The table below presents principal cash flows and related weighted average interest rates for indebtedness by contractual maturity dates as of December 31, 2014.
Contractual Maturity Date as of December 31, 2014:
2016:
Indebtedness | Currency | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | Annual interest rate (Actual interest rate at December 31, 2014) | Currency | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | Annual interest rate (Actual interest rate at December 31, 2016) | ||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (amounts in millions of RUB) | (amounts in millions of RUB) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Variable debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Sberbank | RUB | — | 12,000 | 12,000 | 12,000 | 14,000 | — | 50,000 | 10.90 | % | ||||||||||||||||||||||||||||||||||||||||||
Skandinavska Enskilda Banken AB | USD | 1,781 | 1,645 | 762 | — | — | — | 4,188 | 0.59% | USD | 821 | — | — | — | — | — | 821 | 1.54 | % | |||||||||||||||||||||||||||||||||
Skandinavska Enskilda Banken AB | USD | 329 | 329 | 329 | — | — | — | 987 | 2.16% | USD | 355 | — | — | — | — | — | 355 | 3.12 | % | |||||||||||||||||||||||||||||||||
LBBW | EUR | 319 | 319 | 319 | — | — | — | 956 | 1.69% | EUR | 298 | — | — | — | — | — | 298 | 1.30 | % | |||||||||||||||||||||||||||||||||
Credit Agricole Corporate Bank and BNP Paribas | EUR | 473 | 473 | 473 | 473 | — | — | 1,893 | 1.82% | EUR | 442 | 442 | — | — | — | — | 884 | 1.43 | % | |||||||||||||||||||||||||||||||||
Citibank | USD | 1,808 | 1,808 | 1,808 | 1,808 | 1,808 | 4,519 | 13,559 | 2.22 | % | ||||||||||||||||||||||||||||||||||||||||||
Calyon, ING Bank N.V, Nordea Bank AB, Raiffeisen Zentralbank Osterreich AG | USD | 7,018 | 7,018 | 7,018 | 7,018 | 5,616 | 4,214 | 37,901 | 1.51% | USD | 7,566 | 7,566 | 6,055 | 4,543 | — | — | 25,730 | 2.47 | % | |||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total variable debt | 9,920 | 9,784 | 8,900 | 7,491 | 5,616 | 4,214 | 45,925 | 11,290 | 21,816 | 19,863 | 18,351 | 15,808 | 4,519 | 91,647 | ||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average interest rate | 1.46% | 1.48% | 1.51% | 1.52% | 1.51% | 1.51% | 1.50% | 7.01 | % | 7.67 | % | 7.90 | % | 8.08 | % | 8.20 | % | 2.22 | % | 6.85 | % | |||||||||||||||||||||||||||||||
Fixed-rate notes | ||||||||||||||||||||||||||||||||||||||||||||||||||||
MTS OJSC Notes due 2018 | RUB | 136 | — | — | — | — | — | 136 | 12.00% | |||||||||||||||||||||||||||||||||||||||||||
MTS OJSC Notes due 2015 | RUB | 7,541 | — | — | — | — | — | 7,541 | 7.75% | |||||||||||||||||||||||||||||||||||||||||||
MTS OJSC Notes due 2016 | RUB | — | 1,788 | — | — | — | — | 1,788 | 8.75% | |||||||||||||||||||||||||||||||||||||||||||
MTS PJSC Notes due 2018 | RUB | — | 6 | — | — | — | — | 6 | 10.00 | % | ||||||||||||||||||||||||||||||||||||||||||
MTS International Notes due 2020 | USD | — | — | — | — | — | 35,057 | 35,057 | 8.63% | USD | — | — | — | 18,614 | — | — | 18,614 | 8.63 | % | |||||||||||||||||||||||||||||||||
MTS OJSC Notes due 2017 | RUB | — | — | 10,000 | — | — | 10,000 | 8.70% | ||||||||||||||||||||||||||||||||||||||||||||
MTS OJSC Notes due 2020 | RUB | 15,000 | — | — | — | — | — | 15,000 | 8.15% | |||||||||||||||||||||||||||||||||||||||||||
MTS PJSC Notes due 2017 | RUB | 10,000 | — | — | — | — | — | 10,000 | 8.70 | % | ||||||||||||||||||||||||||||||||||||||||||
MTS PJSC Notes due 2020 | RUB | 1,448 | — | — | — | — | — | 1,448 | 9.25 | % | ||||||||||||||||||||||||||||||||||||||||||
MTS International Notes due 2023 | USD | — | — | — | — | — | 26,920 | 26,920 | 5.00% | USD | — | — | — | — | — | 28,299 | 28,299 | 5.00 | % | |||||||||||||||||||||||||||||||||
MTS OJSC Notes due 2015 (A series) | RUB | 12 | — | — | — | — | — | 12 | 0.67% | |||||||||||||||||||||||||||||||||||||||||||
MTS OJSC Notes due 2015 - 2016 (B series) | RUB | 12 | — | — | — | — | — | 12 | 0.54% | |||||||||||||||||||||||||||||||||||||||||||
MTS OJSC Notes due 2021 - 2022 (V series) | RUB | — | — | — | — | — | 12 | 12 | 0.25% | |||||||||||||||||||||||||||||||||||||||||||
MTS OJSC Notes due 2023 | RUB | — | — | — | 10,000 | — | — | 10,000 | 8.25% | |||||||||||||||||||||||||||||||||||||||||||
MTS PJSC Notes due 2022 (V series) | RUB | — | — | — | — | 12 | — | 12 | 0.25 | % | ||||||||||||||||||||||||||||||||||||||||||
MTS PJSC Notes due 2023 | RUB | — | 10,000 | — | — | — | — | 10,000 | 8.25 | % | ||||||||||||||||||||||||||||||||||||||||||
MTS PJSC Notes due 2031 | RUB | — | 10,000 | — | — | — | — | 10,000 | 9.40 | % | ||||||||||||||||||||||||||||||||||||||||||
Fixed-rate bank loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Sberbank | RUB | 5,000 | 20,000 | 15,000 | 15,000 | 20,000 | 5,000 | 80,000 | 8.45% | RUB | 15,000 | 15,000 | 20,000 | 5,000 | — | — | 55,000 | 8.45 | % | |||||||||||||||||||||||||||||||||
Sberbank | RUB | — | 4,000 | 16,000 | — | — | — | 20,000 | 9.96% | RUB | — | 10,000 | 20,000 | — | — | — | 30,000 | 9.85 | % | |||||||||||||||||||||||||||||||||
Sberbank | RUB | — | — | — | 6,000 | 6,000 | 13,000 | 25,000 | 12.05% | RUB | — | — | 10,000 | — | — | — | 10,000 | 9.65 | % | |||||||||||||||||||||||||||||||||
Ekvant | RUB | 36 | 36 | 36 | 36 | 36 | 174 | 356 | 0.00% | RUB | 36 | 36 | 36 | 37 | 36 | 101 | 282 | 0.00 | % | |||||||||||||||||||||||||||||||||
ASHIB | AMD | 176 | — | — | — | — | — | 176 | 13.00% | |||||||||||||||||||||||||||||||||||||||||||
Uzbektelecom | UZS | 58 | — | — | — | — | — | 58 | 10.00% | |||||||||||||||||||||||||||||||||||||||||||
Aloqabank | UZS | — | — | — | — | 42 | 716 | 758 | 12.00% | |||||||||||||||||||||||||||||||||||||||||||
SMM | RUB | 395 | — | — | — | — | — | 395 | 0.00% | |||||||||||||||||||||||||||||||||||||||||||
SMM | RUB | 160 | — | — | — | — | — | 160 | 15.00% | |||||||||||||||||||||||||||||||||||||||||||
SMM | USD | 164 | — | — | — | — | — | 164 | 15.00% | |||||||||||||||||||||||||||||||||||||||||||
Repo 12% Notes due 2018 | RUB | 1,760 | — | — | — | — | — | 1,760 | 19.36% | |||||||||||||||||||||||||||||||||||||||||||
Repo 12% Notes due 2018 | RUB | 1,665 | — | — | — | — | — | 1,665 | 19.36% | |||||||||||||||||||||||||||||||||||||||||||
Other | RUB | 100 | — | — | — | — | — | 100 | 8.25% - 15% | |||||||||||||||||||||||||||||||||||||||||||
Gasprombank | RUB | 4,000 | — | — | — | — | — | 4,000 | 10.90 | % | ||||||||||||||||||||||||||||||||||||||||||
Citibank | RUB | 2,400 | — | — | — | — | — | 2,400 | 9.90 | % | ||||||||||||||||||||||||||||||||||||||||||
ZTE Ukraine | UAH | 12 | 18 | 15 | 8 | — | — | 53 | 28.00 | % | ||||||||||||||||||||||||||||||||||||||||||
ZTE Corporation | USD | 56 | 55 | 48 | — | — | — | 159 | 15.00 | % | ||||||||||||||||||||||||||||||||||||||||||
KB Platina | RUB | 250 | — | — | — | — | — | 250 | 8.00 | % | ||||||||||||||||||||||||||||||||||||||||||
Repo 10% Notes due 2018 | RUB | 996 | — | — | — | — | — | 996 | 10.39 | % | ||||||||||||||||||||||||||||||||||||||||||
Repo 10% Notes due 2018 | RUB | 1,592 | — | — | — | — | — | 1,592 | 10.24 | % | ||||||||||||||||||||||||||||||||||||||||||
Total fixed debt | 32,215 | 25,824 | 41,036 | 31,036 | 26,078 | 80,879 | 237,070 | 35,790 | 45,115 | 50,099 | 23,659 | 48 | 28,400 | 183,111 | ||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average interest rate | 8.71% | 8.62% | 8.61% | 8.46% | 8.29% | 7.97% | 8.44% | 8.39 | % | 8.22 | % | 7.91 | % | 6.61 | % | 4.97 | % | 4.98 | % | 6.85 | % | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
We would have experienced an additional interest expense of approximately RUB 302.6704 million on an annual basis as a result of a hypothetical increase in the LIBOR/EURIBORvariable rates by 1% over the current rate as of December 31, 2014.2016. The average rates of EUR and USD for the year 2014as of December 31, 2016 were used in calculations.
The fair value of our publicly traded fixed-rate notes as of December 31, 2014,2016, ranged from 75.00%99.21% to 98.00%114.83% of the notional amount. As of December 31, 2014,2016, the difference between the carrying value and the fair value of other fixed rate debt, including capital lease obligations, was immaterial. For details of our fixed-rate debt, refer to Note 1715 of our audited consolidated financial statements. The fair value of variable rate debt approximates its carrying value.
We use derivative financial instruments to reduce our exposure to adverse fluctuations in interest rates. We primarily focus on reducing risk caused by the fluctuations in interest rates for our variable-rate long-term debt. According to our policy, we have entered into various variable-to-fixed interest rate swap agreements. The table below presents a summary of our variable-to-fixed interest rate swap agreements.
Type of derivative | Maturity | Notional amount (at inception) | Mark to Market Value as of December 31, 2014 | Maturity | Notional amount (at inception) | Mark to Market Value as of December 31, 2016 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (amounts in millions of Rubles) | | (amounts in millions of Rubles) | ||||||||||||||
Variable-to-fixed Interest Rate Swap Agreements | ||||||||||||||||||
Fixed-to-variable Interest Rate Swap Agreements | ||||||||||||||||||
Swap agreement with VTB to pay a variable interest rate of 6m LIBOR and receive a fixed interest rate of 8.25% | March 2018 | 2,000 | 4.8 | March 2018 | 2,000 | (8.4 | ) | |||||||||||
Swap agreement with Sberbank to pay a variable interest rate of 3m LIBOR and receive a fixed interest rate of 8.45% | March 2020 | 7,000 | (8.2 | ) | March 2020 | 7,000 | (31.2 | ) | ||||||||||
Swap agreement with BNP Paribas to pay a variable interest rate of 6m LIBOR and receive a fixed interest rate of 8.25% | March 2018 | 5,000 | (27.3 | ) | March 2018 | 5,000 | (19.6 | ) | ||||||||||
Swap agreements with Rosbank to pay a variable interest rate of 6m LIBOR and receive a fixed interest rate of 8.25% | March 2018 | 3,000 | 2.9 | March 2018 | 3,000 | (10.0 | ) | |||||||||||
Swap agreement with Merill Lynch to pay a variable interest rate of 3m LIBOR and receive a fixed interest rate of 8.45% | March 2020 | 3,000 | (10.7 | ) |
As of December 31, 2014,2016, approximately 0.12%18.7% of our variable interest rate debt was hedged against interest rate risks. We continue to consider other financial instruments available to us to mitigate exposure to interest rate fluctuations.
We have also entered into several cross-currency interest rate swap agreements. These contracts, which hedge the risk of both interest rate and currency fluctuations, assume periodical exchanges of both principal and interest payments from ruble-denominated amounts to U.S. dollar- and euro-denominated amounts, to be exchanged at specified rates. The rates were determined with reference to the market spot rates upon issuance. These contracts also include an interest rate swap of a fixed U.S. dollar- and euro-denominated interest rate to a fixed ruble-denominated interest rate. All of our cross-currency interest rate swaps agreements mature in 2019 and 2020.
The table below presents a summary of our cross-currency interest rate swap agreements:
Type of derivative | Maturity | Notional amount (at inception) | Mark to Market Value as of December 31, 2014 | Maturity | Notional amount (at inception) | Mark to Market Value as of December 31, 2016 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (amounts in millions of Rubles) | | (amounts in millions of Rubles) | ||||||||||||||
Cross-currency Interest Rate Swap Agreements | ||||||||||||||||||
Swap agreements with Barclays Bank to pay a fixed rates of 7.3675% to 7.3775% and receive a variable interest rate of 6m LIBOR | September 2020 | 11,252 | 5,329 | |||||||||||||||
Swap agreements with Merill Lynch to pay a fixed rates of 7.095% and receive a variable interest rate of 6m LIBOR | September 2020 | 4,180 | 1,997 | |||||||||||||||
Swap agreements with Sberbank to pay a fixed rates of 7.0950% and receive a variable interest rate of 6m LIBOR | September 2020 | 4,219 | 1,812 | |||||||||||||||
Swap agreements with Barclays Bank to pay a fixed rates of 7.3675% to 7.3800% and receive a variable interest rate of 6m LIBOR | September 2020 | 9,718 | 3,397 | |||||||||||||||
Swap agreements with Merill Lynch to pay a fixed rates of 7.17% and receive a variable interest rate of 6m LIBOR | September 2020 | 3,608 | 1,268 | |||||||||||||||
Swap agreements with Sberbank to pay a fixed rates of 7.095% and receive a variable interest rate of 6m LIBOR | September 2020 | 3,644 | 1,278 | |||||||||||||||
Swap agreements with Rosbank to pay a fixed rates of 7.253% to 7.2575% and receive a variable interest rate of 6m LIBOR | September 2020 | 14,065 | 6,383 | September 2020 | 12,147 | 4,183 | ||||||||||||
Swap agreements with Barclays Bank to pay a fixed rates of 8.12% to 8.295% and receive a variable interest rate of 6m LIBOR | June 2019 | 11,252 | 4,361 | |||||||||||||||
Swap agreements with Barclays Bank to pay a fixed rates of 8.115% to 8.295% and receive a variable interest rate of 6m LIBOR | June 2019 | 7,288 | 2,343 | |||||||||||||||
Swap agreements with HSBC bank Plc to pay a fixed rates of 8.13% and receive a variable interest rate of 6m LIBOR | June 2019 | 1,406 | 542 | June 2019 | 911 | 292 | ||||||||||||
Swap agreement with VTB bank to pay a fixed rate of 8.2% and receive a variable interest rate of 6m LIBOR | June 2019 | 4,219 | 1,512 | June 2019 | 2,733 | 872 |
Foreign Currency Risk
The following tables show, for the periods indicated, certain information regarding the exchange rate between the ruble and the U.S. dollar, based on data published by the CBR. These rates may
differ from the actual rates used in preparation of our financial statements and other financial information provided herein.
| Rubles per U.S. dollar | Rubles per U.S. dollar | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years ended December 31, | High | Low | Average(1) | Period End | High | Low | Average(1) | Period End | ||||||||||||||||||
2010 | 31.78 | 28.93 | 30.37 | 30.48 | ||||||||||||||||||||||
2011 | 32.68 | 27.26 | 29.38 | 32.20 | ||||||||||||||||||||||
2012 | 34.04 | 28.95 | 30.97 | 30.37 | 34.04 | 28.95 | 30.97 | 30.37 | ||||||||||||||||||
2013 | 33.47 | 29.93 | 31.98 | 32.73 | 33.47 | 29.93 | 31.98 | 32.73 | ||||||||||||||||||
2014 | 67.79 | 32.66 | 39.34 | 56.26 | 67.79 | 32.66 | 39.34 | 56.26 | ||||||||||||||||||
2015 | 72.88 | 49.18 | 62.01 | 72.88 | ||||||||||||||||||||||
2016 | 83.59 | 60.27 | 66.35 | 60.66 |
| Rubles per U.S. dollar | ||||||
---|---|---|---|---|---|---|---|
| High | Low | |||||
July 2014 | 35.73 | 33.84 | |||||
August 2014 | 36.93 | 35.44 | |||||
September 2014 | 39.39 | 36.80 | |||||
October 2014 | 43.39 | 39.38 | |||||
November 2014 | 49.32 | 41.96 | |||||
December 2014 | 67.79 | 49.32 | |||||
January 2015 | 68.93 | 56.24 | |||||
February 2015 | 69.66 | 60.71 | |||||
March 2015 | 62.68 | 56.43 |
| Rubles per U.S. dollar | ||||||
---|---|---|---|---|---|---|---|
| High | Low | |||||
July 2016 | 67.05 | 62.99 | |||||
August 2016 | 67.05 | 63.55 | |||||
September 2016 | 65.87 | 63.16 | |||||
October 2016 | 63.40 | 62.05 | |||||
November 2016 | 65.86 | 63.20 | |||||
December 2016 | 65.24 | 60.27 | |||||
January 2017 | 60.66 | 59.15 | |||||
February 2017 | 60.31 | 56.77 | |||||
March 2017 | 59.22 | 56.38 |
Source: CBR.
The exchange rate between the ruble and the U.S. dollar quoted by the CBR for April 18, 201521, 2017 was 50.5256.42 rubles per U.S. dollar.
The following tables show, for the periods indicated, certain information regarding the exchange rate between the hryvnia and the U.S. dollar, based on data published by the National Bank of
Ukraine. These rates may differ from the actual rates used in preparation of our financial statements and other financial information provided herein.
| Hryvnias per U.S. dollar | Hryvnias per U.S. dollar | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years ended December 31, | High | Low | Average(1) | Period End | High | Low | Average(1) | Period End | ||||||||||||||||||
2010 | 8.01 | 7.89 | 7.94 | 7.96 | ||||||||||||||||||||||
2011 | 7.99 | 7.93 | 7.97 | 7.99 | ||||||||||||||||||||||
2012 | 7.99 | 7.98 | 7.99 | 7.99 | 7.99 | 7.98 | 7.99 | 7.99 | ||||||||||||||||||
2013 | 7.99 | 7.99 | 7.99 | 7.99 | 7.99 | 7.99 | 7.99 | 7.99 | ||||||||||||||||||
2014 | 15.85 | 7.99 | 12.19 | 15.77 | 15.85 | 7.99 | 12.19 | 15.77 | ||||||||||||||||||
2015 | 30.01 | 15.75 | 21.81 | 24.00 | ||||||||||||||||||||||
2016 | 27.25 | 23.27 | 25.69 | 27.19 |
| Hryvnias per U.S. dollar | ||||||
---|---|---|---|---|---|---|---|
| High | Low | |||||
July 2014 | 12.10 | 11.64 | |||||
August 2014 | 13.89 | 11.96 | |||||
September 2014 | 13.60 | 12.53 | |||||
October 2014 | 12.97 | 12.93 | |||||
November 2014 | 15.77 | 12.95 | |||||
December 2014 | 15.85 | 14.97 | |||||
January 2015 | 16.16 | 15.75 | |||||
February 2015 | 30.01 | 16.15 | |||||
March 2015 | 27.76 | 21.55 |
| Hryvnias per U.S. dollar | ||||||
---|---|---|---|---|---|---|---|
| High | Low | |||||
July 2016 | 24.86 | 24.79 | |||||
August 2016 | 25.65 | 24.78 | |||||
September 2016 | 26.85 | 25.77 | |||||
October 2016 | 25.94 | 25.50 | |||||
November 2016 | 26.35 | 25.52 | |||||
December 2016 | 27.19 | 25.56 | |||||
January 2017 | 27.72 | 26.29 | |||||
February 2017 | 27.26 | 26.91 | |||||
March 2017 | 27.18 | 26.81 |
Source: National Bank of Ukraine.
The exchange rate between the hryvnia and the U.S. dollar quoted by the National Bank of Ukraine for April 20, 201521, 2017 was 21.0526.76 hryvnias per U.S. dollar.
We have exposure to fluctuations in the value of the U.S. dollar relative to the Russian ruble, Ukrainian hryvnia, Turkmen manat and Armenian dram which are the functional currencies in our countries of operation. As a result, we may face translation losses, increased debt service payments and increased capital expenditures and operating costs should these currencies depreciate against the U.S. dollar.
In 2009, we entered into two foreign currency option agreements to manage our exposure to changes in currency exchange rates related to our U.S. dollar-denominated debt obligations. Under the agreements, we have put and call option rights to acquire $80.0 million of U.S. dollars at rates within a range specified in the contracts. The first option agreement to acquire $40.0 million expired in 2010 and was not exercised, whereas the second option agreement to acquire $40.0 million expired unexercised in April 2011. In 2010, we additionally entered into foreign currency option agreements to manage our exposure to changes in currency exchange rates related to our U.S. dollar-denominated eurobonds. Under these agreements, we had put and call option rights to acquire $250.0 million at rates within a range specified in the contracts. These contracts were not designated for hedge accounting purposes and expired unexercised in January 2012.
A significant part of our capital expenditures, borrowings and certain operating costs (roaming expenses, cost of customer equipment and other costs) are either denominated in U.S. dollars or tightly linked to the U.S. dollar exchange rate, and our U.S. dollar-denominated debt represents our primary future risk of exchange loss in U.S. dollar terms. A decline in the value of the ruble, hryvnia, manat, dram or dramsum versus the U.S. dollar would result in currency remeasurement losses as the amount of these currencies required to repay U.S. dollar-denominated debt increases. In addition, if any of the ruble, hryvnia, manat or dram declines against the U.S. dollar and tariffs cannot be maintained for competitive or other reasons, our revenues and operating margins could be materially adversely affected and we could have difficulty repaying or refinancing our U.S. dollar-denominated indebtedness and financing our capital expenditures and operating costs.
A portion of our capital expenditures, borrowings and certain operating costs (roaming expenses, costs of customer equipment and other costs) are also denominated in euros. We currently do not hedge against the risk of decline in the ruble, hryvnia, manat, dram or dramsum against the euro because settlements denominated in euros are not significant.
We would experience a currency exchange loss of RUB 28,9806,722 million on our U.S. dollar-denominated net monetary liabilities as a result of a hypothetical 20.0% increase in the ruble/hryvnia/manat/dramdram/sum to U.S. dollar exchange rate at December 31, 2014.2016. We would experience a currency exchange gain of RUB 4,7672,274 million in the fair value of our euro-denominated net monetary liabilities as a result of a hypothetical 20.0% increase in the ruble/hryvnia/manat/dram to euro exchange rate at December 31, 2014.2016. We are unable to estimate future loss of earnings as a result of such changes.
Item 12. Description of Securities Other Than Equity Securities
(Only Items 12.D.3-4 are applicable.)
D. American Depositary Shares
Category | Depositary Actions | Associated Fee | ||
---|---|---|---|---|
(a) Depositing or substituting the underlying shares | Each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of share distributions, rights and other distributions, issuances pursuant to a stock split declared by the Company, or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or the deposited securities | $5.00 for each 100 ADSs (or portion thereof) | ||
(b) Receiving or distributing dividends | Distribution of stock dividends | $5.00 for each 100 ADSs (or portion thereof) | ||
Distribution of cash | $0.02 or less per ADS (or portion thereof) | |||
(c) Selling or exercising rights | Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities | $5.00 for each 100 ADSs (or portion thereof) | ||
(d) Withdrawing an underlying security | Acceptance of ADRs surrendered for withdrawal of deposited securities or cancellation or reduction of ADSs for any other reason | $5.00 for each 100 ADSs (or portion thereof) | ||
(e) Transferring, splitting or grouping receipts | Transfers, combining or grouping of depositary receipts | $1.50 per ADS |
Category | Depositary Actions | Associated Fee | ||
---|---|---|---|---|
(f) General depositary services, particularly those charged on an annual basis | Other services performed by the depositary in administering the ADRs | $0.02 per ADS (or portion thereof) per calendar year which may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADSs as of the record date or record dates set by the depositary during each calendar year and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions | ||
Custodian and share register related issues, including, without limitation, any inspections of the share register maintained by the Russian share registrar or other confirmation of holdings of deposited securities | $0.01 or less per ADS (or portion thereof) per year which fee shall be assessed against holders of record as of the date set by the depositary not more often than once each calendar year | |||
(g) Expenses of the depositary | Certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges in connection with: | Charges to be assessed against holders as of the record date or dates set by the depositary and payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions | ||
• compliance with foreign exchange control regulations or any law or regulation relating to foreign investment; | ||||
• depositary or its custodian's compliance with applicable law, rule or regulation; | ||||
• stock transfer or other taxes and other governmental charges; | ||||
• cable, telex, facsimile transmission or delivery charges; |
Category | Depositary Actions | Associated Fee | ||
---|---|---|---|---|
• if applicable, transfer or registration fees for the registration or transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities (which are payable by persons depositing shares or holders withdrawing deposited securities); | ||||
• expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency); | ||||
• any other charge payable by depositary or its agents including, without limitation, the custodian, or the agents of the depositary's agents in connection with the servicing of the shares or other deposited securities |
4. All fees and other direct and indirect payments made by the depositary to the foreign issuer of the deposited securities.
The Depositary has agreed to reimburse to us or pay on our behalf certain reasonable expenses related to our ADS program and incurred by us in connection with the program (such as NYSE listing fees, legal and accounting fees incurred with preparation of Form 20-F and ongoing SEC compliance and listing requirements, investor relations expenses, among others). The amounts the Depositary reimbursed or paid are not perforce related to the fees collected by the depositary from ADS holders.
As part of its service to us, the Depositary has agreed to waive fees for the standard costs associated with the administration of our ADS program, associated operating expenses and investor relations advice estimated to total $0.2 million.
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
As of the end of the period covered by this Annual Report on Form 20- F, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective, as of December 31, 2014,2016, to provide reasonable assurance that the information required to be disclosed in filings and submissions under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions about required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordanceconformity with accounting principles generally accepted inInternational Financial Reporting Standards as issued by the United States of America.International Accounting Standards Board.
Internal control over financial reporting refers tois a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordanceconformity with generally accepted accounting principlesInternational Financial Reporting Standards as issued by the International Accounting Standards Board and includes those policies and procedures that:
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 20142016 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework (2013).
As a result of management's evaluation of our internal control over financial reporting, management concludes that internal control over financial reporting as of December 31, 20142016 was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2014,2016, has been audited and assessed as effective by independent registered public accounting firm ZAO Deloitte & Touche CIS who has also audited and reported on our consolidated financial statements.
There were no changes in our internal control over financial reporting during the year-endedyear ended December 31, 20142016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of OJSC Mobile TeleSystems:TeleSystems PJSC:
Moscow, Russia
We have audited the internal control over financial reporting of Mobile TeleSystems OJSCPJSC and subsidiaries (the "Group") as of December 31, 2014,2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Group's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordanceconformity with generally accepted accounting principles.International Financial Reporting Standards as issued by the International Accounting Standards Board. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,International Financial Reporting
Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 20142016, of the Group and our report dated March 27, 201521, 2017 expressed an unqualified opinion on those financial statements.
/s/ ZAO Deloitte & Touche CIS
Moscow, Russia
March 27, 201521, 2017
Management has evaluated, with the participation of our CEO and CFO, whether any changes in our internal control over financial reporting that occurred during the period covered by this annual report have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, management has concluded that no such changes have occurred.
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that Thomas Holtrop is an "audit committee financial expert" as defined in Item 16A of Form 20-F. Mr. Holtrop is "independent" as defined in Rule 10A-3 under the Exchange Act and current New York Stock Exchange listing rules applicable to us. For a description of Mr. Holtrop's experience, please see "Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Key Biographies."
The current version of our Code of Ethics was adopted on February 13, 2014.18, 2016. Our Code of Ethics applies to all of our officers, directors and employees. The new Code of Ethics did not substantively alter any of its requirements as compared with the code of ethics that was in effect prior to the approval of the new Code of Ethics.
A copy of our Code of Ethics is available on our website at www.mtsgsm.com.
Item 16C. Principal Accountant Fees and Services
ZAO Deloitte & Touche CIS has served as our Independent Registered Public Accounting Firm for each of the fiscal years in the two-year period ended December 31, 20132015 and 2014,2016, respectively, for which audited financial statements appear in this Annual Report on Form 20-F. The following table
presents the aggregate fees billed for professional services and other services by ZAO Deloitte & Touche CIS and its affiliates in 20132015 and 2014,2016, respectively.
| Year ended December 31, | Year ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | 2016 | 2015 | ||||||||||
| (in thousands of Russian rubles) | (in thousands of Russian rubles) | ||||||||||||
Audit Fees | 116,960 | 130,196 | 121,580 | 121,580 | ||||||||||
Audit-Related Fees | 11,106 | 3,460 | 4,564 | 14,981 | ||||||||||
Tax Fees | 750 | 1,098 | 1,461 | 332 | ||||||||||
All Other Fees | — | 949 | — | — | ||||||||||
| | | | | | | | | | | | | | |
Total | 128,816 | 135,703 | 127,606 | 136,893 | ||||||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The Audit Fees for the years ended December 31, 20142016 and 20132015 were for the reviews and integrated audits of our consolidated financial statements prepared in accordance with U.S. GAAP,IFRS, reviews and audits of the financial statements of our public subsidiaries prepared in accordance with U.S. GAAP,IFRS, statutory audits. In the year ended December 31, 2013 there were services associated with the documents issued in connection with securities offerings. Integrated audits include all services necessary to form an opinion on our consolidated financial statements and to report on our internal controls over financial reporting.
The Audit-Related Fees for the years ended December 31, 20142016 and 20132015 mainly included fees for agreed-upon procedures related to audited financial statements and procedures to support ongoing investigations related to our former subsidiary in Uzbekistan, Uzdunrobita.
The Tax Fees for the years ended December 31, 20142016 and 2013,2015, respectively, include the fees principally related to tax compliance services.
All Other Fees for the year ended December 31, 2014, primarily relate to a seminar on corporate governance and quality review of segregation of duties for purchasing cycle in MTS Ukraine. No such services were provided during the year ended December 31, 2014.
Audit Committee Pre-Approval Policies and Procedures
The Sarbanes-Oxley Act of 2002 required us to implement a pre-approval process for all engagements with our independent public accountants. In compliance with Sarbanes-Oxley requirements pertaining to auditor independence, our Audit Committee pre-approves the engagement terms and fees of ZAO Deloitte & Touche CIS and its affiliates for all audit and non-audit services, including tax services. Our Audit Committee pre-approved the engagement terms and fees of ZAO Deloitte & Touche CIS and its affiliates for all services performed for the fiscal year ended December 31, 2014.2016.
Item 16D. Exemption from the Listing Standards for Audit Committees
Not Applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any ADSs in the yearsyear ended December 31, 2012, 2013 and 2014.2015.
A total of 90,881 MTS ordinary shares representing 0.004% of our issued share capital were repurchased for RUB 19.7 million during 2013 pursuant to our shareholders' right to demand buy-out following our decision on merger of our subsidiaries into MTS in accordance with applicable laws. These shares were sold pursuant to the requirements of applicable Russian legislation in March 2014.
A total of 9,935 MTS ordinary shares representing 0.0005% of our issued share capital were repurchased for RUB 2.1 million in August 2014 pursuant to our shareholders' right to demand buy-out following our decision on merger of our subsidiaries into MTS in accordance with applicable laws. These shares were sold pursuant to the requirements of applicable legislation in August 2015.
A total of 29,666 MTS shares representing 0.001% of our issued share capital were repurchased for RUB 5.9 million in October 2015 pursuant to our shareholders' right to demand buy-out following our decision on merger of our subsidiaries into MTS in accordance with applicable laws. These shares were used for reduction of our issued share capital in August 2016.
A total of 6,986 MTS shares representing 0.0003% of our issued share capital were repurchased for RUB 1.1 million in February 2016 pursuant to our shareholders' right to demand buy-out following our decision on merger of our subsidiaries into MTS in accordance with applicable laws. These shares were used for reduction of our issued share capital in August 2016.
In October 2016 we announced a tender offer (the "First Tender Offer") for repurchase of MTS ordinary shares (including ordinary shares represented by ADSs) for the amount of up to RUB 4,934 million. Also, our subsidiary Stream Digital LLC and Sistema entered into a purchase agreement (the "Sistema Purchase Agreement")pursuant to which Sistema agreed not to tender and sell any shares in the First Tender Offer and instead agreed to sell to us, following completion of the First Tender Offer, a pro rata number of shares of ordinary shares based on the number of shares tendered in the First Tender Offer. As a result of the First Tender Offer in December 2016 our subsidiary, Stream Digital LLC, repurchased 1,509,914 MTS ordinary shares (including ordinary shares represented by ADSs) representing approximately 0.08% of our issued share capital for RUB 346 million. Simultaneously, Stream Digital LLC repurchased 1,550,495 MTS ordinary shares from Sistema under the Sistema Purchase Agreement representing approximately 0.08% of our issued share capital for RUB 355 million.
In January 2017 we announced a new tender offer (the "Second Tender Offer") for repurchase of MTS ordinary shares (including ordinary shares represented by ADSs) for the amount of up to RUB 4,647 million. Also, our subsidiary Stream Digital LLC and Sistema Finance S.A., a subsidiary of Sistema, entered into a purchase agreement (the "Second Sistema Purchase Agreement") pursuant to which Sistema Finance S.A. together with Sistema and Sistema's affiliated entities agreed not to tender and sell any shares in the Second Tender Offer and instead agreed to sell to us, following completion of the Second Tender Offer, a pro rata number of shares of ordinary shares based on the number of shares purchased in the Second Tender Offer.
As a result of the Second Tender Offer in March 2017 Stream Digital LLC, repurchased 16,022,364 MTS ordinary shares (including ordinary shares represented by ADSs) representing approximately 0.8% of our issued share capital for RUB 4,646 million.
Simultaneously, Stream Digital LLC repurchased repurchased 16,038,892 MTS ordinary shares from Sistema Finance S.A. under the Second Sistema Purchase Agreement representing approximately 0.8% of our issued share capital for RUB 4,651 million.
We are considering the opportunity to launch a new tender offers in future.
See also "Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders."
Item 16F. Change in Registrant's Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
We are a company organized under the laws of the Russian Federation and qualify as a foreign private issuer as such term is defined in Rule 3b-4 of the Exchange Act. In accordance with the NYSE corporate governance rules, listed companies that are foreign private issuers are permitted in some circumstances to follow home country practice in lieu of the provisions of the corporate governance rules contained in Section 303A of the NYSE Listed Company Manual that are applicable to U.S. companies. In addition, foreign private issuers listed on the NYSE must disclose any significant ways in which their corporate governance practices differ from those followed by U.S. companies listed on the NYSE. With regard to our corporate governance practices, these differences can be summarized as follows:
independent directors and having a written charter specifying the committee's purpose and responsibilities, as well as annual performance evaluations of the committee.
We do not currently have a nominating/corporate governance committee. We have a corporate conduct and ethicsgovernance committee comprising of directors and members of management that is responsible for developing and implementing standards for corporate governance and ethics and making recommendations to the Board of Directors on developing our strategy in the area of corporate governance and ethics. This committee is also responsible for conducting annual performance evaluations of the Board of Directors.governance.
We have a remuneration and nomination committee comprising of threefour independent directors. This committee functions pursuant to bylaws approved by the Board of Directors specifying the committee's purpose, duties and responsibilities. The committee is primarily responsible for recommending appointments to key managerial posts, developing a set of requirements and criteria for directors and management executives and developing a remuneration structure and compensation levels for the Board of Directors, the audit committee and management executives (including the CEO). This committee is also responsible for conducting annual performance evaluations of the Board of Directors.
In accordance withWe are required under the New York Stock Exchange listing rules to disclose any significant differences between the corporate governance rules of the NYSEpractices that we follow under Russian law and applicable to foreign private issuers, we also disclose these differences between our corporate governance practiceslisting standards and those requiredfollowed by the NYSE of listed U.S. domestic companies under New York Stock Exchange listing standards. This disclosure is posted on our Internet website at www.mtsgsm.com.(http://www.mtsgsm.com/information/corporate_governance/).
See instead Item 18.
The following financial statements, together with the report of ZAO Deloitte & Touche CIS, are filed as part of this annual report on Form 20-F.
| Page | |||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-1 | |||
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, | ||||
Consolidated | F-2 - F-3 | |||
Consolidated statement of profit and loss for the years ended December 31, 2016, 2015 and 2014 | F-4 | |||
Consolidated | ||||
Consolidated statements of changes in shareholders' equity for the years ended December 31, | ||||
Consolidated | ||||
Notes to the consolidated financial statements |
Exhibits No. | Description | ||
---|---|---|---|
1.1 | Charter of Mobile TeleSystems | ||
1.2 | |||
Alterations and Amendments to the Charter of Mobile TeleSystems | |||
Code of Corporate Conduct and Business Ethics of Mobile TeleSystems | |||
2.1 | Deposit Agreement, dated as of July 6, 2000, by and among, MTS, Morgan Guaranty Trust Company of New York (as depositary), and holders of ADRs is incorporated herein by reference to Exhibit 2.1 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000, on Form 20-F. | ||
2.2 | Amendment No. 1 to Deposit Agreement is incorporated herein by reference to Exhibit (a)(2) to Form F-6 (Registration No 333-12008). | ||
2.3 | Amendment No. 2 to Deposit Agreement is incorporated herein by reference to Exhibit (a)(3) to Form F-6 (Registration No 333-121240). | ||
2.4 | Amendment No. 3 to Deposit Agreement is incorporated herein by reference to Exhibit (a)(4) to Form F-6 (333-145190). | ||
2.5 | Amendment No. 4 to Deposit Agreement is incorporated herein by reference to Exhibit (a)(5) to Form F-6 (Registration No. 333-166178). | ||
2.6 | Listing Prospectus of Mobile TeleSystems PJSC relating to exchange-traded interest-bearing non-convertible documentary bonds dated March 5, 2013 (English translation). | ||
4.1 | Indenture dated as of January 28, 2005 between Mobile TeleSystems Finance S.A., Mobile TeleSystems | ||
4.2 | Indenture dated as of October 14, 2003 between Mobile TeleSystems Finance S.A., Mobile TeleSystems | ||
4.3 | MTS License No. 50789 for provision of mobile radiotelephone communication services using IMT-2000/UMTS mobile radiotelephone networks in the Russian Federation (English translation) is incorporated herein by reference to Exhibit 4.53 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2006, on Form 20-F. |
MTS License No. 765 for provision of mobile radiotelephone communication services in the 900/1800 MHz band in the territory of the Armenia Republic (English translation) is incorporated herein by reference to Exhibit 4.50 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2007, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
MTS Ukraine License No. 546038 for provision of mobile communication services with the right for telecommunication networks maintenance and operation and for telecommunication channels leasing throughout Ukraine (English translation) is incorporated herein by reference to Exhibit 4.33 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS Ukraine License No. 269377 for provision of mobile communication services with the right for telecommunication networks maintenance and operation and for telecommunication channels leasing throughout Ukraine (English translation) is incorporated herein by reference to Exhibit 4.34 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
4.7 | |||
MTS Ukraine License No. 286185 for construction and maintenance of communication networks with movable facilities and provision of services of network usage in Ukraine (English translation) is incorporated herein by reference to Exhibit 4.35 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 105546 for provision of telecommunication services for provision of communication channels in the territory of Ingushetia Republic, | |||
MTS License No. 105547 for provision of local telephone communication services, excluding local telephone communication services using payphones and shared-access facilities in the territory of Buryatiya Republic (English translation) is incorporated herein by reference to Exhibit 4.41 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 105548 for provision of local telephone communication services, excluding local telephone communication services using payphones and shared-access facilities in the territory of Saratov region (English translation) is incorporated herein by reference to Exhibit 4.42 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 105966 for provision of mobile radiotelephone communication services in the territory of Belgorod Region, Bryansk Region, Vladimir Region, Voronezh Region, Ivanovo Region, Kaluga Region, Kostroma Region, Kursk Region, Lipetsk Region, Nizhny Novgorod Region, Orel Region, Ryazan Region, Smolensk Region, Tambov Region, Tver Region, Tula region and Yaroslavl region (English translation) is incorporated herein by reference to Exhibit 4.43 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
MTS License No. 108058 for provision of data communication services excluding data communication services for the purposes of voice data communication in the territory of the Krasnoyarsk region (English translation) is incorporated herein by reference to Exhibit 4.49 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
Exhibits No. | Description | ||
---|---|---|---|
MTS License No. 108060 for provision of telecommunication services for provision of communication channels in the territory of the Tatarstan Republic (English translation) is incorporated herein by reference to Exhibit 4.51 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 108061 for provision of telecommunication services for provision of communication channels in the territory of the Kalmykia Republic and Severnaya | |||
MTS License No. 108062 for provision of telecommunication services for provision of communication channels in the territory of the Krasnoyarsk region (English translation) is incorporated herein by reference to Exhibit 4.53 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 108063 for provision of telecommunication services for provision of communication channels in the territory of the Republic of Bashkortostan (English translation) is incorporated herein by reference to Exhibit 4.54 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 108064 for provision of telecommunication services for provision of communication channels in the territory of the Kemerovo region and Tomsk region (English translation) is incorporated herein by reference to Exhibit 4.55 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 108065 for provision of telematic communication services in the territory of the Krasnoyarsk region (English translation) is incorporated herein by reference to Exhibit 4.56 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 108069 for provision of local telephone communication services using payphones in the territory of the Moscow (English translation) is incorporated herein by reference to Exhibit 4.57 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 108752 for provision of data communication services for the purposes of voice data communication in the territory of the Sverdlovsk region and Khanty Mansiysk Autonomous | |||
MTS License No. 108753 for provision of data communication services for the purposes of voice data communication in the territory of the Nenets Autonomous District (English translation) is incorporated herein by reference to Exhibit 4.60 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
MTS License No. 108754 for provision of data communication services for the purposes of voice data communication in the territory of the Tatarstan Republic (English translation) is incorporated herein by reference to Exhibit 4.61 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 108755 for provision of data communication services for the purposes of voice data communication in the territory of the Vladimir region and Ryazan region (English translation) is incorporated herein by reference to Exhibit 4.62 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 108756 for provision of data communication services for the purposes of voice data communication in the territory of the Jewish Autonomous region and Chukotsk Autonomous region (English translation) is incorporated herein by reference to Exhibit 4.63 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. | |||
MTS License No. 109493 for provision of local telephone communication services, excluding local telephone communication services using payphones and shared-access facilities in the territory of the Chuvashia Republic (English translation) is incorporated herein by reference to Exhibit 4.69 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 109494 for provision of local telephone communication services, excluding local telephone communication services using payphones and shared-access facilities in the territory of the | |||
MTS License No. 110716 for provision of data communication services for the purposes of voice data communication in the territory of the Perm region (English translation) is incorporated herein by reference to Exhibit 4.83 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 110717 for provision of data communication services for the purposes of voice data communication in the territory of the Krasnodar region (English translation) is incorporated herein by reference to Exhibit 4.84 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 110721 for provision of public network mobile radio communication services in the territory of the Rostov region (English translation) is incorporated herein by reference to Exhibit 4.87 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
MTS License No. 110729 for provision of data communication services for the purposes of voice data communication in the territory of the Udmurt Republic (English translation) is incorporated herein by reference to Exhibit 4.90 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 110869 for provision of intra-zone telephone communication services in the territory of the Rostov region (English translation) is incorporated herein by reference to Exhibit 4.101 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 110870 for provision of intra-zone telephone communication services in the territory of the Severnaya | |||
MTS License No. 110871 for provision of intra-zone telephone communication services in the territory of the Krasnodar region (English translation) is incorporated herein by reference to Exhibit 4.103 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 110872 for provision of telecommunication services for provision of communication channels in the territory of the Rostov region (English translation) is incorporated herein by reference to Exhibit 4.104 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 111800 for provision of data communication services excluding data communication services for the purposes of voice data communication in the territory of the Altai Republic (English translation) is incorporated herein by reference to Exhibit 4.110 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 111801 for provision of mobile radiotelephone communication services (GSM-900) in the territory of the Astrakhan region (English translation) is incorporated herein by reference to Exhibit 4.111 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 111802 for provision of telecommunication services for provision of communication channels in the territory of Komi Republic, Kostroma Region, Moscow Region, Tver Region, Moscow (English translation) is incorporated herein by reference to Exhibit 4.112 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 112630 for provision of mobile wireless communication services in the territory of the Moscow Region; Moscow (English translation) is incorporated herein by reference to Exhibit 4.116 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
MTS License No. 113535 for provision of mobile radiotelephone communication services (GSM-1800) in the territory of the | |||
MTS License No. 113537 for provision of mobile radiotelephone communication services (GSM-900/1800) in the territory of the Moldovia Republic (English translation) is incorporated herein by reference to Exhibit 4.121 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 113538 for provision of mobile radiotelephone communication services (GSM-1800) in the territory of the Kalmykia Republic (English translation) is incorporated herein by reference to Exhibit 4.122 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 113541 for provision of mobile radiotelephone communication services (GSM-900/1800) in the territory of the Ingushetia Republic (English translation) is incorporated herein by reference to Exhibit 4.125 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
MTS License No. 113543 for provision of local telephone communication services, excluding local telephone communication services using payphones and shared-access facilities in the territory of the Kemerovo region (English translation) is incorporated herein by reference to Exhibit 4.127 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 114620 for provision of intra-zone telephone communication services in the territory of the Astrakhan region (English translation) is incorporated herein by reference to Exhibit 4.133 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 114621 for provision of intra-zone telephone communication services in the territory of the Kemerovo region (English translation) is incorporated herein by reference to Exhibit 4.134 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
4.48 | |||
MTS License No. 114622 for provision of intra-zone telephone communication services in the territory of the Arkhangelsk region (English translation) is incorporated herein by reference to Exhibit 4.135 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
MTS License No. 114623 for provision of intra-zone telephone communication services in the territory of the Vologda Region. (English translation) is incorporated herein by reference to Exhibit 4.136 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 114624 for provision of intra-zone telephone communication services in the territory of the Kaliningrad region (English translation) is incorporated herein by reference to Exhibit 4.137 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 114625 for provision of intra-zone telephone communication services in the territory of the Murmansk region (English translation) is incorporated herein by reference to Exhibit 4.138 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 114626 for provision of intra-zone telephone communication services in the territory of the St. Petersburg (English translation) is incorporated herein by reference to Exhibit 4.139 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 114627 for provision of intra-zone telephone communication services in the territory of the Komi Republic (English translation) is incorporated herein by reference to Exhibit 4.140 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 114628 for provision of intra-zone telephone communication services in the territory of the Karelia Republic (English translation) is incorporated herein by reference to Exhibit 4.141 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 114629 for provision of intra-zone telephone communication services in the territory of the Novgorod region (English translation) is incorporated herein by reference to Exhibit 4.142 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 115176 for provision of intra-zone telephone communication services in the territory of the Volgograd region (English translation) is incorporated herein by reference to Exhibit 4.144 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 117814 for provision of intra-zone telephone communication services in the territory of the Kurgan region (English translation) is incorporated herein by reference to Exhibit 4.150 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.58 | MTS License No. 117815 for provision of data communication services for the purposes of voice data communication in the territory of the Arkhangelsk region (English translation) is incorporated herein by reference to Exhibit 4.151 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | ||
MTS License No. 117816 for provision of data communication services for the purposes of voice data communication in the territory of the Krasnoyarsk region (English translation) is incorporated herein by reference to Exhibit 4.152 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 117817 for provision of data communication services for the purposes of voice data communication in the territory of the Novosibirsk region (English translation) is incorporated herein by reference to Exhibit 4.153 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 117818 for provision of data communication services for the purposes of voice data communication in the territory of the Leningrad region (English translation) is incorporated herein by reference to Exhibit 4.154 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
4.62 | |||
MTS License No. 117819 for provision of data communication services for the purposes of voice data communication in the territory of the Nizhny Novgorod region (English translation) is incorporated herein by reference to Exhibit 4.155 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 117820 for provision of data communication services for the purposes of voice data communication in the territory of the Omsk region (English translation) is incorporated herein by reference to Exhibit 4.156 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 117821 for provision of data communication services for the purposes of voice data communication in the territory of the Smolensk region (English translation) is incorporated herein by reference to Exhibit 4.157 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 117822 for provision of data communication services for the purposes of voice data communication in the territory of the Novgorod region (English translation) is incorporated herein by reference to Exhibit 4.158 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 117823 for provision of data communication services for the purposes of voice data communication in the territory of the Tula region (English translation) is incorporated herein by reference to Exhibit 4.159 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.67 | MTS License No. 117824 for provision of data communication services for the purposes of voice data communication in the territory of the Volgograd region (English translation) is incorporated herein by reference to Exhibit 4.160 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | ||
MTS License No. 117825 for provision of data communication services for the purposes of voice data communication in the territory of the Kemerovo region (English translation) is incorporated herein by reference to Exhibit 4.161 Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013, on Form 20-F. | |||
MTS License No. 122269 for provision of intrazonal telephone communication services in the territory of the Ivanovo region (English translation) | |||
MTS License No. 123560 for provision of data transmission services for the purpose of voice transmission in the territory of the Samara region (English translation) |
4.71 | |||
MTS License No. 122267 for provision of data transmission services for the purpose of voice transmission in the territory of the Tver region (English translation) | |||
MTS License No. 124994 for provision of data transmission services for the purpose of voice transmission in the territory of St. Petersburg (English translation) | |||
MTS License No. 123559 for provision of intrazonal telephone communication services in the territory of the Samara region (English translation) | |||
MTS License No. 122730 for provision of data transmission services for the purpose of voice transmission in the territory of the Tambov region (English translation) | |||
MGTS License No. 125652 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Penza region (English translation) |
Exhibits No. | Description | ||
---|---|---|---|
4.76 | MTS License No. 124924 for provision of intrazonal telephone communication services in the territory of the Republic of Tatarstan (Tatarstan) (English translation) | ||
MGTS License No. 125848 for provision of local telephone communication services, excluding local telephone communication services using payphones and shared-access facilities in the territory of the Moscow region (English translation) | |||
MTS License No. 125651 for provision of telematic communication services in the territory of the Penza region (English translation) | |||
MGTS License No. 125847 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of Moscow (English translation) | |||
MGTS License No. 125854 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Moscow region (English translation) |
4.81 | |||
MTS License No. 122731 for provision of data transmission services for the purpose of voice transmission in the territory of the Arkhangelsk region (English translation) | |||
MTS License No. 122568 for provision of mobile radio telephone services in the territory of the Ulyanovsk region (English translation) | |||
MTS License No. 122729 for provision of intrazonal telephone communication services in the territory of the Kursk region (English translation) | |||
MTS License No. 123658 for provision of intrazonal telephone communication services (GSM-900/1800 network) in the territory of the Nizny Novgorod region (English translation) |
Exhibits No. | Description | ||
---|---|---|---|
4.85 | MTS License No. 122567 for provision of mobile radio telephone services (GSM-900/1800 network) in the territory of the Saratov region (English translation) | ||
MTS License No. 122569 for provision of mobile radio telephone services (GSM-900/1800 network) in the territory of the Tomsk region (English translation) | |||
MTS License No. 123659 for provision of communication services for the purpose of wire broadcasting in the territory of the Nizny Novgorod region (English translation) | |||
Sputnikovoe TV License No. 123687 for provision of communication services for the purpose of broadcasting in the territory of the Adygea Republic, the Altai Republic, the Bashkortostan Republic, the | |||
MTS License No. 124558 for provision of communications services for the provision of communication channels in the territory of the Jewish Autonomous region (English translation) |
4.90 | |||
MTS License No. 122552 for provision of mobile radio telephone services in the territory of the Samara region (English translation) | |||
Exhibits No. | Description | ||
---|---|---|---|
4.91 | MTS License No. 122553 for provision of mobile radio telephone services in the territory of the Tyva Republic (English translation) | ||
MTS License No. 122554 for provision of mobile radio telephone services in the territory of the Stavropol | |||
MTS License No. 122560 for provision of mobile radio telephone services (GSM-900/1800 networks) in the territory of the Krasnoyarsk region (English translation) | |||
MTS License No. 122556 for provision of mobile radio telephone services (GSM-900/1800 networks) in the territory of the Khakassiya Republic (English translation) | |||
MTS License No. 122566 for provision of mobile radio telephone services (GSM-900/1800 networks) in the territory of the Tatarstan Republic (English translation) | |||
MTS License No. 120614 (GSM-900/1800 networks) for provision of mobile radio telephone services in the territory of the Adygea Republic (English translation) |
4.97 | |||
MTS License No. 121166 for provision of mobile radio telephone services in the territory of Moscow, the Moscow region (English translation) | |||
MTS License No. 122193 for provision of mobile radio telephone services (GSM-900/1800 networks) in the territory of the Komi Republic (English translation) | |||
MTS License No. 119884 for provision of mobile radio telephone services (GSM-900/1800 networks) in the territory of the Krasnodar region (English translation) | |||
MTS License No. 119985 for provision of communication services for the purpose of broadcasting in the territory of the Chukotsk Autonomous region (English translation) |
Exhibits No. | Description | ||
---|---|---|---|
4.101 | MTS License No. 122268 for provision of communication services for the purpose of cable broadcasting in the territory of the Russian Federation (English translation) | ||
MTS License No. 119295 for provision of communication services for the provision of communication channels in the territory of the Belgorod region, the Bryansk region, the Voronezh region, the Kursk region, the Lipetsk region, the Orel region (English translation) | |||
MTS License No. 120615 for provision of mobile radio telephone services (GSM-900/1800 networks) in the territory of the Bashkortostan Republic (English translation) | |||
MGTS License No. 112630 for provision of mobile radio telephone services in the territory of Moscow, the Moscow region (English translation) | |||
Sibintertelecom | |||
MTS License No. 118158 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Zabaykalsky | |||
4.108 | MTS License No. 138261 for provision of for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the | ||
4.109 | MTS License No. 138258 for provision of for provision of telematic communication services in the territory of the Novosibirsk region (English translation) is incorporated herein by reference to Exhibit 4.195 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.111 | MTS License No. 138260 for provision of data transmission services for the purpose of voice transmission in the territory of the Republic of Bashkortostan (English translation) is incorporated herein by reference to Exhibit 4.198 to the | ||
4.112 | MTS License No. 136447 for provision of mobile radio telephone services in the | ||
4.113 | MTS License No. 136451 for provision of mobile radio telephone services in the | ||
4.114 | MTS License No. 137711 for provision of communication services for the purpose of wire broadcasting in the territory of the Chelyabinsk region (English translation) is incorporated herein by reference to Exhibit 4.201 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.115 | MTS License No. 137565 for provision of data transmission services for the purpose of voice transmission in the territory of the Rostov region (English translation) is incorporated herein by reference to Exhibit 4.202 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.116 | MTS License No. 137567 for provision of telematic communication services in the territory of the Komi |
Exhibits No. | Description | ||
---|---|---|---|
4.117 | MTS License No. 135967 for provision of intrazonal telephone communication services in the territory of the Chelyabinsk Region (English translation) is incorporated herein by reference to Exhibit 4.206 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.119 | MTS License No. 136449 for provision of mobile radio telephone services in the territory of the Republic of North Ossetia-Alania (English translation) is incorporated herein by reference to Exhibit 4.206 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.120 | MTS License No. 136450 for provision of mobile radio telephone services in the territory of the Perm Territory, excluding the Komi-Permyak area (English translation) is incorporated herein by reference to Exhibit 4.207 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.121 | MTS License No. 137566 for provision of intrazonal telephone communication services in the territory of Moscow (English translation) is incorporated herein by reference to Exhibit 4.208 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.122 | MTS License No. 135957 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Primorsky Territory (English translation) is incorporated herein by reference to Exhibit 4.209 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.123 | MTS License No. 135961 for provision of telematic communication services in the territory of the Primorsky Territory (English translation) is incorporated herein by reference to Exhibit 4.210 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.124 | MTS License No. 135958 for provision of mobile radio telephone services in the territory of Republic of Kalmykia (English translation) is incorporated herein by reference to Exhibit 4.211 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.125 | MTS License No. 135965 for provision of communications services for the provision of communication channels in the territory of the Mordovia Republic (English translation) is incorporated herein by reference to Exhibit 4.212 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.126 | MTS License No. 135963 for provision of communications services for the provision of communication channels in the territory of the Aginski Buryatski Autonomous District of the Penza region (English translation) is incorporated herein by reference to Exhibit 4.213 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.127 | MTS License No. 135962 for provision of intrazonal telephone communication services in the territory of the Tyumen region, YamaloNenetsk Autonomous region (English translation) is incorporated herein by reference to Exhibit 4.214 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.128 | MTS License No. 135960 for provision of intrazonal telephone communication services in the territory of the Ulyanovsk region (English translation) is incorporated herein by reference to Exhibit 4.215 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.129 | MTS License No. 135959 for provision of communications services for the provision of communication channels in the territory of Aginski Buryatski Autonomous District of the Zabaikalye Territory (English translation) is incorporated herein by reference to Exhibit 4.216 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.130 | MTS License No. 135506 for provision of data transmission services for the purpose of voice transmission in the territory of Moscow (English translation) | ||
4.131 | MTS License No. 135026 for provision of communications services for the provision of communication channels in the territory of the Sakha Republic (Yakutia), the Khabarovsk Territory, the Zabaikalye Territory (excluding the Aginski Buryatski Autonomous District) (English translation) is incorporated herein by reference to Exhibit 4.218 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.132 | MTS License No. 134508 for provision of data transmission services for the purpose of voice transmission in the territory of the Moscow region (English translation) is incorporated herein by reference to Exhibit 4.219 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.133 | MTS License No. 134510 for provision of data transmission services for the purpose of voice transmission in the territory of the Ivanovo region (English translation) is incorporated herein by reference to Exhibit 4.220 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.134 | MTS License No. 134507 for provision of telematic communication services in the territory of the Rostov region (English translation) is incorporated herein by reference to Exhibit 4.221 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.135 | MTS License No. 135029 for provision of data transmission services for the purpose of voice transmission in the territory of the Primorye Territory, the Sakhalin region, Irkutsk region (excluding the Ust-Ordyn Buryat District) (English translation) is incorporated herein by reference to Exhibit 4.222 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.136 | MTS License No. 134511 for provision of communications services for the provision of communication channels in the territory of the Mari El Republic (English translation) is incorporated herein by reference to Exhibit 4.223 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.137 | MTS License No. 134506 for provision of communications services for the provision of communication channels in the territory of the Vladimir region, the Kaluga region, the Pskov region, the Ryazan region, the Smolensk region, the Tula region (English translation) is incorporated herein by reference to Exhibit 4.2241 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.138 | MTS License No. 134512 for provision of data transmission services for the purpose of voice transmission in the territory of the Kaluga Region (English translation) is incorporated herein by reference to Exhibit 4.225 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.139 | MTS License No. 135027 for provision of intrazonal telephone communication services in the territory of the Moscow region (English translation) is incorporated herein by reference to Exhibit 4.226 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.140 | MTS License No. 135028 for provision of intrazonal telephone communication services in the territory of the Republic of Bashkortostan (English translation) is incorporated herein by reference to Exhibit 4.227 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.141 | MTS License No. 134509 for provision of communications services for the provision of communication channels in the territory of the Ivanov region, the Kirov region, the Nizhny Novgorod region, the Yaroslavl region (English translation) is incorporated herein by reference to Exhibit 4.228 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.142 | MTS License No. 131139 for provision of mobile radio telephone services in the territory of the Ivanovo Region (English translation) is incorporated herein by reference to Exhibit 4.229 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.143 | MTS License No. 131715 for provision of local telephone communication services, excluding local telephone communication services using coin-box telephones and public access services in the territory of Ufa, the Republic of Bashkortostan (English translation) is incorporated herein by reference to Exhibit 4.230 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.144 | MTS License No. 131718 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Mordovia Republic, the Chuvash Republic—Chuvashia (English translation) is incorporated herein by reference to Exhibit 4.231 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.145 | MTS License No. 131716 for provision of telematic communication services in the territory of the Republic of Mari El (English translation) is incorporated herein by reference to Exhibit 4.232 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.146 | MTS License No. 131720 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Mari El Republic (English translation) is incorporated herein by reference to Exhibit 4.233 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.147 | MTS License No. 131721 for provision of telematic communication services in the territory of the Republic of Daghestan, the Republic of Ingushetia, the KabardinoBalkar Republic, the KarachayevoCherkesia Republic, Republic of North Ossetia-Alania (English translation) is incorporated herein by reference to Exhibit 4.234 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.148 | MTS License No. 131138 for provision of data transmission services for the purpose of voice transmission in the territory of the Yaroslavl Region (English translation) is incorporated herein by reference to Exhibit 4.235 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.149 | MTS License No. 131719 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Republic of Daghestan, the Republic of Ingushetia, the KabardinoBalkar Republic, the KarachayevoCherkesia Republic, the Republic of North Ossetia-Alania (English translation) is incorporated herein by reference to Exhibit 4.237 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.150 | MTS License No. 130985 for provision of data transmission services for the purpose of voice transmission in the territory of the Belgorod region, the Bryansk region, the Voronezh region, the Kursk region, the Lipetsk region, the Orel region (English translation) is incorporated herein by reference to Exhibit 4.238 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.151 | MTS License No. 129952 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Krasnodar Territory (English translation) is incorporated herein by reference to Exhibit 4.239 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.152 | MTS License No. 130986 for provision of communications services for the provision of communication channels in the territory of the Sakhalin region (English translation) is incorporated herein by reference to Exhibit 4.240 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.153 | MTS License No. 130983 for provision of communications services for the provision of communication channels in the territory of the Buryatiya Republic (English translation) is incorporated herein by reference to Exhibit 4.241 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.154 | MTS License No. 129956 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Astrakhan region (English translation) is incorporated herein by reference to Exhibit 4.242 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.155 | MTS License No. 129955 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Republic of Bashkortostan (English translation) is incorporated herein by reference to Exhibit 4.243 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.156 | MTS License No. 130201 for provision of mobile radio telephone services in the territory of the Udmurt Republic, the Perm Territory, the Kirov region, the Kurgan region, the Orenburg region, the Sverdlovsk region, the Tyumen region, the Chelyabinsk region, the Khanty Mansiysk Autonomous region, the YamaloNenetks Autonomous region (English translation) is incorporated herein by reference to Exhibit 4.244 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.157 | MTS License No. 129957 for provision of telematic communication services in the territory of the Republic of Kalmykia (English translation) is incorporated herein by reference to Exhibit 4.245 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.158 | MTS License No. 130982 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Irkutsk region, the Jewish Autonomous region, the Chukotsk Autonomous region, and Koryak Autonomous Area of the Kamchatka region (English translation) is incorporated herein by reference to Exhibit 4.246 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.159 | MTS License No. 130984 for provision of telematic communication services in the territory of the Irkutsk region, the Jewish Autonomous Region, the Chukotsk Autonomous region, and the Koryak District of the Kamchatka Territory (English translation) is incorporated herein by reference to Exhibit 4.247 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.160 | MTS License No. 128519 for provision of telematic communication services in the territory of the Tomsk region (English translation) is incorporated herein by reference to Exhibit 4.248 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.161 | MTS License No. 129943 for provision of communications services for the provision of communication channels in the territory of the Chuvash Republic—Chuvashia (English translation) is incorporated herein by reference to Exhibit 4.249 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.162 | MTS License No. 129947 for provision of data telematic communication services in the territory of the Republic of Adygeya (English translation) is incorporated herein by reference to Exhibit 4.250 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.163 | MTS License No. 129951 for provision of telematic communication services in the territory of the Krasnodar region (English translation) is incorporated herein by reference to Exhibit 4.251 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.164 | MTS License No. 129948 for provision of communications services for the provision of communication channels in the territory of the Republic of Adygeya, the Krasnodar Krai (English translation) is incorporated herein by reference to Exhibit 4.252 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.165 | MTS License No. 129945 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Republic of Adygeya (English translation) is incorporated herein by reference to Exhibit 4.253 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.166 | MTS License No. 129949 for provision of telematic communication services in the territory of the Astrakhan region (English translation) is incorporated herein by reference to Exhibit 4.254 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.167 | MTS License No. 129942 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Republic of Kalmykia (English translation) is incorporated herein by reference to Exhibit 4.255 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.168 | MTS License No. 129950 for provision of local telephone communication services, excluding local telephone communication services using coin-box telephones and public access services in the territory of the Ryazan region: Ryazan (English translation) is incorporated herein by reference to Exhibit 4.256 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.169 | MTS License No. 129944 for provision of telematic communication services in the territory of the Tatarstan Republic (English translation) is incorporated herein by reference to Exhibit 4.257 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.170 | MTS License No. 128529 for provision of communications services for the provision of communication channels in the territory of the Republic of Tuva (English translation) is incorporated herein by reference to Exhibit 4.258 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.171 | MTS License No. 128528 for provision of communications services for the provision of communication channels in the territory of the Republic of Altai, the Altai Territory, the Novosibirsk Region (English translation) is incorporated herein by reference to Exhibit 4.259 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.172 | MTS License No. 128533 for provision of communications services for the provision of communication channels in the territory of the Republic of Khakassia (English translation) is incorporated herein by reference to Exhibit 4.260 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.173 | MTS License No. 128527 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Novosibirsk region (English translation) is incorporated herein by reference to Exhibit 4.262 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.174 | MTS License No. 128535 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Tomsk region (English translation) is incorporated herein by reference to Exhibit 4.263 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.175 | MTS License No. 128530 for provision of telematic communication services in the territory of the Republic of Khakassia (English translation) is incorporated herein by reference to Exhibit 4.264 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.176 | MTS License No. 128536 for provision of telematic communication services in the territory of the Kamchatka region (excluding the excluding the Koryak Autonomous Area) (English translation) is incorporated herein by reference to Exhibit 4.265 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.177 | MTS License No. 129415 for provision of communication services for the purpose of wire broadcasting in the territory of the Perm Territory (English translation) is incorporated herein by reference to Exhibit 4.266 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.178 | MTS License No. 129416 for provision of mobile radio telephone services in the territory of the Penza region (English translation) is incorporated herein by reference to Exhibit 4.267 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.179 | MTS License No. 128534 for provision of data transmission services, except for data transmission services for the purpose of voice transmission Republic of Altai (English translation) is incorporated herein by reference to Exhibit 4.268 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.180 | MTS License No. 128520 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Buryatiya Republic, the Magadan region, the Sakhalin region, the Kamchatka region (excluding the Koryak Autonomous Area) (English translation) is incorporated herein by reference to Exhibit 4.269 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.181 | MTS License No. 127687 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Saratov region (English translation) is incorporated herein by reference to Exhibit 4.270 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.182 | MTS License No. 127689 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Samara region (English translation) is incorporated herein by reference to Exhibit 4.271 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.183 | MTS License No. 128526 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Novosibirsk region (English translation) is incorporated herein by reference to Exhibit 4.272 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.184 | MTS License No. 128517 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Republic of Tuva (English translation) is incorporated herein by reference to Exhibit 4.273 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.185 | MTS License No. 128518 for provision of telematic communication services in the territory of the Sakha Republic (Yakutia) (English translation) is incorporated herein by reference to Exhibit 4.274 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.186 | MTS License No. 128522 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Republic of Khakassia (English translation) is incorporated herein by reference to Exhibit 4.275 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.187 | MTS License No. | ||
4.188 | MTS License No. 128525 for provision of telematic communication services in the territory of the | ||
4.189 | MTS License No. 127688 for provision of telematic communication services in the territory of the Saratov region (English translation) is incorporated herein by reference to Exhibit 4.278 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.190 | MTS License No. 128521 for provision of telematic communication services in the territory of the Republic of Tuva (English translation) is incorporated herein by reference to Exhibit 4.279 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.191 | MTS License No. 127171 for provision of communications services for the provision of communication channels in the territory of the Primorye Territory (English translation) is incorporated herein by reference to Exhibit 4.280 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.192 | MTS License No. 127686 for provision of communications services for the provision of communication channels in the territory of the Samara region, the Saratov region, the Ulyanovsk Region (English translation) is incorporated herein by reference to Exhibit 4.281 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.193 | MTS License No. 127683 for provision of communications services for the provision of communication channels in the territory of the Stavropol Territory, the Astrakhan region (English translation) is incorporated herein by reference to Exhibit 4.282 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.194 | MTS License No. 127172 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Khabarovsk Territory (English translation) is incorporated herein by reference to Exhibit 4.283 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.195 | MTS License No. 127682 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Volgograd Region (English translation) is incorporated herein by reference to Exhibit 4.284 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.196 | MTS License No. 127685 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Stavropol Territory (English translation) is incorporated herein by reference to Exhibit 4.285 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.197 | MTS License No. 127679 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Ulyanovsk Region (English translation) is incorporated herein by reference to Exhibit 4.286 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.198 | MTS License No. 127681 for provision of telematic communication services in the territory of the Ulyanovsk region (English translation) is incorporated herein by reference to Exhibit 4.287 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.199 | MTS License No. 127169 for provision of telematic communication services in the territory of the Khabarovsk Territory (English translation) is incorporated herein by reference to Exhibit 4.288 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.289 | MTS License No. 127170 for provision of local telephone communication services, excluding local telephone communication services using coin-box telephones and public access services in the territory of the Zabaikalye Territory (English translation) is incorporated herein by reference to Exhibit 4.289 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.200 | MTS License No. 127680 for provision of telematic communication services in the territory of the Samara region (English translation) is incorporated herein by reference to Exhibit 4.290 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.201 | MTS License No. 127678 for provision of telematic communication services in the territory of the Stavropol Territory (English translation) is incorporated herein by reference to Exhibit 4.291 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.202 | MTS License No. 127684 for provision of telematic communication services in the territory of the Vologda region (English translation) is incorporated herein by reference to Exhibit 4.292 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.203 | MTS License No. 129954 for provision of mobile radio telephone services in the territory of the Rostov region (English translation) is incorporated herein by reference to Exhibit 4.294 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.204 | MTS License No. 134774 for provision of mobile radio telephone services in the territory of the Belgorod region, the Bryansk region, the Vladimir region, the Voronezh region, the Ivanovo region, the Kaluga region, the Kostroma region, the Vladimir region, the Kursk region, the Lipetsk region, the Nizhniiy Novgorod region, the Orel region, the Ryazan, the Smolensk region, the Tambov region, the Tver region, the Tula region, the Yaroslavl region (English translation) is incorporated herein by reference to Exhibit 4.296 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.205 | MTS License No. 131722 for provision of mobile radio telephone services in the territory of the Altai Territory (English translation) is incorporated herein by reference to Exhibit 4.297 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.206 | MTS License No. 134773 for provision of local telephone communication services, excluding local telephone communication services using coin-box telephones and public access services in the territory of the Tyumen Region, the YamaloNenetsk Autonomous region (English translation) is incorporated herein by reference to Exhibit 4.298 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.207 | MTS License No. 135964 for provision of mobile radio telephone services in fixed communication network in the territory of the YamaloNenetsk Autonomous region (English translation) is incorporated herein by reference to Exhibit 4.299 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.208 | MTS License No. 135966 for provision of data transmission services for the purpose of voice transmission in the territory of the Tyumen Region, the YamaloNenetsk Autonomous region (English translation) is incorporated herein by reference to Exhibit 4.300 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.209 | MTS License No. 137354 for provision of communication services for the purpose of cable broadcasting in the territory of the Russian Federation (English translation) is incorporated herein by reference to Exhibit 4.301 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.210 | MGTS License No. 127698 for provision of intrazonal telephone communication services in the territory of the Moscow region, Moscow (English translation) is incorporated herein by reference to Exhibit 4.302 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.211 | MTS License No. 129953 for provision of data transmission services, except for data transmission services for the purpose of voice transmission in the territory of the Republic of Tatarstan (English translation) is incorporated herein by reference to Exhibit 4.304 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.212 | MTS License No. 135956 for provision of intrazonal telephone communication services in the territory of the Perm Territory (English translation) is incorporated herein by reference to Exhibit 4.305 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.213 | MTS License No. 129946 for provision of local telephone communication services, excluding local telephone communication services using coin-box telephones and public access services in the territory of the Kaluga region (English translation) is incorporated herein by reference to Exhibit 4.306 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.214 | MTS License No. 0011997 for the development, production, distribution of encryption (cryptographic) means, information systems and telecommunication systems protected with encryption (cryptographic) means, performing works, rendering services in the field of information encryption services, maintenance of encryption (cryptographic) means, information systems and telecommunication systems protected with encryption (cryptographic) means (except if the maintenance of encryption (cryptographic) means, information systems and telecommunication systems protected with encryption (cryptographic) means is carried out to satisfy the needs of the legal entity or individual entrepreneur) (English translation) is incorporated herein by reference to Exhibit 4.307 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. | ||
4.215 | MTS Ukraine License No. 521949 for use of radio frequency resources of Ukraine (English translation) is incorporated herein by reference to Exhibit 4.308 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015, on Form 20-F. |
Exhibits No. | Description | ||
---|---|---|---|
4.216 | City Telecom CJSC License No. 99294 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of Moscow (English translation). | ||
4.217 | City Telecom CJSC License No. 99295 for provision of communication channel provision services in the territory of Moscow (English translation). | ||
City Telecom CJSC License No. 99296 for provision of telematic communication services in the territory of Moscow (English translation). | |||
4.219 | City Telecom CJSC License No. 99297 for provision of data communication services, except for data communication services for voice transmission in the territory of Moscow (English translation). | ||
4.220 | City Telecom CJSC License No. 122706 for provision of data communication services for voice transmission in the territory of Moscow (English translation). | ||
4.221 | Smarts-Yoshkar-Ola JSC License No. 128311 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Republic of Mari El (English translation). | ||
4.222 | Sputnikovoe TV LLC License No. 129794 for provision of communication channel provision services in the territory of the Russian Federation (English translation). | ||
4.223 | Smarts-Yoshkar-Ola JSC License No. 131212 for provision of data communication services for voice transmission in the territory of the Republic of Mari El (English translation). | ||
4.224 | Smarts-Yoshkar-Ola JSC License No. 131213 for provision of data communication services, except for data communication services for voice transmission in the territory of the Republic of Mari El (English translation). | ||
4.225 | Smarts-Yoshkar-Ola JSC License No. 131214 for provision of telematic communication services in the territory of the Republic of Mari El (English translation). | ||
4.226 | Smarts-Yoshkar-Ola JSC License No. 131215 for provision of communication channel provision services in the territory of the Republic of Mari El (English translation). | ||
4.227 | MGTS License No. 135506 for provision of data communication services for voice transmission in the territory of Moscow (English translation). | ||
4.228 | MTS License No. 135957 for provision of data communication services, except for data communication services for voice transmission in the territory of the Primorsky Territory (English translation). | ||
4.229 | Sibintertelecom | ||
4.230 | MGTS License No. 137355 for provision of telecommunications services for cable broadcasting in the territory of the Moscow Region (English translation). | ||
Exhibits No. | Description | ||
---|---|---|---|
4.236 | MTS License No. 138952 for provision of intra-area telephone communications services in the territory of the Ryazan Region (English translation). | ||
4.237 | MTS License No. 138953 for provision of telecommunications services for wired radio broadcasting in the territory of the Sverdlovsk Region (English translation). | ||
4.238 | MTS License No. 138956 for provision of mobile radio communication services in the allocated telecommunications network in the territory of the Khanty-Mansiysk Autonomous District-Yugra (English translation). | ||
4.239 | MTS License No. 140009 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and | ||
4.240 | MTS License No. 140458 for provision of local telecommunications services, | ||
4.241 | MTS License No. 140459 for provision of telematic communication services in the territory of the Republic of Bashkortostan (English translation). | ||
4.242 | MTS License No. 141405 for provision of mobile radio telephone communication services in the territory of the Republic of Karelia, Arkhangelsk Region, Vologda Region, Kaliningrad Region, Leningrad Region, Murmansk Region, Novgorod Region, Pskov Region, Saint Petersburg, Nenets Autonomous District (English translation). | ||
4.243 | MTS License No. 141520 for provision of mobile radio telephone communication services in the territory of the Republic of Tuva (English translation). | ||
4.244 | MTS License No. 141521 for provision of mobile radio telephone communication services in the territory of the Republic of Altai (English translation). | ||
4.245 | MTS License No. 142343 for provision of mobile radio telephone communication services in the territory of the Russian Federation, except for Moscow, the Moscow Region, the Republic of Crimea and Sevastopol (English translation). | ||
4.246 | MTS License No. 142344 for provision of data communication services, except for data communication services for voice transmission in the territory of the Russian Federation, except for Moscow, the Moscow Region, the Republic of Crimea and Sevastopol (English translation). | ||
4.247 | MTS License No. 142345 for provision of data communication services for voice transmission in the territory of the Russian Federation, except for Moscow, the Moscow Region, the Republic of Crimea and Sevastopol (English translation). | ||
4.248 | MTS License No. 142346 for provision of telematic communication services in the territory of the Russian Federation, except for Moscow, the Moscow Region, the Republic of Crimea and Sevastopol (English translation). |
Exhibits No. | Description | ||
---|---|---|---|
4.249 | MTS License No. 143709 for provision of mobile radio telephone communication services in the territory of the Republic of Bashkortostan (English translation). | ||
4.250 | MTS License No. 144269 for provision of mobile radio telephone communication services in the territory of the Republic of Khakassia (English translation). | ||
4.251 | MTS License No. 144270 for provision of mobile radio telephone communication services in the territory of the Republic of North Ossetia-Alania (English translation). | ||
4.252 | MTS License No. 145056 for provision of telematic communication services in the territory of the Republic of Karelia, Arkhangelsk Region, Vologda Region, Kaliningrad Region, Leningrad Region, Murmansk Region, Novgorod Region, Saint Petersburg, Nenets Autonomous District (English translation). | ||
4.253 | MTS License No. 145057 for provision of mobile radio telephone communication services in the territory of the Astrakhan Region (English translation). | ||
4.254 | MTS License No. 145058 for provision of mobile radio communication services in the allocated telecommunications network in the territory of the Orenburg Region (English translation). | ||
4.255 | MTS License No. 145059 for provision of mobile radio telephone communication services in the territory of the Volgograd Region (English translation). | ||
4.256 | MTS License No. 145060 for provision of intra-area telephone communications services in the territory of the Omsk Region (English translation). | ||
4.257 | MGTS License No. 145447 for provision of telematic communication services in the territory of the Moscow Region and Moscow (English translation). | ||
4.258 | Stream LLC License No. 145493 for provision of telematic communication services in the territory of the Russian Federation (English translation). | ||
4.259 | MTS License No. 146066 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Khabarovsk Territory (English translation). | ||
4.260 | MTS License No. 146067 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Krasnodar Territory (English translation). | ||
4.261 | MTS License No. 146068 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Ivanovo Region (English translation). | ||
4.262 | MTS License No. 146069 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Irkutsk Region, except for the Ust-Ordyn Buryat Autonomous District (English translation). | ||
4.263 | MTS License No. 146070 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Primorsky Territory (English translation). | ||
4.264 | MTS License No. 146071 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Novosibirsk Region (English translation). |
Exhibits No. | Description | ||
---|---|---|---|
4.265 | MTS License No. 146072 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Orenburg Region (English translation). | ||
4.266 | MTS License No. 146073 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Altai Territory (English translation). | ||
4.267 | MTS License No. 146074 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Chelyabinsk Region (English translation). | ||
4.268 | MTS License No. 146075 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Nizhny Novgorod Region (English translation). | ||
4.269 | MTS License No. 146076 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Republic of Sakha (Yakutia) (English translation). | ||
4.270 | MTS License No. 146077 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Yaroslavl Region (English translation). | ||
4.271 | MTS License No. 146078 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Perm Territory (English translation). | ||
4.272 | MTS License No. 146079 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Republic of Komi (English translation). | ||
4.273 | MTS License No. 146080 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Astrakhan Region (English translation). | ||
4.274 | MTS License No. 146081 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Sakhalin Region (English translation). | ||
4.275 | MTS License No. 146082 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Republic of Tatarstan (English translation). | ||
4.276 | MTS License No. 146083 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Khanty-Mansijsk Autonomous District-Yugra (English translation). | ||
4.277 | MTS License No. 146084 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Rostov Region (English translation). | ||
4.278 | MTS License No. 146085 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Volgograd Region (English translation). | ||
4.279 | MTS License No. 146086 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Kurgan Region (English translation). |
Exhibits No. | Description | ||
---|---|---|---|
4.280 | MTS License No. 146087 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Krasnoyarsk Territory, except for the Evenk Autonomous District (English translation). | ||
4.281 | MTS License No. 146088 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Omsk Region (English translation). | ||
4.282 | MTS License No. 146089 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Kirov Region (English translation). | ||
4.283 | MTS License No. 146090 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Samara Region (English translation). | ||
4.284 | MTS License No. 146091 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Udmurt Republic (English translation). | ||
4.285 | MTS License No. 146092 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Amur Region (English translation). | ||
4.286 | MTS License No. 146093 for provision of local telecommunications services via coin-box telephones in the territory of the Moscow Region (English translation). | ||
4.287 | MTS License No. 146094 for provision of local telecommunications services, except for local telecommunications services via coin-box telephones and multiple-access facilities in the territory of the Tomsk Region (English translation). | ||
4.288 | MTS License No. 147352 for provision of telematic communication services in the territory of the Altai Territory (English translation). | ||
4.289 | MTS License No. 147353 for provision of mobile radio telephone communication services in the territory of the Moscow Region and Moscow (English translation). | ||
4.290 | MTS License No. 147354 for provision of intra-area telephone communications services in the territory of the Leningrad Region (English translation). | ||
4.291 | MTS License No. 147355 for provision of communication channel provision services in the territory of the Russian Federation (English translation). | ||
4.292 | MTS License No. 147356 for provision of mobile radio telephone communication services in the territory of the Omsk Region (English translation). | ||
4.293 | MTS License No. 147357 for provision of communication channel provision services in the territory of the Omsk Region (English translation). | ||
4.294 | Smarts-Yoshkar-Ola JSC License No. 148726 for provision of mobile radio telephone communication services in the territory of the Republic of Mari El (English translation). | ||
4.295 | MTS License No. 149715 for provision of telecommunications services for wired radio broadcasting in the territory of the Kirov Region (English translation). | ||
4.296 | MTS License No. 149828 for provision of mobile radio telephone communication services in the territory of the Kemerovo Region (English translation). |
Exhibits No. | Description | ||
---|---|---|---|
4.297 | MTS License No. 149829 for provision of mobile radio telephone communication services in the territory of the Chechen Republic (English translation). | ||
4.298 | MTS License No. 149830 for provision of mobile radio telephone communication services in the territory of the Chuvash Republic—Chuvashia (English translation). | ||
4.299 | MTS License No. 149831 for provision of mobile radio telephone communication services in the territory of the Karachay-Cherkess Republic (English translation). | ||
4.300 | MTS License No. 149832 for provision of mobile radio telephone communication services in the territory of the Republic of Altai (English translation). | ||
4.301 | Multikabel'nye sety balashikhi LLC License No. 149923 for provision of data communication services, except for data communication services for voice transmission in the territory of in the territory of the settlement of Balashikha in the Moscow Region (English translation). | ||
4.302 | Multikabel'nye sety balashikhi LLC License No. 149924 for provision of telecommunications services for cable broadcasting in the territory of the settlement of Balashikha in the Moscow Region (English translation). | ||
4.303 | Multikabel'nye sety balashikhi LLC License No. 149925 for provision of telematic communication services in the territory of the settlement of Balashikha in the Moscow Region (English translation). | ||
4.304 | MTS form License for provision of mobile radio telephone communication services in the territory of Mari El Republic, Khabarovsk region, Novosibirsk region, Omsk region, Primorsky region, Amur region, Buryatiya Republic, Chukotsk Autonomous region, Irkutsk region, Jewish Autonomous region, Kamchatka region, Magadan region, Sakha Republic (Yakutia), Sakhalin region and Zabaykalsky Territory (English translation). | ||
4.305 | MTS form License for provision of communication channels in the territory of Kaliningrad region, St. Petersburg, Leningrad region, Arkhangelsk region, Karelia Republic, Murmansk region, Nenetsk Autonomous region, Novgorod region and Vologda region (English translation). | ||
4.306 | MTS form License for provision of intra-area telephone communication services in the territory of Saratov region, Penza region, Tambov region, Kaluga region, Sverdlovsk region, Kirov region, Altai region, Irkutsk region, Khabarovsk region, Primorsky region, Orenburg region, Udmurt Republic, Moscow region, Moscow, Bashkortostan Republic and Ulyanovsk region (English translation). | ||
4.307 | MTS form License for provision of data transmission services for voice transmission in the territory of Mordovia Republic, Saratov region, Mari El Republic, Amur region, Altaisk territory, Buryatiya Republic, Kalmykia Republic, KarachayevoCherkesia Republic, Pskov region, Kamchatka region, Komi Republic, Murmansk region, Kostroma region, Altai Republic, Vologda region, Dagestan Republic, Orenburg region, Sakha Republic (Yakutia), Stavropol territory, Tyva Republic, Chechen Republic, Zabaykalsky Territory, Kirov region, Khakassiya Republic, KabardinoBalkar Republic, Ulyanovsk region, Adygeya Republic, Ingushetia Republic, Kaliningrad region, Karelia Republic, Penza region, Severnaya Osetia Alania Republic, Khabarovsk Territory, Chuvashia Republic, Magadan region, Chelyabinsk region, Kurgan region, Moscow and Moscow region (English translation). | ||
4.308 | MTS License No. 152165 for provision of telecommunication services for the purpose of wired radio broadcasting services in the territory of the Rostov region (English translation). | ||
8.1 | List of Subsidiaries of Mobile TeleSystems |
Exhibits No. | Description | ||
---|---|---|---|
12.1 | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
12.2 | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
13.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
13.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: April 21, | MOBILE TELESYSTEMS | |||||
By: | /s/ Andrey A. Dubovskov | |||||
Name: | Andrey A. Dubovskov | |||||
Title: | President and Chief Executive Officer |
OJSCPJSC MOBILE
TELESYSTEMS
AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 20142016, 2015 and 2013 and
for the Years Ended
December 31, 2014, 20132016, 2015 and 20122014.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-1 | |||
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, | ||||
Consolidated | F-2 - F-3 | |||
Consolidated | F-4 | |||
Consolidated statement of comprehensive income for the years ended December 31, | ||||
Consolidated statements of changes in shareholders' equity for the years ended December 31, | ||||
Consolidated | ||||
Notes to the consolidated financial statements |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Mobile TeleSystems OJSC:PJSC:
Moscow, Russia
We have audited the accompanying consolidated statementsstatement of financial position of Mobile TeleSystems OJSCPJSC and subsidiaries (the "Group") as of December 31, 20142016 and 2013,2015, and the related consolidated statements of operations andprofit or loss, comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014.2016. These consolidated financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on thethese consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Mobile TeleSystems OJSCPJSC and subsidiaries as of December 31, 20142016 and 2013,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014,2016, in conformity with accounting principles generally accepted inInternational Financial Reporting Standards as issued by the United States of America.International Accounting Standards Board.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group's internal control over financial reporting as of December 31, 20142016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 27, 201521, 2017 expressed an unqualified opinion on the Group's internal control over financial reporting.
/s/ ZAO Deloitte & Touche CIS
Moscow, Russia
March 27, 2015, except for Note 31,as to which the date is April 21, 20152017
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 20142016 AND 20132015
(Amounts in millions of Russian Rubles, except share amounts and per share amounts)Rubles)
| | December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Note | 2014 | 2013 | |||||||
CURRENT ASSETS: | ||||||||||
Cash and cash equivalents | 6 | 61,410 | 30,612 | |||||||
Short-term investments, including available-for-sale securities at fair value of 576 and 4,154, respectively, and related party amounts of 760 and 9,235, respectively | 7 | 9,849 | 14,633 | |||||||
Trade receivables, net of allowance for doubtful accounts of 2,165 and 3,753, respectively | 8 | 32,966 | 34,554 | |||||||
Accounts receivable, related parties | 25 | 4,525 | 965 | |||||||
Inventory and spare parts | 9 | 7,510 | 8,498 | |||||||
Prepaid expenses, including related party amounts of 322 and 123, respectively | 11,752 | 9,811 | ||||||||
Deferred tax assets | 24 | 11,206 | 7,933 | |||||||
VAT receivable | 8,071 | 6,651 | ||||||||
Assets related to disposal group held for sale | 10 | 2,004 | — | |||||||
Other current assets | 2,831 | 3,019 | ||||||||
| | | | | | | | | | |
Total current assets | 152,124 | 116,676 | ||||||||
| | | | | | | | | | |
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of 313,623 and 293,389, including advances to related parties of 254 and 367, respectively | 11 | 299,479 | 270,660 | |||||||
LICENSES, net of accumulated amortization of 5,226 and 3,194, respectively | 3, 12 | 5,498 | 3,202 | |||||||
GOODWILL | 3, 13 | 36,311 | 32,704 | |||||||
OTHER INTANGIBLE ASSETS, net of accumulated amortization of 65,785 and 58,153, including advances to related parties of 88 and 232, respectively | 3, 14 | 56,971 | 38,423 | |||||||
DEBT ISSUANCE COSTS, net of accumulated amortization of 2,336 and 2,375, respectively | 1,738 | 2,023 | ||||||||
INVESTMENTS IN AND ADVANCES TO ASSOCIATES | 15 | 16,277 | 13,393 | |||||||
OTHER INVESTMENTS, including related party amounts of 835 and 743, respectively | 16 | 14,969 | 4,392 | |||||||
OTHER NON-CURRENT ASSETS, including asset derivatives of 21,944 and 1,837, respectively, and deferred tax assets of 3,610 and 862, respectively | 21, 24 | 25,560 | 4,051 | |||||||
| | | | | | | | | | |
Total assets | 608,927 | 485,524 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Notes | December 31, 2016 | December 31, 2015 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||||
NON-CURRENT ASSETS: | ||||||||||
Property, plant and equipment | 11 | 272,841 | 302,662 | |||||||
Investment property | 336 | 364 | ||||||||
Goodwill | 12 | 33,685 | 34,468 | |||||||
Other intangible assets | 14 | 75,128 | 74,596 | |||||||
Investments in associates | 7 | 10,551 | 9,299 | |||||||
Other investments | 8 | 36,319 | 34,667 | |||||||
Deferred tax assets | 19 | 6,150 | 9,287 | |||||||
Accounts receivable, related parties | 21 | 3,693 | 3,335 | |||||||
Other financial assets | 17 | 13,877 | 25,203 | |||||||
Other non-financial assets | 896 | 480 | ||||||||
| | | | | | | | | | |
Total non-current assets | 453,476 | 494,361 | ||||||||
| | | | | | | | | | |
CURRENT ASSETS: | ||||||||||
Inventories | 10 | 14,330 | 14,510 | |||||||
Trade and other receivables | 9 | 29,805 | 34,542 | |||||||
Accounts receivable, related parties | 21 | 4,401 | 6,326 | |||||||
Short-term investments | 6 | 8,657 | 49,840 | |||||||
Advances paid and prepaid expenses | 5,749 | 4,648 | ||||||||
VAT receivable | 7,098 | 9,815 | ||||||||
Income tax assets | 1,601 | 5,190 | ||||||||
Assets held for sale | 808 | 549 | ||||||||
Cash and cash equivalents | 5 | 18,470 | 33,464 | |||||||
Other assets | 75 | 133 | ||||||||
| | | | | | | | | | |
Total current assets | 90,994 | 159,017 | ||||||||
| | | | | | | | | | |
TOTAL ASSETS | 544,470 | 653,378 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF FINANCIAL POSITION (Continued)
AS OF DECEMBER 31, 20142016 AND 20132015
(Amounts in millions of Russian Rubles, except share amounts and per share amounts)Rubles)
| | December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Note | 2014 | 2013 | |||||||
CURRENT LIABILITIES: | ||||||||||
Accounts payable, related parties | 25 | 4,674 | 3,315 | |||||||
Trade payables | 36,337 | 23,864 | ||||||||
Subscriber prepayments and deposits | 19,355 | 17,884 | ||||||||
Debt, current portion | 17 | 19,435 | 7,564 | |||||||
Notes payable, current portion | 17 | 22,701 | 17,462 | |||||||
Deferred connection fees, current portion | 20 | 1,677 | 1,604 | |||||||
Income tax payable | 1,427 | 997 | ||||||||
Accrued liabilities | 23 | 27,620 | 27,674 | |||||||
Liabilities related to disposal group held for sale | 227 | — | ||||||||
Other payables, including capital lease obligations of 538 and 38, respectively | 3,986 | 1,498 | ||||||||
| | | | | | | | | | |
Total current liabilities | 137,439 | 101,862 | ||||||||
| | | | | | | | | | |
LONG-TERM LIABILITIES: | ||||||||||
Notes payable, net of current portion | 17 | 83,776 | 85,282 | |||||||
Debt, net of current portion | 17 | 157,084 | 108,792 | |||||||
Capital lease obligations, net of current portion | 18 | 8,857 | 10 | |||||||
Deferred connection fees, net of current portion | 20 | 1,760 | 2,045 | |||||||
Deferred taxes | 24 | 33,278 | 21,202 | |||||||
Retirement and post-retirement obligations | 1,055 | 1,059 | ||||||||
Property, plant and equipment contributions | 2,327 | 2,428 | ||||||||
Other long-term liabilities, including asset retirement obligations of 3,022 and 2,743, respectively | 19 | 4,234 | 3,859 | |||||||
| | | | | | | | | | |
Total long-term liabilities | 292,371 | 224,677 | ||||||||
| | | | | | | | | | |
Total liabilities | 429,810 | 326,539 | ||||||||
| | | | | | | | | | |
Commitments and contingencies | 30 | |||||||||
Redeemable noncontrolling interest | 27 | 3,192 | 2,932 | |||||||
SHAREHOLDERS' EQUITY: | ||||||||||
Common stock (2,066,413,562 shares issued as of December 31, 2014 and 2013, 777,396,505 of which are in the form of ADS as of December 31, 2014 and 2013) | 26 | 207 | 207 | |||||||
Treasury stock (77,501,432 and 77,582,378 common shares at cost as of December 31, 2014 and 2013) | (24,464 | ) | (24,482 | ) | ||||||
Additional paid-in capital | 5,419 | 3,019 | ||||||||
Accumulated other comprehensive loss | (6,294 | ) | (15,030 | ) | ||||||
Retained earnings | 191,081 | 188,217 | ||||||||
| | | | | | | | | | |
Total equity attributable to the Group | 165,949 | 151,931 | ||||||||
| | | | | | | | | | |
Nonredeemable noncontrolling interest | 9,976 | 4,122 | ||||||||
| | | | | | | | | | |
Total equity | 175,925 | 156,053 | ||||||||
| | | | | | | | | | |
Total liabilities and equity | 608,927 | 485,524 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Notes | December 31, 2016 | December 31, 2015 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
EQUITY AND LIABILITIES | ||||||||||
EQUITY: | ||||||||||
Common stock | 22 | 200 | 207 | |||||||
Treasury stock | 22 | (748 | ) | (24,468 | ) | |||||
Additional paid-in capital | 191 | — | ||||||||
Retained earnings | 145,622 | 173,200 | ||||||||
Accumulated other comprehensive income | 22 | (6,030 | ) | 11,176 | ||||||
| | | | | | | | | | |
Equity attributable to owners of the Company | 139,235 | 160,115 | ||||||||
Non-controlling interests | 4,713 | 8,256 | ||||||||
| | | | | | | | | | |
Total equity | 143,948 | 168,371 | ||||||||
| | | | | | | | | | |
NON-CURRENT LIABILITIES: | ||||||||||
Borrowings | 15 | 237,113 | 292,168 | |||||||
Deferred tax liabilities | 19 | 26,611 | 27,346 | |||||||
Provisions | 16 | 2,350 | 2,565 | |||||||
Other non-financial liabilities | 4,129 | 4,342 | ||||||||
Other financial liabilities | 17 | 2,774 | 676 | |||||||
| | | | | | | | | | |
Total non-current liabilities | 272,977 | 327,097 | ||||||||
| | | | | | | | | | |
CURRENT LIABILITIES: | ||||||||||
Trade and other payables | 41,473 | 57,756 | ||||||||
Accounts payable, related parties | 21 | 1,014 | 1,809 | |||||||
Subscriber prepayments | 15,460 | 17,451 | ||||||||
Borrowings | 15 | 47,207 | 53,701 | |||||||
Income tax liabilities | 962 | 831 | ||||||||
Provisions | 16 | 8,075 | 7,863 | |||||||
Other non-financial liabilities | 10,305 | 8,721 | ||||||||
Other financial liabilities | 17 | 3,049 | 9,778 | |||||||
| | | | | | | | | | |
Total current liabilities | 127,545 | 157,910 | ||||||||
| | | | | | | | | | |
TOTAL EQUITY AND LIABILITIES | 544,470 | 653,378 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF OPERATIONSPROFIT OR LOSS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(Amounts in millions of Russian Rubles, except per share amounts)
| Notes | Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Service revenue | 386,486 | 386,159 | 381,143 | ||||||||||
Sales of goods | 49,206 | 40,480 | 29,535 | ||||||||||
| | | | | | | | | | | | | |
25 | 435,692 | 426,639 | 410,678 | ||||||||||
| | | | | | | | | | | | | |
Cost of services | 130,158 | 126,805 | 119,053 | ||||||||||
Cost of goods | 10 | 45,574 | 36,555 | 25,445 | |||||||||
Selling, general and administrative expenses | 23 | 94,046 | 87,340 | 88,095 | |||||||||
Depreciation and amortization | 25 | 81,582 | 77,843 | 74,734 | |||||||||
Operating share of the profit of associates | 7 | (3,115 | ) | (3,456 | ) | (3,459 | ) | ||||||
Provision for investments in distressed Ukrainian banks | 28 | — | 1,698 | 5,138 | |||||||||
Impairment of goodwill in Armenia | 13 | — | 3,516 | — | |||||||||
Other (income)/expenses | (222 | ) | 2,415 | 1,814 | |||||||||
| | | | | | | | | | | | | |
Operating profit | 87,669 | 93,923 | 99,858 | ||||||||||
| | | | | | | | | | | | | |
Finance income | 24 | (5,273 | ) | (8,368 | ) | (4,519 | ) | ||||||
Finance costs | 24 | 27,136 | 26,422 | 17,252 | |||||||||
Currency exchange (gain)/loss | (3,241 | ) | 6,154 | 17,926 | |||||||||
Non-operating share of the loss of associates | 7 | 1,287 | 3 780 | 6,537 | |||||||||
Change in fair value of financial instruments | (166 | ) | (1 014 | ) | 95 | ||||||||
Other / expenses/(income) | 317 | (54 | ) | 937 | |||||||||
| | | | | | | | | | | | | |
Profit before tax | 67,609 | 67,003 | 61,630 | ||||||||||
| | | | | | | | | | | | | |
Income tax expense | 19 | 15,138 | 13,931 | 15,909 | |||||||||
| | | | | | | | | | | | | |
Profit for the year from continuing operations | 52,471 | 53,072 | 45,721 | ||||||||||
| | | | | | | | | | | | | |
(Loss) / Profit from discontinued operations | 26 | (4,021 | ) | (5,668 | ) | 5,775 | |||||||
| | | | | | | | | | | | | |
Profit for the year | 48,450 | 47,404 | 51,496 | ||||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Profit / (loss) for the year attributable to: | |||||||||||||
Owners of the Company | 48,474 | 49,489 | 51,306 | ||||||||||
Non-controlling interests | (24 | ) | (2,085 | ) | 190 | ||||||||
Earnings per share (basic and diluted), Russian Rubles: | 20 | 24.37 and 24.35 | 24.88 and 24.87 | 25.80 and 25.78 |
The accompanying notes are an integral part of these consolidated financial statements.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2014, 20132016, 2015 AND 20122014
(Amounts in millions of Russian Rubles, except share amounts and per share amounts)Rubles)
| | Years ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Note | 2014 | 2013 | 2012 | |||||||||
NET OPERATING REVENUES | |||||||||||||
Services revenue and connection fees (including related party amounts of 1,372 and 1,113 and 492, respectively) | 381,822 | 371,950 | 349,338 | ||||||||||
Sales of handsets and accessories | 28,936 | 26,493 | 28,902 | ||||||||||
| | | | | | | | | | | | | |
Total net operating revenues | 410,758 | 398,443 | 378,240 | ||||||||||
| | | | | | | | | | | | | |
OPERATING EXPENSES | |||||||||||||
Cost of services, excluding depreciation and amortization shown separately below (including related party amounts of 1,985 and 1,186 and 692, respectively) | 89,589 | 83,777 | 83,051 | ||||||||||
Cost of handsets and accessories | 25,093 | 22,636 | 25,042 | ||||||||||
General and administrative expenses (including related party amounts of 2,096 and 2,047 and 2,097, respectively) | 28 | 90,971 | 85,458 | 77,977 | |||||||||
Allowance for doubtful accounts | 3,266 | 3,106 | 2,606 | ||||||||||
Sales and marketing expenses (including related party amounts of 1,632 and 1,853 and 1,941, respectively) | 21,908 | 22,861 | 21,667 | ||||||||||
Depreciation and amortization expense | 74,710 | 73,253 | 67,910 | ||||||||||
Other operating expense / (income) (including related party amounts of (635) and 370 and (116), respectively) | 4,468 | 5,594 | 6,193 | ||||||||||
Provision for investment in Delta Bank in Ukraine | 5 | 5,138 | — | — | |||||||||
Gain from reentrance into Uzbekistan | 4 | (6,734 | ) | — | — | ||||||||
| | | | | | | | | | | | | |
Net operating income | 102,349 | 101,758 | 93,794 | ||||||||||
| | | | | | | | | | | | | |
CURRENCY EXCHANGE AND TRANSACTION LOSS / (GAIN) | 18,024 | 5,473 | (3,952 | ) | |||||||||
OTHER EXPENSES / (INCOME) | |||||||||||||
Interest income (including related party amounts of 654 and 742 and 172, respectively) | (4,519 | ) | (2,793 | ) | (2,588 | ) | |||||||
Interest expense, net of capitalized interest (including related party amounts of 41 and nil and 367, respectively) | 16,453 | 15,498 | 17,673 | ||||||||||
Equity in net loss / (income) of associates | 15 | 2,880 | (2,472 | ) | (869 | ) | |||||||
Other expenses / (income), net (including gain of (11,087) related to Bitel settlement in 2013) | 30 | 771 | (10,636 | ) | 688 | ||||||||
| | | | | | | | | | | | | |
Total other expenses / (income), net | 15,585 | (403 | ) | 14,904 | |||||||||
| | | | | | | | | | | | | |
Income from continuing operations before provision for income taxes | 68,740 | 96,688 | 82,842 | ||||||||||
| | | | | | | | | | | | | |
PROVISION FOR INCOME TAXES | 24 | 16,347 | 19,633 | 19,384 | |||||||||
| | | | | | | | | | | | | |
NET INCOME FROM CONTINUING OPERATIONS | 52,393 | 77,055 | 63,458 | ||||||||||
| | | | | | | | | | | | | |
NET INCOME / (LOSS) FROM DISCONTINUED OPERATIONS | 4 | — | 3,733 | (32,846 | ) | ||||||||
| | | | | | | | | | | | | |
NET INCOME | 52,393 | 80,788 | 30,612 | ||||||||||
| | | | | | | | | | | | | |
LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST | (571 | ) | (949 | ) | (970 | ) | |||||||
| | | | | | | | | | | | | |
NET INCOME ATTRIBUTABLE TO THE GROUP | 51,822 | 79,839 | 29,642 | ||||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
OTHER COMPREHENSIVE INCOME / (LOSS), NET OF TAX | |||||||||||||
Currency translation adjustment | 8,925 | (2,877 | ) | (2,211 | ) | ||||||||
Unrealized gain on derivatives, net of tax of (700) and (361) and (64) | 21 | 2,801 | 1,445 | 255 | |||||||||
Unrecognized actuarial gain / (loss), net of tax of (4) and (46) and 38 | 14 | 185 | (152 | ) | |||||||||
| | | | | | | | | | | | | |
Other comprehensive income / (loss), net of tax | 11,740 | (1,247 | ) | (2,108 | ) | ||||||||
| | | | | | | | | | | | | |
TOTAL COMPREHENSIVE INCOME | 64,133 | 79,541 | 28,504 | ||||||||||
| | | | | | | | | | | | | |
LESS: TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST | (3,575 | ) | (1,056 | ) | (772 | ) | |||||||
| | | | | | | | | | | | | |
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO THE GROUP | 60,558 | 78,485 | 27,732 | ||||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Weighted average number of common shares outstanding, in thousands—basic and diluted | 1,988,757 | 1,988,849 | 1,988,919 | ||||||||||
Earnings per share attributable to the Group—basic and diluted, RUB | |||||||||||||
EPS from continuing operations | 26.06 | 38.27 | 31.42 | ||||||||||
EPS from discontinued operations | — | 1.88 | (16.51 | ) | |||||||||
Total EPS | 26.06 | 40.14 | 14.90 |
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Profit for the year | 48,450 | 47,404 | 51,496 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other comprehensive (loss) / income | ||||||||||
Items that will not be reclassified subsequently to profit or loss: | ||||||||||
Unrecognized actuarial gain | 50 | 86 | 278 | |||||||
Items that may be reclassified subsequently to profit or loss: | ||||||||||
Exchange differences on translating foreign operations | (15,104 | ) | 2,647 | 10,005 | ||||||
Net fair value (loss) / gain on financial instruments | (1,200 | ) | (3,223 | ) | 2,664 | |||||
Share of other comprehensive (loss) / income of associates | ||||||||||
Items that may be reclassified subsequently to profit or loss: | ||||||||||
Exchange differences on translating foreign operations in associates | (1,553 | ) | (1,182 | ) | 943 | |||||
| | | | | | | | | | |
Other comprehensive (loss) / income for the year, net of income tax | (17,807 | ) | (1,672 | ) | 13,890 | |||||
| | | | | | | | | | |
Total comprehensive income for the year | 30,643 | 45,732 | 65,386 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total comprehensive income / (loss) for the year attributable to: | ||||||||||
Owners of the Company | 31,268 | 47,187 | 63,051 | |||||||
Non-controlling interests | (625 | ) | (1,455 | ) | 2,335 |
The accompanying notes are an integral part of these consolidated financial statements.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014, 20132016, 2015 AND 20122014
(Amounts in millions of Russian Rubles, except share amounts)
| | | | | | | | Total equity attributable to the Group | | | | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common stock | Treasury stock | | Accumulated other comprehensive loss | | Non- redeemable noncontrolling interest | | | ||||||||||||||||||||||||||
| Additional paid-in capital | Retained earnings | Total equity | Redeemable noncontrolling interest | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||
Balances at January 1, 2012 | 2,066,413,562 | 207 | (77,496,725 | ) | (24,462 | ) | 110 | (11,766 | ) | 148,019 | 112,108 | 2,852 | 114,960 | 2,595 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | — | — | — | — | — | — | 29,642 | 29,642 | 694 | 30,336 | 276 | |||||||||||||||||||||||
Other comprehensive (loss) / income, net of tax | — | — | — | — | — | (1,910 | ) | — | (1,910 | ) | 41 | (1,869 | ) | (239 | ) | |||||||||||||||||||
Dividends declared by MTS | — | — | — | — | — | — | (29,257 | ) | (29,257 | ) | — | (29,257 | ) | — | ||||||||||||||||||||
Dividends to noncontrolling interest | — | — | — | — | — | — | — | — | — | — | (367 | ) | ||||||||||||||||||||||
Change in fair value of noncontrolling interest of K-Telecom | — | — | — | — | — | — | (33 | ) | (33 | ) | — | (33 | ) | 33 | ||||||||||||||||||||
Sale of own stock | — | — | 2,340 | 0 | — | — | — | 0 | — | 0 | — | |||||||||||||||||||||||
Repurchase of own shares by MGTS | — | — | — | — | 57 | — | — | 57 | (319 | ) | (262 | ) | — | |||||||||||||||||||||
Disposal of Stream (Note 3) | — | — | — | — | 116 | — | — | 116 | — | 116 | — | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2012 | 2,066,413,562 | 207 | (77,494,385 | ) | (24,462 | ) | 283 | (13,676 | ) | 148,371 | 110,723 | 3,268 | 113,991 | 2,298 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | — | — | — | — | — | — | 79,839 | 79,839 | 693 | 80,532 | 256 | |||||||||||||||||||||||
Other comprehensive (loss) / income, net of tax | — | — | — | — | — | (1,354 | ) | — | (1,354 | ) | 10 | (1,344 | ) | 97 | ||||||||||||||||||||
Issuance of stock options (Note 2) | — | — | — | — | 94 | — | — | 94 | — | 94 | — | |||||||||||||||||||||||
Dividends declared by MTS | — | — | — | — | — | — | (39,419 | ) | (39,419 | ) | — | (39,419 | ) | — | ||||||||||||||||||||
Dividends to noncontrolling interest | — | — | — | — | — | — | — | — | — | — | (293 | ) | ||||||||||||||||||||||
Acquisition of own stock | — | — | (90,881 | ) | (20 | ) | — | — | — | (20 | ) | — | (20 | ) | — | |||||||||||||||||||
Change in fair value of noncontrolling interest of K-Telecom | — | — | — | — | — | — | (574 | ) | (574 | ) | — | (574 | ) | 574 | ||||||||||||||||||||
Sale of own stock | — | — | 2,888 | 0 | 1 | — | — | 1 | — | 1 | — | |||||||||||||||||||||||
Disposal of Business-Nedvizhimost (Note 3) | — | — | — | — | 2,641 | — | — | 2,641 | 151 | 2,792 | — | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2013 | 2,066,413,562 | 207 | (77,582,378 | ) | (24,482 | ) | 3,019 | (15,030 | ) | 188,217 | 151,931 | 4,122 | 156,053 | 2,932 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | — | — | — | — | — | — | 51,822 | 51,822 | 190 | 52,012 | 381 | |||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 8,736 | — | 8,736 | 2,312 | 11,048 | 692 | |||||||||||||||||||||||
Issuance of stock options (Note 2) | — | — | — | — | 167 | — | — | 167 | — | 167 | — | |||||||||||||||||||||||
Dividends declared by MTS | — | — | — | — | — | — | (49,325 | ) | (49,325 | ) | — | (49,325 | ) | — | ||||||||||||||||||||
Dividends to noncontrolling interest | — | — | — | — | — | — | — | — | (357 | ) | (357 | ) | (249 | ) | ||||||||||||||||||||
Sale of own shares | — | — | 90,881 | 20 | 4 | — | — | 24 | — | 24 | — | |||||||||||||||||||||||
Change in fair value of noncontrolling interest of K-Telecom | — | — | — | — | — | — | 564 | 564 | — | 564 | (564 | ) | ||||||||||||||||||||||
Consolidation of UMS (Note 4) | — | — | — | — | — | — | — | — | 3,565 | 3,565 | — | |||||||||||||||||||||||
Acquisition of own stock | — | — | (9,935 | ) | (2 | ) | — | — | — | (2 | ) | — | (2 | ) | — | |||||||||||||||||||
Investments in shares of entities under common control | — | — | — | — | (354 | ) | — | (245 | ) | (599 | ) | (3 | ) | (602 | ) | — | ||||||||||||||||||
Sale of building to Sistema (Note 25) | — | — | — | — | 232 | — | — | 232 | 13 | 245 | — | |||||||||||||||||||||||
Disposal of Business-Nedvizhimost (Note 25) | — | — | — | — | 2,351 | — | — | 2,351 | 134 | 2,485 | — | |||||||||||||||||||||||
Other | — | — | — | — | — | — | 48 | 48 | — | 48 | — | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2014 | 2,066,413,562 | 207 | (77,501,432 | ) | (24,464 | ) | 5,419 | (6,294 | ) | 191,081 | 165,949 | 9,976 | 175,925 | 3,192 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Accumulated other comprehensive income / (loss) | | | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common stock | Treasury stock | | | Foreign currency translation reserve | Remeasurements of the net defined benefit liability | | Equity attributable to equity holders | | | |||||||||||||||||||||||||||
| Additional paid-in capital | Investments revaluation reserve | Retained earnings | Non-controlling interests | Total equity | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balances at January 1, 2014 | 2,066,413,562 | 207 | (77,582,378 | ) | (24,482 | ) | 2,506 | 1,604 | — | 129 | 172,527 | 152,491 | 4,106 | 156,597 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | — | — | — | — | — | — | — | — | 51,306 | 51,306 | 190 | 51,496 | |||||||||||||||||||||||||
Other comprehensive income for the year, net of income tax | — | — | — | — | — | 2,664 | 8,803 | 278 | — | 11,745 | 2,145 | 13,890 | |||||||||||||||||||||||||
Total comprehensive income for the year | — | — | — | — | — | 2,664 | 8,803 | 278 | 51,306 | 63,051 | 2,335 | 65,386 | |||||||||||||||||||||||||
Issuance of stock options | — | — | — | — | 167 | — | — | — | — | 167 | — | 167 | |||||||||||||||||||||||||
Dividends declared by MTS | — | — | — | — | — | — | — | — | (49,325 | ) | (49,325 | ) | — | (49,325 | ) | ||||||||||||||||||||||
Dividends to non-controlling interest | — | — | — | — | — | — | — | — | — | — | (356 | ) | (356 | ) | |||||||||||||||||||||||
Unclaimed dividends over 3 years | — | — | — | — | — | — | — | — | 48 | 48 | — | 48 | |||||||||||||||||||||||||
Effect from re-entrance into Uzbekistan | — | — | — | — | — | — | — | — | — | — | 3,565 | 3,565 | |||||||||||||||||||||||||
Sale of own stock | — | — | 90,881 | 20 | 4 | — | — | — | — | 24 | — | 24 | |||||||||||||||||||||||||
Purchase of own stock | — | — | (9,935 | ) | (2 | ) | — | — | — | — | — | (2 | ) | — | (2 | ) | |||||||||||||||||||||
Acquisition of NCI in Teleservice | — | — | — | — | (23 | ) | — | — | — | — | (23 | ) | (3 | ) | (26 | ) | |||||||||||||||||||||
Increase in MTS Bank equity | — | — | — | — | 112 | — | — | — | — | 112 | — | 112 | |||||||||||||||||||||||||
Sale of building to Sistema | — | — | — | — | 233 | — | — | — | — | 233 | 13 | 246 | |||||||||||||||||||||||||
Sale of Business Nedvizhimost (Note 7) | — | — | — | — | 2,053 | — | — | — | — | 2,053 | 133 | 2,186 | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2014 | 2,066,413, 562 | 207 | (77,501,432 | ) | (24,464 | ) | 5,052 | 4,268 | 8,803 | 407 | 174,556 | 168,829 | 9,793 | 178,622 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit / (loss) for the year | — | — | — | — | — | — | — | — | 49,489 | 49,489 | (2,085 | ) | 47,404 | ||||||||||||||||||||||||
Other comprehensive (loss) / income for the year, net of income tax | — | — | — | — | — | (3,223 | ) | 835 | 86 | — | (2,302 | ) | 630 | (1,672 | ) | ||||||||||||||||||||||
Total comprehensive (loss) / income for the year | — | — | — | — | — | (3,223 | ) | 835 | 86 | 49,489 | 47,187 | (1,455 | ) | 45,732 | |||||||||||||||||||||||
Issuance of stock options | — | — | — | — | 158 | — | — | — | — | 158 | — | 158 | |||||||||||||||||||||||||
Dividends declared by MTS | — | — | — | — | — | — | — | — | (50,061 | ) | (50,061 | ) | — | (50,061 | ) | ||||||||||||||||||||||
Dividends to non-controlling interest | — | — | — | — | — | — | — | — | (480 | ) | (480 | ) | (257 | ) | (737 | ) | |||||||||||||||||||||
Sale of own stock | — | — | 9,935 | 2 | — | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||||||
Purchase of own stock | — | — | (29,666 | ) | (6 | ) | — | — | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||||||||
Disposal of Intellect Telecom (Note 4) | — | — | — | — | 252 | — | — | — | — | 252 | 14 | 266 | |||||||||||||||||||||||||
Disposal of Rent Nedvizhimost (Note 4) | — | — | — | — | 6,003 | — | — | — | — | 6,003 | 343 | 6,346 | |||||||||||||||||||||||||
Acquisition of NIS (Note 4) | — | — | — | — | (506 | ) | — | — | — | — | (506 | ) | (29 | ) | (535 | ) | |||||||||||||||||||||
Acquisition of NVision (Note 4) | — | — | — | — | (10,371 | ) | — | — | — | — | (10,371 | ) | — | (10,371 | ) | ||||||||||||||||||||||
Acquisition of Stream (Note 4) | — | — | — | — | (997 | ) | — | — | — | — | (997 | ) | — | (997 | ) | ||||||||||||||||||||||
Changes in ownership interest with no gain/loss of control—MGTS and NIS | — | — | — | — | 105 | — | — | — | — | 105 | (153 | ) | (48 | ) | |||||||||||||||||||||||
Reclassification to retained earnings | — | — | — | — | 304 | — | — | — | (304 | ) | — | — | — | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2015 | 2,066,413,562 | 207 | (77,521,163 | ) | (24,468 | ) | — | 1,045 | 9,638 | 493 | 173,200 | 160,115 | 8,256 | 168,371 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of thethese consolidated financial statements.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (Continued)
(Amounts in millions of Russian Rubles, except share amounts)
| | | | | | Accumulated other comprehensive income / (loss) | | | | | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common stock | Treasury stock | | | Foreign currency translation reserve | Remeasurements of the net defined benefit liability | | Equity attributable to equity holders | | | |||||||||||||||||||||||||||
| Additional paid-in capital | Investments revaluation reserve | Retained earnings | Non-controlling interests | Total equity | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balances at December 31, 2015 | 2,066,413,562 | 207 | (77,521,163 | ) | (24,468 | ) | — | 1,045 | 9,638 | 493 | 173,200 | 160,115 | 8,256 | 168,371 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit / (loss) for the year | — | — | — | — | — | — | — | — | 48,474 | 48,474 | (24 | ) | 48,450 | ||||||||||||||||||||||||
Other comprehensive (loss) / income for the year, net of income tax | — | — | — | — | — | (1,200 | ) | (13,970 | ) | 50 | — | (15,120 | ) | (601 | ) | (15,721 | ) | ||||||||||||||||||||
Total comprehensive (loss) / income for the year | — | — | — | — | — | (1,200 | ) | (13,970 | ) | 50 | 48,474 | 33,354 | (625 | ) | 32,729 | ||||||||||||||||||||||
Issuance of stock options | — | — | — | — | 131 | — | — | — | — | 131 | 11 | 142 | |||||||||||||||||||||||||
Dividends declared by MTS | — | — | — | — | — | — | — | — | (51,738 | ) | (51,738 | ) | — | (51,738 | ) | ||||||||||||||||||||||
Dividends to non-controlling interest | — | — | — | — | — | — | — | — | — | — | (1,120 | ) | (1,120 | ) | |||||||||||||||||||||||
Unclaimed dividends | — | — | — | — | — | — | — | — | 3 | 3 | — | 3 | |||||||||||||||||||||||||
Sale of own stock | — | — | 1,074,525 | 213 | — | — | — | — | — | 213 | — | 213 | |||||||||||||||||||||||||
Purchase of own stock (Note 22) | — | — | (3,067,396 | ) | (748 | ) | — | — | — | — | — | (748 | ) | — | (748 | ) | |||||||||||||||||||||
Purchase of NCI | — | — | — | — | 5 | — | — | — | — | 5 | (22 | ) | (17 | ) | |||||||||||||||||||||||
Changes in ownership interest with no gain / loss of control—MTS Bank additional share issuance (Note 7) | — | — | — | — | (14 | ) | — | — | — | — | (14 | ) | — | (14 | ) | ||||||||||||||||||||||
Redemption of treasury shares (Note 22) | (68,031,987 | ) | (7 | ) | 68,031,987 | 24,255 | — | — | — | — | (24,248 | ) | — | — | — | ||||||||||||||||||||||
Uzbekistan deconsolidation (Note 26) | — | — | — | — | — | — | (2,086 | ) | — | — | (2,086 | ) | (1,787 | ) | (3,873 | ) | |||||||||||||||||||||
Reclassification to retained earnings | — | — | — | — | 69 | — | — | — | (69 | ) | — | — | — | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2016 | 1,998,381,575 | 200 | (11,482,047 | ) | (748 | ) | 191 | (155 | ) | (6,418 | ) | 543 | 145,622 | 139,235 | 4,713 | 143,948 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014, 20132016, 2015 AND 20122014
(Amounts in millions of Russian Rubles)
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net income | 52,393 | 80,788 | 30,612 | |||||||
Net (income) / loss from discontinued operations | — | (3,733 | ) | 32,846 | ||||||
| | | | | | | | | | |
Net income from continuing operations | 52,393 | 77,055 | 63,458 | |||||||
| | | | | | | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Depreciation and amortization | 74,710 | 73,253 | 67,910 | |||||||
Non-cash gain from reentrance into Uzbekistan | (6,724 | ) | — | — | ||||||
Non-cash provision for investment in Delta Bank in Ukraine | 5,061 | — | — | |||||||
Currency exchange and transaction loss / (gain) | 18,024 | 5,473 | (3,952 | ) | ||||||
Debt issuance cost amortization | 645 | 784 | 952 | |||||||
Amortization of deferred connection fees | (1,912 | ) | (1,921 | ) | (2,287 | ) | ||||
Equity in net loss/(income) of associates | 2,880 | (2,472 | ) | (869 | ) | |||||
Allowance for doubtful accounts | 3,266 | 3,106 | 2,606 | |||||||
Inventory obsolescence expense | 357 | 660 | 759 | |||||||
Deferred tax expense | 6,540 | 9,671 | 3,290 | |||||||
Other non-cash items | 328 | (192 | ) | 461 | ||||||
Changes in operating assets and liabilities: | ||||||||||
Decrease / (increase) in trade receivables | 4,466 | (3,474 | ) | (8,489 | ) | |||||
Decrease / (increase) in inventory and spare parts | 731 | (592 | ) | (61 | ) | |||||
Decrease / (increase) in prepaid expenses and other current assets | 777 | (2,966 | ) | (727 | ) | |||||
(Increase) / decrease in VAT receivable | (1,058 | ) | (1,190 | ) | 673 | |||||
(Decrease) / increase in trade payables, accrued liabilities and other current liabilities | (3,616 | ) | 8,136 | 9,365 | ||||||
(Decrease) / increase in liability for Bitel | — | (7,238 | ) | 241 | ||||||
Dividends received | 2,650 | 1,831 | 1,526 | |||||||
| | | | | | | | | | |
Net cash provided by operating activities—continuing operations | 159,518 | 159,924 | 134,856 | |||||||
Net cash used in operating activities—discontinued operations | — | (547 | ) | (2,733 | ) | |||||
| | | | | | | | | | |
NET CASH PROVIDED BY OPERATING ACTIVITES | 159,518 | 159,377 | 132,123 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
Acquisition of subsidiaries, net of cash acquired | (2,755 | ) | — | (1,937 | ) | |||||
Purchases of property, plant and equipment | (74,243 | ) | (67,146 | ) | (79,836 | ) | ||||
Purchases of intangible assets | (18,356 | ) | (14,429 | ) | (7,947 | ) | ||||
Proceeds from sale of property, plant and equipment | 619 | 418 | 395 | |||||||
Purchases of short-term investments | (35,923 | ) | (37,623 | ) | (33,474 | ) | ||||
Proceeds from sale of short-term investments | 47,619 | 27,785 | 31,548 | |||||||
Purchase of other investments | (34,613 | ) | (703 | ) | (2,100 | ) | ||||
Proceeds from sales of other investments | 19,831 | — | 2,029 | |||||||
Investments in and advances to associates | (7,767 | ) | (5,088 | ) | — | |||||
| | | | | | | | | | |
Net cash used in investing activities—continuing operations | (105,588 | ) | (96,786 | ) | (91,322 | ) | ||||
Net cash provided by / (used in) investing activities—discontinued operations | — | 115 | (2,045 | ) | ||||||
| | | | | | | | | | |
NET CASH USED IN INVESTING ACTIVITIES | (105,588 | ) | (96,671 | ) | (93,367 | ) | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Profit for the year | 48,450 | 47,404 | 51,496 | |||||||
Adjustments for: | ||||||||||
Depreciation and amortization | 83,259 | 82,473 | 75,021 | |||||||
Impairment of goodwill in Armenia | — | 3,516 | — | |||||||
Loss from sale of subsidiary in Uzbekistan | 2,726 | — | — | |||||||
Non-cash gain from reentrance into Uzbekistan | — | — | (6,724 | ) | ||||||
Non-cash provision for investment in Delta Bank | — | — | 5,061 | |||||||
Finance income | (5,273 | ) | (8,368 | ) | (4,519 | ) | ||||
Finance costs | 27,427 | 26,630 | 17,260 | |||||||
Income tax expense | 14,954 | 13,269 | 15,985 | |||||||
Currency exchange (gain)/loss | (3,232 | ) | 6,213 | 17,911 | ||||||
Amortization of deferred connection fees | (2,287 | ) | (2,362 | ) | (1,912 | ) | ||||
Share of the (profit) / loss of associates | (1,828 | ) | 324 | 3,080 | ||||||
Change in fair value of financial instruments | (166 | ) | (1,014 | ) | 95 | |||||
Inventory obsolescence expense | 1,548 | 384 | 357 | |||||||
Allowance for doubtful accounts | 2,857 | 3,221 | 3,270 | |||||||
Change in provisions | 13,161 | 7,265 | 8,965 | |||||||
Other non-cash items | (3,656 | ) | (562 | ) | (31 | ) | ||||
Movements in operating assets and liabilities: | ||||||||||
(Increase)/Decrease in trade and other receivables | (3,525 | ) | 2,781 | 5,412 | ||||||
(Increase)/Decrease in inventory | (1,816 | ) | (5,998 | ) | 731 | |||||
(Increase)/Decrease in advances paid and prepaid expenses | (812 | ) | 574 | 1,217 | ||||||
Decrease/(Increase) in VAT receivable | 227 | (642 | ) | (1,058 | ) | |||||
Decrease in trade and other payables and other current liabilities | (9,086 | ) | (4,449 | ) | (12,790 | ) | ||||
Dividends received | 2,801 | 3,269 | 2,650 | |||||||
Income tax paid | (11,687 | ) | (9,643 | ) | (9,906 | ) | ||||
Interest received | 3,344 | 4,760 | 3,752 | |||||||
Interest paid, net of interest capitalized | (26,821 | ) | (24,957 | ) | (16,344 | ) | ||||
| | | | | | | | | | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 130,565 | 144,088 | 158,979 | |||||||
| | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
Purchase of subsidiaries, net of cash acquired | (5 | ) | — | (2,755 | ) | |||||
Purchases of property, plant and equipment (including capitalized interest in the amount of RUB 388 million, RUB 885 million and RUB 790 million, respectively) | (55,538 | ) | (76,671 | ) | (73,573 | ) | ||||
Purchases of other intangible assets | (28,013 | ) | (19,440 | ) | (18,356 | ) | ||||
Purchase of 3G and 4G licenses in Ukraine and Russia | (2,598 | ) | (10,426 | ) | — | |||||
Proceeds from sale of property, plant and equipment and assets held for sale | 4,042 | 2,988 | 619 | |||||||
Purchases of short-term and other investments | (9,739 | ) | (73,485 | ) | (70,626 | ) | ||||
Proceeds from sale of short-term and other investments | 39,021 | 31,678 | 67,450 | |||||||
Investments in associates (Note 7) | (4,094 | ) | — | (7,767 | ) | |||||
Disposal of discontinued operation, net of cash disposed | (378 | ) | — | — | ||||||
| | | | | | | | | | |
NET CASH USED IN INVESTING ACTIVITIES | (57,302 | ) | (145,356 | ) | (105,008 | ) | ||||
| | | | | | | | | | |
The accompanying notes are an integral part of thethese consolidated financial statements.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 20132016, 2015 AND 20122014
(Amounts in millions of Russian Rubles)
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | 2012 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Cash payments for the acquisitions of subsidiaries from entities under common control and noncontrolling interests | (26 | ) | — | (261 | ) | |||||
Contingent consideration paid on acquisition of subsidiaries | — | — | (20 | ) | ||||||
Proceeds from issuance of notes | 2 | 25,651 | — | |||||||
Repayment of notes | (23,152 | ) | (6,195 | ) | (25,561 | ) | ||||
Notes and debt issuance cost | (360 | ) | (193 | ) | — | |||||
Reimbursement of debt issuance cost | — | 959 | — | |||||||
Capital lease obligation principal paid | (227 | ) | (202 | ) | (213 | ) | ||||
Dividends paid | (49,921 | ) | (39,706 | ) | (29,626 | ) | ||||
Proceeds on disposal of Business-Nedvizhimost, net of cash disposed | — | 3,068 | — | |||||||
Cash on sale of building to Sistema | 508 | — | — | |||||||
Cash deconsolidated on the loss of control over Stream | — | — | (227 | ) | ||||||
Proceeds from loans | 69,421 | 353 | 17,955 | |||||||
Loan principal paid | (29,437 | ) | (38,996 | ) | (37,394 | ) | ||||
Other financing activities | 21 | 116 | 1 | |||||||
| | | | | | | | | | |
Net cash used in financing activities—continuing operations | (33,171 | ) | (55,145 | ) | (75,346 | ) | ||||
| | | | | | | | | | |
NET CASH USED IN FINANCING ACTIVITIES | (33,171 | ) | (55,145 | ) | (75,346 | ) | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | 10,195 | 1,037 | (985 | ) | ||||||
| | | | | | | | | | |
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS | 30,954 | 8,598 | (37,575 | ) | ||||||
CASH AND CASH EQUIVALENTS, beginning of the year | 30,612 | 22,014 | 59,589 | |||||||
| | | | | | | | | | |
CASH AND CASH EQUIVALENTS, end of the year | 61,566 | 30,612 | 22,014 | |||||||
Less: cash and cash equivalents from discontinued operations, end of the year | — | — | (411 | ) | ||||||
CASH AND CASH EQUIVALENTS from continuing operations, end of the year | 61,566 | 30,612 | 21,603 | |||||||
| | | | | | | | | | |
Less: cash and cash equivalents within disposal group held for sale | (156 | ) | — | — | ||||||
| | | | | | | | | | |
CASH AND CASH EQUIVALENTS, end of the year | 61,410 | 30,612 | 21,603 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
SUPPLEMENTAL INFORMATION: | ||||||||||
Income taxes paid | 9,906 | 11,590 | 17,050 | |||||||
Interest paid | 17,134 | 15,979 | 19,104 | |||||||
Non-cash investing and financing activities: | ||||||||||
Amounts owed for capital expenditures | 21,935 | 3,908 | 3,502 | |||||||
Payables related to business acquisitions | 99 | 11 | 277 | |||||||
Capital lease obligations | 9,395 | 48 | 212 |
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Repayment of notes | (20,364 | ) | (24,018 | ) | (23,153 | ) | ||||
Proceeds from issuance of notes | 10,000 | 5 | — | |||||||
Notes and debt issuance cost paid | (16 | ) | (1,244 | ) | (360 | ) | ||||
Finance lease obligation principal paid | (334 | ) | (409 | ) | (227 | ) | ||||
Dividends paid | (52,805 | ) | (50,786 | ) | (49,921 | ) | ||||
Cash flows from transactions with entities under common control | 3,063 | (4,821 | ) | 508 | ||||||
Proceeds from loans | 50,696 | 63,162 | 69,179 | |||||||
Repayment of loans | (69,532 | ) | (16,132 | ) | (29,235 | ) | ||||
Cash flows under credit guarantee agreement related to foreign-currency hedge (Note 18) | (2,984 | ) | 6,706 | — | ||||||
Repurchase of common stock | (748 | ) | (6 | ) | (2 | ) | ||||
Other financial activities | (14 | ) | (52 | ) | (1 | ) | ||||
| | | | | | | | | | |
NET CASH USED IN FINANCING ACTIVITIES | (83,038 | ) | (27,595 | ) | (33,212 | ) | ||||
| | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | (5,219 | ) | 761 | 10,195 | ||||||
| | | | | | | | | | |
NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS | (14,994 | ) | (28,102 | ) | 30,954 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
CASH AND CASH EQUIVALENTS, beginning of the year, including cash and cash equivalents within assets held for sale of nil, nil and 156, respectively | 33,464 | 61,566 | 30,612 | |||||||
CASH AND CASH EQUIVALENTS, end of the year | 18,470 | 33,464 | 61,566 | |||||||
Less cash and cash equivalents within assets held for sale | — | — | 156 | |||||||
| | | | | | | | | | |
CASH AND CASH EQUIVALENTS, end of the year | 18,470 | 33,464 | 61,410 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying notes are an integral part of thethese consolidated financial statements.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
1. GENERAL INFORMATION AND DESCRIPTION OF BUSINESS
Public Joint-Stock Company Mobile TeleSystems ("MTS PJSC", or "the Company") is a company incorporated under the laws of the Russian Federation and having its registered address at 4, Marksistskaya Street, 109147, Moscow, Russian Federation.
The consolidated financial statements of the Company and its subsidiaries ("the Group" or "MTS") as of 31 December 2016 and 2015, and for the years ended 31 December 2016, 2015 and 2014 were authorized for issue by President on March 21, 2017.
Business of the Group—Open Joint-Stock Company Mobile TeleSystems ("MTS OJSC", or "the Company")PJSC was incorporated on March 1, 2000, through the merger of MTS CJSC and Rosico TC CJSC, its wholly-owned subsidiary. MTS CJSC started its operations in the Moscow license area in 1994 and then began expanding through Russia and the CIS. MTS OJSC'sPJSC's majority shareholder is Joint-Stock Financial Corporation Sistema or "Sistema"., whose controlling shareholder is Vladimir P. Yevtushenkov.
In these notes, "MTS" or the "Group" refers to Mobile TeleSystems OJSC and its subsidiaries.
The Group provides a wide range of telecommunications services including voice and data transmission, internet access, pay TV, various value added services through wireless and fixed lines, integration services as well as selling equipment and accessories. The Group's principal operations are located in Russia, Ukraine, Turkmenistan Uzbekistan and Armenia.
MTS completed its initial public offering in 2000 and listed its shares of common stock, represented by American Depositary Shares, or ADSs, on the New York Stock Exchange under the symbol "MBT". Since 2003 common shares of MTS OJSCPJSC have been traded on the OpenPublic Joint-Stock Company "Moscow Exchange MICEX-RTS" ("Moscow Exchange").
Since 2009, the Group has been developing its own retail network, operated by Russian Telephone Company CJSC ("RTC"), a wholly owned subsidiary of MTS OJSC.PJSC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
Accounting principlesBasis of preparation—The Group's entities maintain accounting books and records in local currencies of their domicileThese consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the requirementsInternational Accounting Standards Board ("IASB").
These consolidated financial statements are prepared on a historical cost basis, unless disclosed otherwise. Historical cost is generally based on the fair value of respective accountingthe consideration given in exchange for goods and tax legislation. The accompanyingservices.
Amounts in the consolidated financial statements are stated in millions of Russian Rubles ("RUB million"), unless indicated otherwise.
These consolidated financial statements have been prepared in order to present MTS' financial position and its results of operations and cash flows in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and are expressed in terms of Russian Rubles.
The accompanying consolidated financial statements differ from the financial statements used for statutory purposes in that they reflect certain adjustments, not recorded on the entities' books, which are appropriate to presentassumption that the financial position, results of operationsGroup is a going concern and cash flowswill continue in accordance with U.S. GAAP. The principal adjustments are related to revenue recognition, foreign currency translation, deferred taxation, consolidation, acquisition accounting, depreciation and valuation of property, plant and equipment, intangible assets and investments.operation for the foreseeable future.
Basis of consolidation—The consolidated financial statements includeincorporate the accountsfinancial statements of the Company as well asand entities controlled by the Company. Control is achieved only where the Company has operatingthe power over the entity, is exposed and financial control, most often through the direct or indirect ownership of a majority voting interest. Those ventures where the Group exercises significant influence but does not have operatinghas rights to variable returns, and financial control are accounted for using the equity method. Investments in which the Group does not have the abilityis able to exercise significant influence over operating and financial policies are accounted for under the cost method and included in long-term investments in the consolidated statements of financial position. The consolidated financial statements also include accountsuse power to affect its amount of variable interestreturns. The results of the controlled entities ("VIEs") in which the Group is deemed toacquired or disposed of
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
beduring the primary beneficiary. An entity is generally a VIE if it meets any ofreporting period are included in the following criteria: (i)consolidated financial statements from the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii)date, the equity investors cannot make significant decisions about the entity's operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses ofGroup achieves control over the entity, or receiveuntil the expected returnsdate on which the Company ceases to control the entity. If necessary, the accounting policies of controlled entities' are aligned with the accounting policy applied by the Group. All intra-group balances, income, expenses and cash flows are eliminated on consolidation.
Those entities where the Group exercises significant influence are recognized as associates and accounted for using the equity method. Significant influence is the power to participate in the financial and operating policy decisions of the entityinvestee but is not control or joint control over those policies. These entities are recognized at cost at the time of acquisition and substantially alladjusted thereafter to recognize the Group's share of the profit or loss and other comprehensive income. The carrying amount of the investment in such entities may include goodwill as the positive difference between the cost of the investment and Group's proportionate share in the fair values of the entity's activities involve or are conducted on behalfidentifiable assets and liabilities. The carrying amount of the investor with disproportionately few voting rights. All significant intercompany transactions, balancesinvestment accounted for using the equity method is tested for impairment provided there are indications of impairment. If the carrying amount of the investment exceeds its recoverable amount, an impairment loss is recognized in the amount of the difference. The recoverable amount is measured at the higher of fair value less costs of disposal and unrealized gains andvalue in use. The Group presents its share in profits or losses on transactions have been eliminated.
in associates within operating profit if those interests are viewed as part of Group's core operations. As of December 31, 20142016, only MTS Belarus was considered to be a part of Group's core operating activity. Shares in profits and 2013, the Company had investments in the following significant legal entities:
| | December 31, | |||||||
---|---|---|---|---|---|---|---|---|---|
| Accounting method | ||||||||
| 2014 | 2013 | |||||||
MTS Turkmenistan | Consolidated | 100.0 | % | 100.0 | % | ||||
MTS Bermuda(1) | Consolidated | 100.0 | % | 100.0 | % | ||||
MTS Finance | Consolidated | 100.0 | % | 100.0 | % | ||||
MTS Ukraine | Consolidated | 100.0 | % | 100.0 | % | ||||
RTC | Consolidated | 100.0 | % | 100.0 | % | ||||
Sibintertelecom | Consolidated | 100.0 | % | 100.0 | % | ||||
TVT(2) | Consolidated | — | 100.0 | % | |||||
Sputnikovoe TV | Consolidated | 100.0 | % | 100.0 | % | ||||
Sistema Telecom(2) | Consolidated | — | 100.0 | % | |||||
Elf Group(2) | Consolidated | — | 100.0 | % | |||||
Intercom(2) | Consolidated | — | 100.0 | % | |||||
Zheleznogorsk City Telephone Communications ("ZhelGorTeleCom")(2) | Consolidated | — | 100.0 | % | |||||
Pilot(2) | Consolidated | — | 100.0 | % | |||||
TVKiK(2) | Consolidated | — | 100.0 | % | |||||
Dega | Consolidated | 100.0 | % | 100.0 | % | ||||
SMARTS | Consolidated | 100.0 | % | — | |||||
Metro-Telecom | Consolidated | 95.0 | % | 95.0 | % | ||||
MGTS | Consolidated | 94.6 | % | 94.6 | % | ||||
K-Telecom | Consolidated | 80.0 | % | 80.0 | % | ||||
UMS | Consolidated | 50.01 | % | — | |||||
MTS International Funding Limited ("MTS International") | Consolidated | VIE | VIE | ||||||
Intellect Telecom | Equity | 47.3 | % | 47.3 | % | ||||
Stream | Equity | 45.0 | % | 45.0 | % | ||||
MTS Belarus | Equity | 49.0 | % | 49.0 | % | ||||
MTS Bank | Equity | 27.0 | % | 26.3 | % | ||||
OZON Holdings Limited | Equity | 10.8 | % | — |
The Group has joint operations with MTS OJSC on October 1, 2014.
Investments in shares of the companies over which the Group does not have control or an ability to exercise significant influence are accounted for under the cost method. The Group does not evaluate cost-method investments for impairment unless there is an indicator of impairment.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
TheAs of December 31, 2016 and December 31, 2015, the Company had investments in the following significant entities:
| Accounting method | December 31, 2016 | December 31, 2015 | ||||||
---|---|---|---|---|---|---|---|---|---|
RTC | Consolidated | 100.0 | % | 100.0 | % | ||||
MTS Ukraine | Consolidated | 100.0 | % | 100.0 | % | ||||
MTS Turkmenistan | Consolidated | 100.0 | % | 100.0 | % | ||||
Sibintertelecom | Consolidated | 100.0 | % | 100.0 | % | ||||
NVision Group | Consolidated | 100.0 | % | 100.0 | % | ||||
Sitronics Telecom Solutions | Consolidated | 100.0 | % | 100.0 | % | ||||
NVision Czech Republic | Consolidated | 100.0 | % | 100.0 | % | ||||
Sputnikovoe TV | Consolidated | 100.0 | % | 100.0 | % | ||||
Stream | Consolidated | 100.0 | % | 100.0 | % | ||||
Dega | Consolidated | 100.0 | % | 100.0 | % | ||||
MTS Bermuda(1) | — | — | 100.0 | % | |||||
Stream Digital(2) | Consolidated | 100.0 | % | — | |||||
Metro-Telecom | Consolidated | 95.0 | % | 95.0 | % | ||||
MGTS Group | Consolidated | 94.7 | % | 94.7 | % | ||||
K-Telecom | Consolidated | 80.0 | % | 80.0 | % | ||||
Navigation Information Systems Group | Consolidated | 77.7 | % | 77.7 | % | ||||
UMS(3) | — | — | 50.01 | % | |||||
MTS International Funding Limited(4) ("MTS International") | Consolidated | SE | SE | ||||||
MTS Belarus | Equity | 49.0 | % | 49.0 | % | ||||
MTS Bank | Equity | 26.6 | % | 27.0 | % | ||||
Zifrovoe TV | Equity | 20.0 | % | 20.0 | % | ||||
OZON Holdings Limited | Equity | 10.8 | % | 10.8 | % |
Ireland. The Group is the primary beneficiary ofdoes not have any equity in MTS International. MTS InternationalIt was established for the purpose of raising capital through the issuance of debt securities on the Irish Stock Exchange followed by transferring the proceeds through a loan facility to the Group. In 2010 and 2013, MTS International issued $750 million 8.625% notes due in 2020 and $500 million 5.0% notes due in 2023, respectively (Note 17)15). In 2014 the Group repurchased Notes due in 2020 and 2023 with a nominal value of $126.9 million (RUB 5,043 million) and $21.5 million (RUB 781 million), respectively. The notes are guaranteed by MTS OJSCPJSC in the event of default. While the Group does not hold any equity in MTS International, it has concluded that it is the primary beneficiary by virtue of the fact that it has the power to direct the activities of MTS International that most significantly impact its performance and by virtue of the guarantee that exists which means the Group has the obligation to absorb losses of MTS International that could potentially be significant to MTS International.
The table below summarizes the assets and liabilities of MTS International as of December 31, 2014 and 2013:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Cash and cash equivalents | 3 | 1 | |||||
Intercompany receivable from MTS OJSC(1) | 70,535 | 41,035 | |||||
| | | | | | | |
Total assets | 70,538 | 41,036 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest payable(2) | 212 | 123 | |||||
Notes payable due 2020 and 2023(3) | 70,323 | 40,912 | |||||
Other payables | 3 | 1 | |||||
| | | | | | | |
Total liabilities | 70,538 | 41,036 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The MTS International Notes due 2020 and 2023 and related interest payable are fully covered by intercompany receivables from MTS OJSC. MTS International does not perform any other activities except those required for notes servicing. The Group bears all costs incurred by MTS International in connection with the notes' maintenance activities. Such costs forAccordingly, the years ended December 31, 2014, 2013Group concluded that it exercises control over the entity.
Acquisitions from entities under common control—Business combinations arising from transfers of interests in entities that are under common control with the Group are consolidated prospectively starting from the date, the control over those entities is passed to the Group. The assets and 2012 amounted to RUB 4,080 million, RUB 2,535 million and RUB 2,011 million,liabilities acquired are recognized at the carrying values recoded previously in the counterparty's financial statements with the resulting gain or loss recognized directly in equity.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
respectively, and were included in interest expense reported by the Group in the consolidated statements of operations and comprehensive income.
Functional currency translation methodology—As of December 31, 2014,2016, the functional currencies of Group entities were as follows:
RemeasurementForeign-currency transactions are translated into the functional currency at the exchange rates at the dates of the financial statements into functionaltransactions. At the reporting date, monetary items denominated in foreign currencies where applicable, and translation of financial statements into Russian Rubles has been performed as follows:
For entities whose records are not maintained in their functional currencies, monetary assets and liabilities have been remeasuredtranslated at the period-endclosing rate, whereas non-monetary items are stated at the exchange rates. Non-monetary assets and liabilities have been remeasuredrate at historical rates. Revenues, expenses and cash flows have been remeasured at average rates. Remeasurementthe date of their recognition. Exchange rate differences resulting from the use of these rates have been accounted for as currency exchange and translation gains and lossesare recognized in the accompanying consolidated statements of operations and comprehensive income.profit or loss.
For entities whose records are maintained in their functional currency, which is other than the reporting currency, all year-end assets and liabilities have been translated into U.S. DollarsDollar at the period-end exchange rate set by local central banks. Subsequently, U.S. Dollars balances have been translated into Russian Rubles at the period-end exchange rate set by the Central Bank of Russia. Revenues and expenses have been translated at the average exchange rate for the period using cross-currency exchange rate via U.S. Dollar as described above. Translation differences resulting from the use of these rates are reported as a component of accumulated other comprehensive income in the consolidated statements of financial position.income.
Management estimates—The preparation of the consolidated financial statements in conformity 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 during the reporting period. Actual results could differ from those estimates.
Significant estimates include the allowance for doubtful accounts and inventory obsolescence, valuation allowance for deferred tax assets for which it is more likely than not the assets will not be realized, the valuation of assets acquired and liabilities assumed in business combinations, the recoverability of investments and incomethe valuation of goodwill, property, plant and equipment and intangible assets, liability under put option agreement, certain provisions and financial instruments.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
tax benefits, the recoverability of investments and the valuation of goodwill, intangible assets, other long-lived assets, redeemable noncontrolling interest, certain accrued liabilities and financial instruments.
Cash and cash equivalents—Cash and cash equivalents represent cash on hand and in bank accounts and short-term investments, including term deposits, having original maturities of less than three months. The carrying value of these investments approximates their fair value.
Short-term investments—Short-term investments mainly represent investments in loans, time deposits, which have original maturities in excess of three months and are repayable in less than twelve months, as well as investments in a mutual investment fund and debt securities. The investment in the mutual investment fund and debt securities were classified as available for sale and carried at fair value with unrealized gains and losses recorded as part of other comprehensive income. Deposits and loans are carried at amortized cost (Note 7).
Other investments—Other investments consist primarily of long-term deposits, which are repayable in more than a year, loans and equity holdings in private companies. Deposits and loans are classified as held to maturity and carried at amortized cost. The Group reviews these investments for indicators of impairment on a regular basis. Investments in shares of companies over which the Group has no significant influence are carried at cost. The Group does not evaluate cost-method investments for impairment unless there is an indicator of impairment.
Property, plant and equipment—Property, plant and equipment, including improvements, are stated at cost. Property, plant and equipment with a useful life of more than one year is capitalized at historical cost and depreciated on a straight-line basis over its expected useful life.life, as follows:
Network and base station equipment: | ||
Network infrastructure | 5 - 44 years | |
Other | 1.5 - 21 years | |
Land and buildings: | ||
Buildings | 20 - 150 years | |
Leasehold improvements | the term of the lease | |
Office equipment, vehicles and other: | ||
Office equipment | 3 - 21 years | |
Vehicles | 3 - 7 years | |
Other | 2 - 25 years |
The estimated useful lives and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
The gain or loss arising on the disposal of an item of property, plant and equipment is determined as the difference between any sale proceeds and the carrying amount of the asset and is recognised in the consolidated statement of profit or loss.
Construction in progress and equipment held for installation is not depreciated until the constructed or installed asset is ready for its intended use. Maintenance and repair costs are expensed as incurred, while upgrades and improvements are capitalized.
Borrowing costs—Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset during the construction phase that necessarily takes a substantial period of time are capitalized as part of property, plant and equipment until the asset is substantially ready for its intended use. The Group considers a construction period of more than six months to be substantial.
Other intangible assets—Other intangible assets primarily consist of billing, telecommunication, accounting and office software as well as numbering capacity, customer base and customer base.licenses. These assets are assets with finite useful lives. They are initially recognized at cost and amortized on a straight-line basis over their estimated useful lives.
Accounts receivableGoodwill—Accounts receivableGoodwill represents an excess of consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets of the acquired entity. Goodwill is not amortized, but is tested for impairment based on the recoverable amount of the cash-generating unit (CGU) to which the goodwill is allocated. The impairment test is carried out on a regular basis at the end of each financial year, as well as whenever there are stated netindications that the carrying amount of allowancethe cash-generating unit is impaired. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units that are expected to benefit from the synergies of the combination. If the carrying
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
amount of the cash-generating unit to which goodwill is allocated exceeds its recoverable amount, goodwill allocated to this cash-generating unit must be reduced. Impairment losses for doubtful accounts.goodwill must not be reversed. If the impairment loss recognized for the cash-generating unit exceeds the carrying amount of the allocated goodwill, the additional amount of the impairment loss is recognized through the pro-rata reduction of the carrying amounts of the assets allocated to the cash-generating unit.
Impairments of intangible assets and property, plant and equipment—Impairments are identified by comparing the carrying amount with the recoverable amount. If no future cash flows generated independently of other assets can be allocated to individual assets, recoverability is assessed on the basis of the cash-generating unit to which the assets can be allocated. At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. If any such indication exists, the recoverable amount of the asset or cash-generating unit must be determined. In addition, at the end of each period the Group assesses whether there is any indication that an impairment loss recognized in prior periods for an asset other than goodwill no longer exists or may be decreased. If the impairment loss is reversed, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years.
AllowanceAssets and disposal groups held for doubtful accountssale—The Group provides an allowanceclassifies assets and disposal groups as held for doubtful accounts based on management's periodic review with respectsale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is met only when the assets (or disposal group) are available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and their sale is highly probable to occur within a year. Held for sale assets and disposal groups are measured at the recoverabilitylower of trade receivables, advances given, loans and other receivables. Such allowance reflects specific cases, collection trendscarrying amount or estimates based on evidence of collectability. For changes in the allowance for doubtful accounts receivable see Note 8.fair value less cost to sell.
InventoryInventories and spare parts—Inventory isInventories are stated at the lower of cost or marketnet realizable value. Inventory cost is determined using the weighted average cost method. Handsets and accessories held for sale are expensed when sold. The Group regularly assesses its inventories for obsolete and slow-moving stock.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Value-added tax ("VAT")—Value-added tax related to sales is payable to the tax authorities on an accrual basis based upon invoices issued to the customer. VAT incurred for purchases may be reclaimed from the state, subject to certain restrictions, against VAT related to sales.
Income taxes—Income taxes of the Group's Russia-incorporated entities have been computed in accordance with Russian legislation.legislation and are based on the taxable profit for the period. The corporate income tax rate in Russia is 20%. The incomewithholding tax rate on dividends paid within Russia is 9%13%. The foreign subsidiaries of the Group are paying incomewithholding taxes in their respective jurisdictions. Deferred tax assets and liabilities are recognized for temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases of assets and liabilities that will result in future taxable or deductible amounts. The deferred tax assets and liabilities are measured using the enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance when,
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in the opinionmillions of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making such determination, the Group considers all available information, including future reversals of existing taxable temporary differences, projected taxable income, tax strategies and recent financial results.Russian Rubles unless otherwise stated)
Uncertain tax positions are recognized in the consolidated financial statements for positions which are considered more likely than not of being sustained based on the technical merits of the position on audit by the tax authorities. The measurement of the tax benefit recognized in the consolidated financial statements is based upon the largest amount of tax benefit that, in management's judgment, is more than 50% likely of being realized based on a cumulative probability assessment of the possible outcomes.
The Group recognizes interest and penalties related to unrecognized tax benefits within income taxes.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Assets heldFinancial instruments—A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets include, in particular, cash and cash equivalents, trade and other receivables, investments (mainly deposits with original maturity of more than three months, originated loans and notes, as well as debt securities) and derivative financial assets. Financial liabilities generally substantiate claims for repayment in cash or another financial asset. In particular, this includes bonds, trade and other payables, bank loans, finance lease obligations and derivative financial liabilities. Financial instruments are recognized as soon as the Group becomes a party to the contractual regulations of the financial instrument.
Financial assets and financial liabilities are recognized initially at fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability, except for a financial asset or liability accounted for at fair value through profit or loss, in which case transaction costs are expensed. Subsequently they are measured either at amortized cost or fair value depending on classification of those assets and liabilities based on their purpose. Financial assets can be classified as 1) financial assets at fair value through profit or loss; 2) held-to-maturity investments; 3) available for sale financial assets; 4) loans and receivables. Financial liabilities can be classified as 1) financial liabilities at fair value or 2) other financial liabilities.
Cash and cash equivalents—Cash and cash equivalents represent cash on hand and in bank accounts, as well as short-term bank deposits, which have original maturities of less than three months. Such investments are measured at amortized cost.
Trade and other receivables—Trade and other receivables are stated at their nominal value as reduced by appropriate allowance for doubtful accounts.
Allowance for doubtful accounts—The Group classifiesprovides an allowance for doubtful accounts based on management's periodic review with respect to the recoverability of trade receivables, advances given, loans and other receivables. Such allowance reflects specific cases, collection trends or estimates based on evidence of collectability.
Short-term investments—Short-term investments mainly represent investments in loans, time deposits, which have original maturities in excess of three months and are repayable in less than twelve months, as well as investment in debt securities. Investment in debt securities are classified as financial assets at fair value through profit and loss, if they held for trading, otherwise they are classified as available for sale with unrealized gains and losses recorded as part of other comprehensive income. Deposits and loans are carried at amortized cost.
Other investments—Other investments consist primarily of long-term deposits, which are repayable in more than a year, loans, notes and equity holdings in private companies. Deposits, loans and notes not quoted in active market are classified as loans and receivables and carried at amortized cost. The notes quoted in active market are classified based on Group's intention and ability to hold these notes to maturity either as held to maturity or available for sale. The Group reviews these investments for indicators of impairment on a regular basis.
Trade payables and other non-derivative financial liabilities are measured at amortized cost.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Hedging activities—The Group uses derivative instruments, including interest rate and foreign currency swaps, to manage foreign currency and interest rate risk exposures. The Group measures derivatives at fair value and recognizes them as either other current or other non-current financials assets or liabilities in the consolidated statement of financial position. Cash flows from derivatives are classified according to their nature. The Group reviews related fair value hierarchy classifications on a quarterly basis. The fair value measurement of the Group's derivative instruments is based on the observable yield curves for similar instruments.
The Group designates derivatives as either fair value hedges or cash flow hedges in case the required criteria are met.
Fair value hedges—Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately together with any changes in the fair value of the hedged asset or liability that is attributed to the hedged risk.
Cash flow hedges—The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in other comprehensive income.
The gain or loss relating to the ineffective portion is recognized immediately in profit or loss. Gains or losses accumulated in other comprehensive income are immediately reclassified into consolidated statement of profit or loss when related hedged transactions affects earnings.
For derivatives that do not meet the conditions for hedge accounting, gains and losses from changes in the fair value are recorded immediately in profit or loss.
Assets and liabilities related to multiple derivative contracts with one counterparty are not offset by the Group.
Fair value of financial instruments—Fair value of financial assets and liabilities is defined as held for sale when allan exit price, representing the following conditions have been met: (i) management having the authority to approve the action, commits to a planamount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the asset (disposal group); (ii)inputs used in the asset (disposal group)methodologies of measuring fair value for assets and liabilities, is availableas follows:
Financial assets and financial liabilities are classified in the three-tier hierarchy based on the lowest level of input that is significant to locatethe fair value measurements. The Group's assessment of the significance of a buyerparticular input to the fair value measurements requires judgment, and other actions required to completemay affect the plan to sell have been initiated; (iv) the sale is probable and transfervaluation of the assets (disposal group)and liabilities being measured and their placement within the fair value hierarchy.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Liability under put option agreement—To optimize the structure of business acquisitions and to defer payment of the purchase price, the Group enters into put and call option agreements to acquire the remaining non-controlling stakes in newly acquired subsidiaries. Upon initial recognition, the commitment to purchase non-controlling interests is expected to qualify for recognitionrecognized as a completed sale, within one year; (v)financial liability for the present value of the redemption amount, which approximates its fair value Subsequent changes in the value of the commitment are recognized in profit or loss for the reporting period.
Finance leases—Leases are classified as finance whenever the terms of the lease transfer substantially all risks and rewards incidental to ownership of the leased asset (the disposal group)to the Group. At the commencement of the lease term, the leased asset is being marketed at a reasonable price; and (vi) it is unlikely that the plan will be changed significantly or withdrawn. Held for sale assets are measured at the lower of carrying amount or fair value less cost to sell.or present value of the future minimum lease payments and is depreciated over the lease term. The corresponding liability is recognized in the consolidated statement of financial position within borrowings. The discount rate used in the calculating the present value of minimum lease payments is the interest rate implicit in the lease. If there is no interest rate in the lease, the Group's incremental borrowing rate is used.
AssetShare-based payment programs—Equity-settled share-based payment transactions are measured at fair value on the grant date. The fair value of the obligation is recognized as personnel costs over the vesting period and offset against capital reserves. For cash-settled share-based payment transactions, the fair value of the obligation is newly determined at each reporting date and at the settlement date, and the changes in the fair value are recognized in profit or loss, until the liability is settled.
Retirement benefits—MGTS, a subsidiary of the Group, has historically offered its employees certain benefits upon and after retirement, obligationswhich form a defined benefit plan. The cost of providing benefits is determined using projected unit credit method with actuarial valuation being carried out at the end of each reporting period.
Provisions—Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured at managements' best estimate of the expenditure required to settle the obligation at the reporting date and are discounted to present value where the effect is material. The main provisions the Group holds are in relation to employees' bonuses and other rewards, decommissioning and restoration obligation, tax provisions as well as legal claims.
Provision for decommissioning and restoration—The Group calculates asset retirement obligationsa provision for decommissioning and an associated asset retirement costrestoration when the Group has a legal or constructive obligation in connection with the retirement of tangible long-lived assets. The Group's obligations relate primarily to the cost of removing its equipment from sites. The Group recordedrecords the present value of asset retirement obligationsprovision for decommissioning and restoration as other long-term liabilitiesnon-current provisions in the consolidated statementsstatement of financial position.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
License costs—License costs are being amortized during the initial license period without consideration of possible future renewals, subject to periodic review for impairment, on a straight-line basis over the period of validity, which varies from three to fifteen years.
Goodwill—For acquisitions before January 1, 2009 goodwill represents the excess of the consideration paid over the fair value of the net identifiable assets acquired in business combinations and is not amortized. For acquisitions after January 1, 2009 goodwill is determined as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. Goodwill is reviewed for impairment at least annually or whenever it is determined that one or more impairment indicators exist. The Group determines whether impairment has occurred by assigning goodwill to the reporting unit identified in accordance with FASB ASC 350, Intangibles—Goodwill and Other, and comparing the carrying amount of the reporting unit to its fair value. If an impairment of goodwill has occurred, the Group recognizes a loss for the difference between the carrying amount and the implied fair value of goodwill. During the year ended December 31, 2012 the Group recognized goodwill impairment in amount of RUB 3,523 million related to Uzdunrobita litigation (Note 4) which is included in net income / (loss) from discontinued operations in the consolidated statements of operations and comprehensive income.
Impairment of long-lived assets—The Group periodically evaluates the recoverability of the carrying amount of its long-lived assets. Whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable, the Group compares undiscounted net cash flows estimated to be generated by those assets to their carrying amount. When the undiscounted cash flows are less than the carrying amounts of the assets, the Group records impairment losses to write the assets down to fair value, measured by estimating the discounted net future cash flows expected to be generated from the use of the assets. None of the Group's long-lived assets were impaired in 2014 and 2013. An impairment loss in the amount of RUB 16,514 million for the year ended December 31, 2012 was recognized by the Group subsidiaries in Uzbekistan as a result of the events described in Note 4 and included in net income / (loss) from discontinued operations.
Subscriber prepayments—The Group requires the majority of its customers to pay in advance for telecommunications services. All amounts received in advance of services provided are recorded as a
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
subscriber prepayment liability and are not recognized as revenues until the related services have been provided to the subscriber.
Treasury stock—Shares of common stock repurchased by the Group are recorded at cost as treasury stock and reduce the shareholders' equity in the Group's consolidated financial statements.
Revenue recognition—Revenue includes all revenues from the ordinary business activities of the Group. Revenues are measured at the fair value of the consideration received or receivable and recorded net of value-added taxtax. The Group recognizes revenue when the amount of revenue and recognized inrelated costs can be measured reliably; when it is probable that future economic benefit will flow to the accounting period in which they are earned in accordance with the realization principle.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)Group; and when specific criteria have been met, as described below.
Revenues derived from wireless, local telephone, long distance, data and video services are recognized when services are provided. This is based upon either usage (minutes of traffic processed, volume of data transmitted) or period of time (monthly subscription fees).
Content revenue is presented net of related costs when the Group acts as an agent of the content providers while gross revenue and related costs are recorded when the Group acts as a primary obligor in the arrangement.
Upfront fees received for connection of new subscribers, installation and activation of wireless, wireline and data transmission services ("connection fees") are deferred and recognized over the estimated average subscriber life, as follows:
Mobile subscribers | ||
Residential wireline voice phone subscribers | 15 years | |
| ||
Other fixed line subscribers | 3 - 5 years |
The Group calculates an average life of mobile subscribers for each region in which it operates and amortizes connection fees based on the average life specific to that region.
Regulated services—Regulated services provided by the Group primarily consist of local telephone services and services rendered to other operators, such as traffic charges, connection fees and line rental services. Changes in the rate structure for such services are subject to the Federal Tariff Service approval.
Revenue from regulated tariff services represented approximately 5.2%, 5.7% and 6.5% of the consolidated revenue for the years ended December 31, 2014, 2013 and 2012, respectively. This does not include revenue attributable to discontinued operations (Note 4).
Leasing arrangements—The Group classifies lease arrangements as capital or operating leases depending on their nature. Rentals payable under operating leases are charged to the statement of operations and comprehensive income on a straight line basis over the term of the relevant lease. For capital leases, the present value of future minimum lease payments at the inception of the lease is recognised as an asset and a liability in the statement of financial position.
Customer incentives—Incentives provided to customers are usually offered on signing a new contract or as part of a promotional offering. Incentives, representing the reduction of the selling price of the service (free minutes and discounts) are recorded in the period to which they relate, when the respective revenue is recognized, as a reduction to both trade receivables and service revenue.
The Group regularly provides special incentives to its retail customers. Generally the Group sells mobile devices of worldwide known brands with an offer of free telecommunication services for a time period from one to twelve months. Such arrangements with a customer provide for two deliverables—a mobile device delivered immediately and mobile services to be consumed in the future. Both deliverables in the arrangement qualify as separate units of accounting. The consideration received
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
from a customer is allocated between the deliverables based on their standalone value on the market, which is deemed to be a vendor-specific objective evidence of selling price.market. Revenue on the devices sales is recognized at the moment of their sale, and the revenue on provision of free telecommunication services is deferred and recognized in line with theirupon consumption by a subscriber. Revenue generated from multiple-element arrangements
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in the amountmillions of RUB 961 million and RUB 3,276 million were recognized in the consolidated statements of operations and comprehensive income for the years ended December 31, 2014 and 2013, respectively. The amount recognized for the year ended December 31, 2012 was not significant. The Group's multiple-element arrangements stipulate no performance-, cancellation-, termination- and refund-type provisions.Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Prepaid cards—The Group sells prepaid cards to subscribers separately from the handset. Prepaid cards, used as a method of cash collection, are accounted for as customer advances.subscriber prepayments. These cards allow subscribers to make a predetermined allotment of wireless phone calls and / or take advantage of other services offered by the Group, such as short messages and value-added services. Revenue from the sale of prepaid cards is deferred until the service is rendered to the customer, whereby the customer uses the airtime or the card expires.
Roaming discounts—The Group enters into roaming discount agreements with a number of wireless operators. According to the terms of the agreements the Group is obliged to provide and entitled to receive a discount that is generally dependent on the volume of inter operator roaming traffic. The Group accounts for discounts received from and granted to roaming partners in accordance with FASB ASC 650, Revenue Recognition. The Group uses various estimates and assumptions, based on historical data and adjusted for known changes, to determine the amount of discount to be received or granted. Such estimates are adjusted monthly to reflect newly-available information.
The Group accounts for discounts received as a reduction of roaming expenses and discountsrebates granted as reduction of roaming revenue. The Group considers terms of the various roaming discount agreements in order to determine the appropriate presentation of the amounts receivable from and payable to its roaming partners in its consolidated statementsstatement of financial position.
Sales and marketing expenses—Sales and marketing expenses consist primarily of dealers' commissions and advertising costs. Dealers' commissions are linked to revenues received during the six-month period from the date a new subscriber is activated by a dealer. The Group expenses these costs as incurred. Advertising costs for the years ended December 31, 2014, 2013 and 2012, were RUB 8,313 million, RUB 8,463 million and RUB 7,908 million, respectively.
Retirement benefit and social security costsNetting—The Group contributesoffsets its financial assets and financial liabilities only if it has a legally enforceable right to set off the local state pensionrecognized amounts and social fundsintends either to settle on behalf of all its employees.a net basis or to realise the asset and settle the liability simultaneously.
Standards, interpretations and amendments adopted on January 1, 2016
In Russia all social contributions paid during the year ended December 31, 2014 are represented by payments to governmental social funds, including the Pension FundNone of the Russian Federation,standards, interpretations and amendments adopted by the Social Security Fund ofGroup on January 1, 2016 had a significant effect on the Russian Federation and the Medical Insurance Fund of the Russian Federation. The contributions are expensed as incurred. The amount of social contributions recognizedGroup's consolidated financial statements.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
by the GroupStandards, interpretations and amendments in Russia amounted to RUB 8,064 million, RUB 7,535 million and RUB 6,512 million in 2014, 2013 and 2012, respectively.issue but not yet effective
MGTS, a subsidiary of theThe Group has historically offered its employees certain benefits uponnot applied the following new and revised IFRSs that have been issued but not yet effective:
Amendments to IAS 12 | Recognition of Deferred Tax Assets for Unrealized Losses(1) | |
Amendments to IAS 7 | Disclosure Initiative(1) | |
IFRS 9 | Financial Instruments(2) | |
Amendments to IFRS 2 | Classification and measurement of Share-based Payment Transactions(2) | |
IFRS 15 | Revenue from contracts with Customers(2) | |
Amendments to IFRS 4 | Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts(2) | |
Amendments to IAS 40 ) | Transfers of Investment Property(2) | |
IFRIC 22 | Foreign Currency Transactions and advances Consideration | |
IFRS 16 | Leases(3) | |
Amendments to IFRS 10 and IAS 28 | Sale or Contribution of Assets between an Investor and its Associate or Joint Venture(4) | |
Amendments IFRSs | Annual Improvements to IFRSs 2014-2016 Cycle |
In Ukraine, Uzbekistan, Turkmenistan and Armenia the subsidiaries of the Group are required to contribute a specified percentage of each employee's payroll up to a fixed limit to the local pension, unemployment and social security funds. Payments to the pension fund in Ukraine amounted to RUB 1,535 million, RUB 2,803 million and RUB 2,493 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amounts contributed to the pension funds in Uzbekistan, Turkmenistan and Armenia were not significant.
Redeemable noncontrolling interest—From time to time, to optimize the structure of business acquisitions and to defer payment of the purchase price, the Group enters into put and call option agreements to acquire the remaining noncontrolling stakes in newly acquired subsidiaries. As these put and call option agreements are not freestanding, the underlying shares of such put and call options are classified as redeemable securities and are accounted for at redemption value which is the fair value of redeemable noncontrolling interests as of the reporting date. The fair value of redeemable noncontrolling interests is measured using discounted future cash flows techniques, subject to applicable caps. The noncontrolling interest is measured at fair value using a discounted cash flow technique utilizing significant unobservable inputs ("Level 3" significant unobservable inputs of the hierarchy established by the U.S. GAAP guidance). Changes in the redemption value of redeemable noncontrolling interests are accounted for in the Group's retained earnings. Redeemable noncontrolling interests are presented as temporary equity in the consolidated statements of financial position.IFRS 9,
Financial instruments and hedging activitiesInstruments.—The Group uses derivative instruments, including interest rate IFRS 9 governs the classification and foreign currency swaps, to manage foreign currency and interest rate risk exposures. The Group measures derivatives at fair value and recognizes them as either other current or other non-current assets or liabilities in the consolidated statements of financial position. Cash flows from derivatives are classified according to their nature. The Group reviews its fair value hierarchy classifications on a quarterly basis. Changes in significant observable valuation inputs identified during these reviews may trigger reclassification of fair value hierarchy levelsmeasurement of financial assets and liabilities. During the years ended December 31, 2014, 2013liabilities, derecognition, impairment and 2012, no reclassifications occurred.hedge accounting matters. The fair value measurementadoption of these amendments is not expected to have a material impact on the Group's derivative instruments is based on the observable yield curves for similar instruments ("Level 2" of the hierarchy established by the U.S. GAAP guidance).
The Group designates derivatives as either fair value hedges or cash flow hedges in case the required criteria are met. Changes in the fair value of derivatives that are designated and qualify as fair
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
value hedges are recorded in the consolidated statements of operations and comprehensive income together with any changes in the fair value of the hedged asset or liability that is attributed to the hedged risk.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in accumulated other comprehensive income. Gains and losses associated with the related hedged items are recognized in the consolidated statements of operations and comprehensive income, depending on their nature.
The gain or loss relating to the ineffective portion is recognized immediately in earnings in the consolidated statements of operations and comprehensive income.
For derivatives that do not meet the conditions for hedge accounting, gains and losses from changes in the fair value are included in the consolidated statements of operations and comprehensive income (Note 21).
Assets and liabilities related to multiple derivative contracts with one counterparty are not offset by the Group.
The Group does not use financial instruments for trading or speculative purposes.
Fair value of financial instruments—The fair value of financial instruments, consisting of cash and cash equivalents, short-term investments, receivables and payables, which are included in current assets and liabilities, approximates the carrying value of these items due to the short-term nature of these amounts. The fair value of issued notes as of December 31, 2014 is disclosed in Note 17 and is based on quoted prices in active markets ("Level 1" of the hierarchy established by the U.S. GAAP guidance). The fair value of variable rate debt approximates its carrying value as of December 31, 2014. The fair value of fixed rate bank loans is disclosed in Note 22 and is measured by discounting future cash flows using current market rates.
Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Financial assets and financial liabilities are classified in three-tier hierarchy based on the lowest level of input that is significant to the fair value measurements. The Group's assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
Stock-based compensation—The Group accounts for stock-based compensation under FASB ASC 718, Compensation—Stock Compensation. Under the provisions of this guidance, companies must calculate and record the cost of equity instruments, such as stock options awarded to employees for services received, in the statements of operations and comprehensive income. The cost of the equity instruments is to be measured based on the fair value of the instruments on the date they are granted (with certain exceptions) and recognized over the period during which the employees are required to provide services in exchange for equity instruments. Compensation cost related to phantom stock options granted to the Group's employees recognized in the consolidated statements of operations and comprehensive income for the years ended December 31, 2014, 2013 and 2012 amounted to and RUB 1,017.2 million, RUB 483.0 million and RUB 1,445.8 million, respectively.statements.
Concentration of credit risk—Financial instruments that potentially subject the Group to significant concentrations of credit risk consist principally of cash and cash equivalents, investments, trade accounts receivable, loans and derivatives. The Group maintains cash and cash equivalents, investments, derivatives and certain other financial instruments with various financial institutions. These financial institutions are located in many different geographical regions, and the Group's policy is designed to limit exposure to any one institution. As part of its risk management processes, the Group performs periodic evaluations of the relative credit ratings of financial institutions (refer to Note 5 for description of political and economic risks in Ukraine).IFRS 15,
Concentrations of credit risk with respect to trade receivables are limited due to a highly diversified customer base, which includes a large number of individuals, private businesses and state-financed institutions.
New and recently adopted accounting pronouncementsRevenue from Contracts with Customers.—In May 2014, FASB amended This standard provides a single, principles-based five-step model for the determination and recognition of revenue to be applied to all contracts with customers. It replaces the existing accounting standards forIAS 18,Revenue, and IAS 11,Construction Contracts. The core principle of IFRS 15 is that an entity should recognize revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The GroupUnder the standard, an entity recognizes revenue when (or as) a performance obligation is required to adopt the amendments in the reporting period starting after December 15, 2017. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized assatisfied, i. e. when "control" of the date of initial application.goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15.
The Group is currently evaluating the impact of these amendments and the transition alternativesmain effect on the Group's consolidated financial statements.statements from implementation of the new standard will relate to future capitalization and recognition of the expenses for sales commissions (customer acquisition costs) over the estimated customer retention period.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR(Amounts in millions of Russian Rubles unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
The Group will utilize the option for simplified initial application, so that contracts that are not completed by January 1, 2018 will be accounted for as if they had been recognized in accordance with IFRS 15 from the very beginning. The cumulative effect arising from the transaction will be recognized as an adjustment to the opening balance of equity in the year of initial application. Prior period's comparatives will not be restated.
The Group is continuing to analize the effects of the new standard implementation, though a reliable estimate of the quantitative effects will only be possible once the project has been completed.
IFRS 16, Leases. This standard principally requires lessees to recognize assets and liabilities for all leases and to present the rights and obligations associated with these leases in the statement of financial position. Going forward, lessees will therefore no longer required to make the distinction between finance and operating leases. For all leases, the lessee will recognize a lease liability in its statement of financial position for the obligation to make future lease payments. At the same time, the lessee will capitalize a right of use to the underlying asset which is generally equivalent to the present value of the future lease payment plus directly attributable expenditures. The standard also includes new provisions on the definition of a lease and its presentation, on disclosures in the notes, and on sale and leaseback transactions. The Group is currently evaluating the impact of these amendments on the consolidated financial statements, though a reliable estimate of the quantitative effects is not possible at the present time.
Other mentioned IFRS pronouncements do not have a material impact on the Group's consolidated financial statements.
3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
Critical accounting estimates
A critical accounting estimate is an estimate that is both important to the presentation of the Group's financial position and requires management's most difficult, subjective or complex judgments, often as a result of the need to determine estimates and develop assumptions about the outcome of matters that are inherently uncertain.
Management evaluates such estimates on an on-going basis, based upon historical results, historical experience, trends, consultations with experts, forecasts of the future, and other methods which management considers reasonable under the circumstances. Management considers the accounting estimates discussed below to be its critical accounting estimates, and, accordingly, provides an explanation of each.
Depreciation and amortization of non-current assets
Depreciation and amortization expenses are based on management estimates of useful life, residual value and amortization method of property and equipment and intangible assets. Estimates may change due to technological developments, competition, changes in market conditions and other factors and may result in changes in the estimated useful life and in the amortization or depreciation charges. Technological developments are difficult to predict and management views on the trends and pace of
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (Continued)
development may change over time. Some of the assets and technologies, in which the Group invested several years ago, are still in use and provide the basis for the new technologies. Critical estimates in the evaluations of useful lives for intangible assets include, but are not limited to, the estimated average customer relationship based on churn, the remaining license period and the expected developments in technology and markets.
The useful lives of property and equipment and intangible assets are reviewed at least annually, taking into consideration the factors mentioned above and all other important relevant factors. The actual economic lives of intangible assets may be different from useful lives estimated by management, thereby resulting in a different carrying value of intangible assets with finite lives.
The Group continues to evaluate the amortization period for intangible assets with finite lives to determine whether events or circumstances warrant revised amortization periods. A change in estimated useful lives is a change in accounting estimate, and depreciation and amortization charges are adjusted prospectively. See Notes 11 and 14 for further information.
Impairment of non-current assets
The Group has made significant investments in property, plant and equipment, intangible assets, goodwill and other investments.
Pursuant to IAS 36, goodwill and other intangible assets with indefinite useful lives and intangible assets not yet brought into use must be tested for impairment annually or more often if indicators of impairment exist. Other assets are tested for impairment when circumstances indicate that there may be a potential impairment.
Estimating recoverable amounts of assets and CGUs must, in part, be based on management's evaluations, including the determination of the appropriate CGUs, the discount rate, estimates of future performance, the revenue generating capacity of the assets, timing and amount of future purchases of property and equipment, assumptions of the future market conditions and the long-term growth rate into perpetuity (terminal value). Changing the assumptions selected by management, in particular, the discount rate and growth rate assumptions used to estimate the recoverable amounts of assets, could significantly impact the Group's impairment evaluation and hence results.
All of the Group's operations are in countries with emerging markets. The political and economic situation in these countries may change rapidly and potentially have a significant impact on these countries.Changing state of the world economy, and increased macroeconomic risks, impact our assessment of cash flow forecasts and the discount rates applied.
There are significant variations between different markets with respect to growth, mobile penetration, Average Revenue Per User ("ARPU"), market share and similar parameters, resulting in differences in operating margins. The future developments of operating margins are important in the Group's impairment assessments, and the long-term estimates of these margins are highly uncertain.
See Notes 12 and 13 for further information about goodwill and impairment test.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (Continued)
Fair value of financial instruments
Where the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques, including discounted cash flow models. The inputs to these models are taken from observable markets where possible, but when this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. See Note 17 for further information.
Provisions and contingencies
The Group is subject to various legal proceedings, disputes and claims, including regulatory discussions related to the Group's business, licenses, tax positions and investments, where the outcomes are subject to significant uncertainty. In addition, significant uncertainty exists in relation of employee bonuses and other rewards, which depend on their individual performance and Group's results. Management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss or related expense. Unanticipated events or changes in these factors may require the Group to increase or decrease the amount recorded or to be recorded for a matter that has not been previously recorded because it was not considered probable.
See Note 16 and Note 28 for further information.
4. BUSINESS ACQUISITIONS AND DISPOSALS
Acquisition and disposal in 2016
Acquisition of Smarts-Yoshkar-Ola—In September 2016, the Group acquired 100% of the shares of Smarts-Yoshkar-Ola CJSC ("Smarts-Yoshkar-Ola"), operating in the Republic of Mari El and holding rights to use 1800 MHz radio frequencies. The acquisition enhances the Group's spectrum resources in the Republic of Mari El. The acquisition was accounted for using the acquisition method.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
4. BUSINESS ACQUISITIONS AND DISPOSALS (Continued)
The following table summarizes the purchase price allocation for SMARTS-Yoshkar-Ola, finalized as of December 31, 2016:
Smarts- Yoshkar-Ola | ||||
---|---|---|---|---|
Cash | 5 | |||
Current assets | 5 | |||
Licenses | 323 | |||
Other non-current assets | 14 | |||
Current liabilities | (30 | ) | ||
Non-current liabilities | (69 | ) | ||
| | | | |
Gain on bargain purchase (included in other operating income in the consolidated statement of profit or loss) | (235 | ) | ||
| | | | |
Deferred payment | (3 | ) | ||
Consideration paid in cash | 10 | |||
| | | | |
| | | | |
| | | | |
The consideration paid was initially determined by a contract concluded between the Group and the seller (SMARTS Group) in 2014. To determine the fair value of assets acquired, the Group used comparative prices of the first radio frequencies auction held in Russia in 2015, which gave rise to the recognition of a gain from bargain purchase.
The details on disposal of 50.01% share in LLC "Universal Mobile Systems" are disclosed in Note 26.
Acquisition and disposals in 2015
Acquisition of Stream—In December 2015, the Group increased its share in Stream from 45% to 100%, after Sistema Mass Media, subsidiary of Sistema, exchanged ownership of 55% in Stream for rights for its own debt in amount of RUB 561 million and promissory notes of LLC Stream Digital (fully-owned subsidiary of Stream) of RUB 1,089 million due on demand and bearing interest of 9% p.a. In 2016 promissory notes of LLC Stream Digital were returned to the Group as non-cash payment for 49% interest of Rent Nedvizhimost from a subsidiary of Sistema. Stream operates as content aggregator, providing VAS services mainly to the Group. The acquisition was accounted for as a transaction under common control directly in equity.
Acquisition of Nvision Group—In the first stage of the transaction, carried in July 2015, the Group has acquired 100% of the shares of SITRONICS Telecom Solutions CJSC, NVision program solutions, NVision Czech Republic a.s. and some smaller subsidiaries of NVision Group, from subsidiaries of Sistema. Through this transaction, the Group has obtained proprietary rights over billing system, exploited by the Group, which will allow reducing time-to-market for new products and billing and IT-related expenses. In December 2015, the Group has completed acquisition of 100% share in the holding company NVision Group JSC ("NVision Group"), from subsidiaries of Sistema. NVision Group is also one of the largest system integrators and complex IT solutions providers in Russia. Total consideration amounted to RUB 11,213 million, including RUB 73 million in notes and RUB 11,140 million in cash. As of December 31, 2016 and 2015 the Group has accounted for
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
4. BUSINESS ACQUISITIONS AND DISPOSALS (Continued)
indemnification asset in amount of RUB 299 million and RUB 386 million respectively related to tax provisions of acquired companies. The acquisition was accounted for as a transaction under common control directly in equity.
Acquisition of Navigation Information Systems—In January 2015, the Group acquired 89.5% of Navigation Information Systems ("NIS") from Sistema for RUB 44 million. NIS is the leading systems integrator for GLONASS satellite projects. The acquisition allows the Group to develop its proprietary technological platform for machine-to-machine solutions. The acquisition was accounted for as a transaction under common control directly in equity.
Disposal of Rent Nedvizhimost—In February 2015, the Group sold 51% stake in its wholly-owned subsidiary Rent Nedvizhimost to a subsidiary of Sistema, for RUB 4.3 billion. The Group classified the associated assets and liabilities of the disposal group as held for sale as of December 31, 2014. After the loss of control, the Group applied for its remaining 49% interest the equity method of accounting. Further, in May 2015, the Group sold remaining 49% interest to a subsidiary of Sistema for RUB 4.2 billion. These disposals were accounted for as transactions under common control directly in equity.
The following table summarizes the details of acquisitions of subsidiaries under common control finalized in 2015:
Acquired company | Consideration paid net of cash acquired* | Non cash consideration made | Cash acquired | Assets acquired other than cash | Liabilities assumed | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
NVision | 10,181 | 73 | 959 | 12,861 | 12,977 | |||||||||||
NIS | (177 | ) | — | 221 | 589 | 1,360 | ||||||||||
Stream | (558 | ) | — | 558 | 512 | 2,065 | ||||||||||
| | | | | | | | | | | | | | | | |
The following table summarizes the details of disposal of subsidiaries under common control finalized in 2015 (only for part of transaction with loss of control):
Disposed company | Consideration received net of cash disposed* | Non cash consideration received | Cash disposed | Asset disposed other than cash | Liabilities disposed | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Rent Nedvizhimost | 1,193 | — | 157 | 2,013 | 316 | |||||||||||
| | | | | | | | | | | | | | | | |
Disposal of Intellect-Telekom—In January 2015, the Group sold its 47.3% equity investment in Intellect Telecom to Sistema for RUB 344 million. The Group classified the investment as held for sale as of December 31, 2014. The disposal was accounted for as a transaction under common control directly in equity.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
4. BUSINESS ACQUISITIONS AND DISPOSALS (Continued)
Acquisitions in 2014
Acquisition of Smarts companies—In December 2014 the Group acquired controlling stakes in Penza-GSM, SMARTS-Ivanovo and SMARTS-Ufa, operating in Penza, Ivanovo and the Bashkortostan Republic, respectively. The acquired companies hold rights to use 900 and 1800 MHz radio frequencies. The acquisition enhances the Group's spectrum resources in the above regions. The purchase price comprised of cash consideration and a deferred payment, payable in 18 months after the acquisition date. The acquisition was accounted for using the purchase methodacquisition method.
In 2015 the Group finalized valuation of accounting.
assets of Smarts companies and the acquisition date fair value of the assets changed. The following table summarizes the preliminary purchase price allocation for regional mobile operators acquired during the year ended December 31, 2014:Smarts companies:
| SMARTS- Ivanovo | SMARTS-Ufa | Penza-GSM | Total | Preliminary amounts | Measurement period adjustment | Final amounts | SMARTS- Ivanovo | SMARTS-Ufa | Penza-GSM | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Month of acquisition | December | December | December | December | December | December | ||||||||||||||||||||||||||
Region of operations | Central region | Volga region | Volga region | Central region | Volga region | Volga region | ||||||||||||||||||||||||||
Ownership interest acquired | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||
Property, plant and equipment | 358 | (182 | ) | 176 | 7 | 7 | 162 | |||||||||||||||||||||||||
Licenses | 1,460 | 111 | 1,571 | 466 | 621 | 484 | ||||||||||||||||||||||||||
Customer base | 78 | 86 | 164 | — | — | 164 | ||||||||||||||||||||||||||
Goodwill | 1,630 | (9 | ) | 1,621 | 101 | 114 | 1,406 | |||||||||||||||||||||||||
Other non-current assets | 165 | — | 165 | — | — | 165 | ||||||||||||||||||||||||||
Current assets | 24 | 47 | 97 | 168 | 125 | — | 125 | 19 | 8 | 98 | ||||||||||||||||||||||
Property, plant and equipment | 68 | 94 | 196 | 358 | ||||||||||||||||||||||||||||
Rights to use radio frequencies | 455 | 434 | 571 | 1,460 | ||||||||||||||||||||||||||||
Goodwill | 41 | 182 | 1,407 | 1,630 | ||||||||||||||||||||||||||||
Customer base | 21 | 13 | 44 | 78 | ||||||||||||||||||||||||||||
Other non-current assets | — | — | 165 | 165 | ||||||||||||||||||||||||||||
Current liabilities | (88 | ) | (268 | ) | (327 | ) | (683 | ) | (683 | ) | 3 | (680 | ) | (86 | ) | (269 | ) | (325 | ) | |||||||||||||
Non-current liabilities | (95 | ) | (101 | ) | (123 | ) | (319 | ) | (276 | ) | 2 | (274 | ) | (78 | ) | (81 | ) | (115 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||
Contingent consideration | (2 | ) | (2 | ) | (96 | ) | (100 | ) | (100 | ) | — | (100 | ) | (2 | ) | (2 | ) | (96 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consideration paid | 424 | 399 | 1,934 | 2,757 | 2,757 | 11 | 2,768 | 427 | 398 | 1,943 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The purchase price allocation of SMARTS-Ivanovo, SMARTS-Ufa and Penza-GSM was not finalized as of the date of these financial statements as the Group had not completed the valuation of individual assets of each company acquired. The Group's consolidated financial statements reflect the allocation of the purchase price based on a preliminary fair value assessment of the assets acquired and liabilities assumed. The excess of the consideration paid over the value of net assets in the amount of RUB 1,630 million was preliminarily allocated to goodwill and was attributable to the "Russia convergent" segment.
Under the terms of purchase agreements the Group is obliged to pay additional consideration of RUB 150 million in 18 months after the acquisition date. The consideration could be reduced by the amount of tax expenses related to activities prior to the acquisition date. As of the acquisition date,December 31, 2015 the Group recorded a provision for tax liabilities in the amount of RUB 2423 million and respectively reduced the additional consideration. The purchase price allocationGiven the effects of discounting of long-term liability, total liability for additional consideration equaled RUB 115 million as of December 31, 2015. As of December 31, 2016 additional consideration liability was fully settled by the acquisition date reflected preliminary estimationGroup.
The excess of the fairconsideration paid over the value of net assets acquired in the contingent consideration.amount of RUB 1,621 million was allocated to goodwill which was attributable to the "Russia convergent" segment. Goodwill mainly arised from expected synergies on economies of scale related to operating and capital expenditures.
Licenses acquired are amortized over a period of their remaining useful life of average 15 years. Customer base acquired is amortized over the period of its estimated average useful life of 51 months.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
3.4. BUSINESS ACQUISITIONS AND DISPOSALS (Continued)
Rights to use radio frequencies recognized as a result of the acquisition are amortized over a period of their remaining useful life as of the acquisition date ranging from 7 to 8 years. Customer base recognized as a result of the acquisition is amortized over the period of its estimated average useful life of 31 months.
Pro forma results of operations (unaudited)—The following unaudited pro forma financial data for the years ended December 31, 2014, 20132016, 2015 and 2012,2014 give effect to the 2014 acquisitions of SMARTS-Ivanovo, SMARTS-Ufa and Penza-GSMbusiness combinations as though these business combinationsthey had been completed at the beginning of 2012.the year.
| 2014 | 2013 | 2012 | 2016 (SMARTS- Yoshkar-Ola) | 2015 (NVision Group, NIS and Stream) | 2014 (SMARTS- Ivanovo, SMARTS-Ufa and Penza-GSM) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pro forma: | ||||||||||||||||||||
Net revenues | 411,353 | 399,161 | 378,938 | 435,694 | 434,757 | 411,375 | ||||||||||||||
Net income | 51,598 | 79,738 | 29,665 | 48,465 | 46,887 | 50,701 |
The pro forma information is based on various assumptions and estimates. The pro forma information is neither necessarily indicative of the operating results that would have occurred if the Group acquisitions had been consummated as of January 1, 2012,2014, 2015, or 2016, nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any potential revenue enhancements or cost synergies or other operating efficiencies that could result from the acquisitions. The actual results of operations of these companies are included into the consolidated financial statements of the Group only from the respective dates of acquisition.
Since their respective acquisition dates, companies acquired in 2014 contributed revenue in the amount of RUB 3 million and net loss in the amount of RUB 4 million to consolidated statement of operations and comprehensive incomeprofit or loss for the year ended December 31, 2014. Companies acquired in 2015 contributed revenue in the amount of RUB 2,133 million and net loss in the amount of RUB 447 million to consolidated statement of profit or loss for the year ended December 31, 2015. The company acquired in 2016 contributed revenue in the amount of RUB 1 million and net loss in the amount of RUB 15 million to consolidated statement of profit or loss for the year ended December 31, 2016.
Disposal in 2013Table of Contents
Disposal
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Business-NedvizhimostRussian Rubles unless otherwise stated)
5. CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 2016 and December 31, 2015 comprised the following:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Cash and cash equivalents at banks and on hand in: | |||||||
Russian rubles | 7,657 | 7,523 | |||||
US dollars | 3,904 | 4,296 | |||||
Ukraine hryvna | 1,538 | 1,612 | |||||
Turkmenian manat | 1,252 | 778 | |||||
Euro | 1,173 | 4,738 | |||||
Uzbek som | — | 628 | |||||
other | 394 | 393 | |||||
Short-term deposits with an original maturity of less than 92 days: | |||||||
Ukraine hryvna | 1,990 | 2,869 | |||||
Russian rubles | 504 | 2,123 | |||||
US dollars | 50 | 8,236 | |||||
Euro | — | 199 | |||||
other | 8 | 69 | |||||
| | | | | | | |
Total cash and cash equivalents | 18,470 | 33,464 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
There were certain limitations on cash disposition in Ukraine as of December 31, 2016 (for details see Note 28). Cash balances in Ukraine amounted to RUB 3,617 million and RUB 6,612 million as of December 31, 2016 and 2015, respectively.
6. SHORT-TERM INVESTMENTS
The Group's short-term investments comprised the following:
| Category | December 31, 2016 | December 31, 2015 | ||||||
---|---|---|---|---|---|---|---|---|---|
Deposits | Loans and receivables | 3,850 | 42,492 | ||||||
Assets in Sistema-Capital trust management (Notes 17, 21) | Financial asset at fair value through profit or loss | 3,721 | — | ||||||
Loans | Loans and receivables | 1,021 | 7,082 | ||||||
Notes | Available for sale | 65 | 266 | ||||||
| | | | | | | | | |
Total short-term investments | 8,657 | 49,840 | |||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
—NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
7. INVESTMENTS IN ASSOCIATES
The Group's investments in associates (all accounted for using the equity method) comprised the following:
| Country of operations | Operating activity | December 31, 2016 | December 31, 2015 | | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
MTS Belarus | Belarus | telecommunications | 4,303 | 5,407 | ||||||||||
MTS Bank | Russia | banking | 3,592 | 1,120 | ||||||||||
Equity investments in other unquoted companies | Russia | e-commerce, digital TV, etc. | 2,656 | 2,772 | ||||||||||
| | | | | | | | | | | | | | |
Total investments in associates | 10,551 | 9,299 | ||||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The reconciliation of summarised financial information of MTS-Belarus to the carrying amount of the Group's interest in associate is presented as follows:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Assets | |||||||
Non-current assets | 9,414 | 11,404 | |||||
Current assets | 6,800 | 6,153 | |||||
| | | | | | | |
Liabilities | |||||||
Non-current liabilities | (0 | ) | (2 | ) | |||
Current liabilities | (7,433 | ) | (6,519 | ) | |||
| | | | | | | |
Total identifiable net assets | 8,781 | 11,036 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Group's share in associate | 49 | % | 49 | % | |||
The Group's share of identifiable net assets | 4,303 | 5,407 | |||||
Carrying amount of the Group's interest | 4,303 | 5,407 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
7. INVESTMENTS IN ASSOCIATES (Continued)
The Group's share in the profit of MTS Belarus was included in operating share of the profit of associates in the accompanying consolidated statement of profit or loss. The composition of the Group's share of income of MTS Belarus is as follows:
| Year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | |||||||
Revenue | (22,256 | ) | (20,886 | ) | (23,616 | ) | ||||
Net profit for the year | (6,356 | ) | (7,054 | ) | (7,057 | ) | ||||
The Group's share of the profit of the associate for the year | (3,115 | ) | (3,456 | ) | (3,459 | ) | ||||
Other comprehensive loss for the year (currency translation adjustment) | 2,292 | 3,110 | - | * | ||||||
Total comprehensive income for the year | (4,064 | ) | (3,944 | ) | (7,057 | ) | ||||
The Group's share of total comprehensive income of the associate for the year | (1,991 | ) | (1,933 | ) | (3,467 | ) | ||||
Dividends received | 2,795 | 3,269 | 2,650 |
The reconciliation of summarized financial information of MTS Bank to the carrying amount of the Group's interest in associate is presented below:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Total assets | 166,594 | 184,915 | |||||
Total liabilities | (137,627 | ) | (164,662 | ) | |||
Non-controlling interests | (3,339 | ) | (4,161 | ) | |||
| | | | | | | |
Total identifiable net assets attributable to the Group | 25,628 | 16,092 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Group's share in associate | 26,6 | % | 27 | % | |||
The Group's share of identifiable net assets | 6,817 | 4,345 | |||||
Impairment of investment in associate | (3,225 | ) | (3,225 | ) | |||
| | | | | | | |
Carrying amount of the Group's interest | 3,592 | 1,120 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
In 2014, an impairment charge of RUB 3,225 million related to the Group's equity investments in MTS Bank was recognized in the non-operating share of the loss of the associates in the accompanying consolidated statement of profit or loss. The impairment reflected the assessment of the development prospects influenced by an economic downturn in Russia. The fair value of equity investment in the amount of RUB 4,857 million was determined based on a discounted cash flow technique utilizing significant unobservable inputs ("Level 3" in the hierarchy established by IFRS). The key assumptions in the fair value calculations included discount rate of 23.3% and average OIBDA (Operating Income Before Depreciation and Amortization) margin of 5%.
No impairment charge was recognized in 2015 and 2016.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
7. INVESTMENTS IN ASSOCIATES (Continued)
The Group's share in the net losses of MTS Bank was included in the non-operating share of the loss of the associates in the accompanying consolidated statement of profit or loss. The composition of the Group's share of loss of MTS Bank is as follows:
| Year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | |||||||
Total interest income | (16,555 | ) | (20,455 | ) | (25,107 | ) | ||||
Total interest expense | 8,364 | 9,691 | 9,868 | |||||||
Net loss for the year | 4,495 | 15,371 | 12,585 | |||||||
The Group's share of the loss of the associate for the year | 1,179 | 4,078 | 3,108 | |||||||
Other comprehensive loss / (income) for the year | 1,614 | (1,251 | ) | (3,611 | ) | |||||
Total comprehensive loss for the year | 6,109 | 14,120 | 8,974 | |||||||
The Group's share of the total comprehensive loss for the year | 1,608 | 3,737 | 2,410 |
In February 2016, MTS Bank placed 3,588,304 additional ordinary shares. The Group acquired 946,347 shares in the placement for a total consideration of RUB 1,325 million. As the result of the transaction, the Group's share in MTS Bank decreased from 27.0% to 26.8%.
In November 2016, MTS Bank placed 10,000,000 additional ordinary shares. The Group acquired 2,637,310 shares in the placement for a total consideration of RUB 2,769 million. As the result of the transaction, the Group's share in MTS Bank decreased from 26.8% to 26.6%.
The Group also has interests in a number of individually immaterial associates. For one of these associates, OZON Holdings Limited, the Group owns less than 20% of the equity interests, however, the Group has determined that it has significant influence based on direct and indirect ownership of equity shares, representation on the investee's Board of Directors and certain veto rights related to matters intersecting with the Group's interests.
In December 2013, the Group sold a 51% stake in Business-Nedvizhimost CJSC to Sistema for RUB 3.2 billion. Business-Nedvizhimost ownsowned and managesmanaged 76 real estate sites and 44 real estate facilities throughout Moscow with a total area of roughly 178,000 sq. m. After the loss of control over the subsidiary, the Group deconsolidated Business-Nedvizhimost and applied for its 49% interest the equity method of accounting. In April 2014, the Group sold the remaining 49% stake to Sistema for RUB 3.1 billion. The disposal was accounted for as a transaction under common control directly in equity.
Acquisitions and disposals in 2012
Acquisitions of controlling interests in regional fixed line operators—In 2012, as part of its program of regional expansion, the Group acquired controlling interests in a number of fixed line operators in certain regions of Russia. The purchase price for these acquisitions was paid in cash. The acquisitions were accounted for using the acquisition method of accounting.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
3. BUSINESS ACQUISITIONS AND DISPOSALS7. INVESTMENTS IN ASSOCIATES (Continued)
The following table summarizesis the purchase price allocation for regional fixed line operators acquired duringaggregate financial information of investments in the year ended December 31, 2012:other individually immaterial associates, held by the Group:
| Elf Group | Intercom | ZhelGorTeleCom | Pilot & TVKiK | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Month of acquisition | August | August | October | October | ||||||||||||
Region of operations | Central region | Volga region | Central region | Central region | ||||||||||||
Ownership interest acquired | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Current assets | 6 | 9 | 4 | 3 | 22 | |||||||||||
Property, plant and equipment | 49 | 11 | 3 | 21 | 84 | |||||||||||
Goodwill | 172 | 62 | 115 | 55 | 404 | |||||||||||
Customer base | 45 | 29 | 54 | 22 | 150 | |||||||||||
Current liabilities | (44 | ) | (15 | ) | (13 | ) | (6 | ) | (78 | ) | ||||||
Non-current liabilities | (9 | ) | (6 | ) | (11 | ) | (4 | ) | (30 | ) | ||||||
Fair value of contingent consideration | (28 | ) | (10 | ) | (5 | ) | — | (43 | ) | |||||||
| | | | | | | | | | | | | | | | |
Consideration paid | 191 | 80 | 147 | 91 | 509 | |||||||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | |||||||
Net loss/(profit) for the year | 1,172 | (1,079 | ) | 2,047 | ||||||
The Group's share of the loss/(profit) of the associate for the year | 108 | (297 | ) | 205 | ||||||
Other comprehensive income for the year | — | — | (2,175 | ) | ||||||
Total comprehensive loss/(income) for the year | 1,172 | (1,079 | ) | (128 | ) | |||||
The Group's share of total comprehensive loss/(income) of the associate for the year | 108 | (297 | ) | (32 | ) |
8. OTHER INVESTMENTS
The Group's consolidated financial statements reflectother investments comprised the allocationfollowing:
| Category | December 31, 2016 | December 31, 2015 | ||||||
---|---|---|---|---|---|---|---|---|---|
Deposits | Loans and receivables | 27,056 | 30,677 | ||||||
Loans/Unquoted Notes | Loans and receivables | 8,004 | 2,787 | ||||||
Other | — | 1,259 | 1,203 | ||||||
| | | | | | | | | |
Total other investments | 36,319 | 34,667 | |||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
In December 2010, the Group granted a $90.0 million (RUB 2,777 million at the date of transaction) loan to Mr. Pierre Fattouche and Mr. Moussa Fattouche, the purchaseholders of a 20% noncontrolling stake in K-Telecom, the Group's subsidiary in Armenia. Simultaneously, the Group signed an amendment to the put and call option agreement for the acquisition of noncontrolling stake. According to the amendment, the call exercise price based on a fair value assessment of the assets acquired and liabilities assumed.
Customer base intangibles recognized as a result of the acquisitions are being amortized over a period ranging from 7 to 9 years dependingshall be reduced by deducting any outstanding balance on the typeloan amount and all accrued and unpaid interest and any other sums due and outstanding under the loan agreement at the time of subscribers.
exercise (Note 27). Also loan was prolonged to December 31, 2018 according to amendment concluded in December 2016 to loan agreement. The recognition of goodwill in the amount of RUB 404 million from the acquisitions is due to the economic potential of the marketsloan and related interest included in which the acquired companies operate and synergies arising from the acquisitions. Goodwill is attributable to the "Russia convergent" segment.
Tascom—In May 2012, the Group acquired a 100% stake in Tascom CJSC ("Tascom"), a market leader in providing telecommunication services to corporate clients in Moscow and the Moscow region, for RUB 1,437 million. The seller has indemnified the Group against all losses which arise in connection with liability for taxation matters relating to the pre-acquisition period. As of the acquisition date the Group recorded a provision for tax liabilities and a related indemnification asset in the amount of RUB 236 million relating to this warranty. Asother investments as of December 31, 2014 the amount of the indemnification asset and related provision for tax liabilities was reduced2016 totaled to RUB 43 million.
The Group also should pay5,802 million and in short-term investments as of December 31, 2015 and January 1, 2015 totaled to the seller any amounts received for the services rendered by Tascom prior to the acquisition date, capped at RUB 400 million—this contingent consideration arrangement was recorded at fair value of6,775 million and RUB 1705,533 million, which was determined based on unobservable inputs ("Level 3" of the hierarchy established by the U.S. GAAP guidance). The fair value was measured as the best estimate of all possible outcomes. During 2012-2013, the contingent consideration in the amount of RUB 170 million was completely paid to the seller.respectively.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
3. BUSINESS ACQUISITIONS9. TRADE AND DISPOSALS (Continued)OTHER RECEIVABLES
The acquisition was accounted for usingTrade and other receivables as of December 31, 2016 and December 31, 2015 comprised the acquisition method of accounting. The summary of the purchase price allocation for the acquisition was as follows:following:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Subscribers | 11,360 | 12,412 | |||||
Roaming | 8,083 | 11,807 | |||||
Dealers | 2,723 | 2,084 | |||||
Interconnect | 2,517 | 3,195 | |||||
Other trade receivables | 4,805 | 6,118 | |||||
Other receivables | 2,477 | 1,854 | |||||
Allowance for doubtful accounts | (2,160 | ) | (2,928 | ) | |||
| | | | | | | |
Trade and other receivables | 29,805 | 34,542 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The excessanalysis of the consideration paid over the valueage of net assets acquiredtrade and other accounts receivables that are past due as at December 31, 2016 and December 31, 2015 but not impaired:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Neither past due nor impaired | 24,100 | 29,095 | |||||
Past due, but not impaired: | |||||||
Less than 60 days | 3,225 | 2,710 | |||||
61-150 days | 1,205 | 1,203 | |||||
More than 150 days | 1,275 | 1,534 | |||||
| | | | | | | |
Total | 29,805 | 34,542 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table summarizes changes in the amount of RUB 1,083 million was allocated to goodwill which was attributable toallowance for doubtful accounts receivable for the "Moscow fixed line" segmentyears ended December 31, 2016, 2015 and is not deductible for income tax purposes. Goodwill is mainly attributable to the expected synergies from increase of market share and reduction of capital expenditures to be made by the Group to construct optical fiber network.2014:
Disposal of Stream—In May 2012, MTS and Sistema signed a shareholders agreement with respect to the management of Stream LLC ("Stream"), which owns and manages Stream.ru. In addition Sistema contributed RUB 496.1 million into Stream's charter capital giving it an ownership of 55% of Stream, thereby reducing MTS's direct ownership in Stream from 100% to 45%. After a loss of control over the subsidiary, the Group deconsolidated Stream and accounted for its interest using the equity method. The disposal was accounted for as transaction under common control directly in equity.
4. OPERATIONS IN UZBEKISTAN
In June 2012, the authorities of the Republic of Uzbekistan commenced repeat audits of previously audited financial and operating activities of MTS' wholly owned subsidiary Uzdunrobita. On July 17, 2012, Uzdunrobita suspended its services in Uzbekistan pursuant to the order of the State Agency for Communications and Information of Uzbekistan (the "SACI") temporarily suspending the operating license of Uzdunrobita for a period of ten business days. This suspension was subsequently extended to three months due to the decision of the Tashkent Economic Court of July 30, 2012.
On August 6 and 7, 2012, fourteen regional antimonopoly departments of the Republic of Uzbekistan simultaneously held hearings and declared that Uzdunrobita had violated antimonopoly laws, consumer protection laws and laws governing advertisements. In total, the claims of the regional antimonopoly departments against Uzdunrobita amounted to approximately RUB 2,558 million. This amount was subsequently reduced by the superior antimonopoly regulator to RUB 416 million in the aggregate. The disputes with the antimonopoly authorities were dismissed after payments were made by Uzdunrobita pursuant to the Appeal Decision (as defined below).
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance, beginning of the year | (2,928 | ) | (2,166 | ) | (3,754 | ) | ||||
Allowance for doubtful accounts | (2,863 | ) | (3,269 | ) | (3,060 | ) | ||||
Accounts receivable written off | 3,459 | 2,507 | 4,648 | |||||||
Disposal of subsidiary | 172 | — | — | |||||||
| | | | | | | | | | |
Balance, end of the year | (2,160 | ) | (2,928 | ) | (2,166 | ) | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
4. OPERATIONS IN UZBEKISTAN (Continued)10. INVENTORIES
On August 13, 2012,Inventory and spare parts as of December 31, 2016 and December 31, 2015 comprised the Tashkent Economic Court granted the petitionfollowing:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Handsets and accessories | 11,597 | 11,861 | |||||
SIM cards and prepaid phone cards | 1,165 | 400 | |||||
Software and equipment for installation and resale | 703 | 927 | |||||
TV equipment for resale | 320 | 527 | |||||
Advertising and other materials | 280 | 508 | |||||
Spare parts for telecommunication equipment | 265 | 287 | |||||
| | | | | | | |
Total inventory and spare parts | 14,330 | 14,510 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other materials mainly consist of stationery, fuel and auxiliary materials.
Spare parts for base stations included in inventory are expected to be utilized within twelve months of the SACI to terminate all operating licensesyear end.
Expenses for inventory obsolescence provision were included in cost of Uzdunrobita permanently. This decision was subsequently upheld by the appeals and cassation instance courts on August 27, 2012 and April 4, 2013, respectively.
Notwithstanding the fact that a tax audit of Uzdunrobita's operations for the period of 2007-2010 was completed in February 2012 and did not reveal any serious violations, further tax audits were conducted and purported to find alleged violations of licensing regulations as well as income and other tax legislation resultinggoods in the impositionconsolidated statement of additional taxesprofit or loss.
For the years ended December 31, 2016, 2015 and fines totaling approximately RUB 28,776 million. This amount was subsequently reduced2014, cost of goods comprised the following expenses:
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Amount of inventories recognized as an expense | 44,026 | 36,568 | 25,852 | |||||||
Inventory obsolescence provision | 2,159 | 865 | 356 | |||||||
Reversal of obsolescence provision | (611 | ) | (878 | ) | (763 | ) | ||||
| | | | | | | | | | |
Total cost of goods | 45,574 | 36,555 | 25,445 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The reversal of the inventory obsolescence provision relates to RUB 21,390 millionhandsets and accessories sold in the aggregate.
During September-October of 2012, RUB 201 million were seized from Uzdunrobita's bank accounts by the Uzbek State and applied to settle its alleged liabilities under these claims.
On September 17, 2012, the Tashkent City Criminal Court issued a ruling in favorcourse of the Uzbek state authorities authorizing the confiscation of all assets of Uzdunrobita based on a criminal court's verdict which the Tashkent City Criminal Court issued against four employees of Uzdunrobita. Previously, Uzbek law enforcement agencies arrested all of Uzdunrobita's assets, including cash held in local bank accounts.
On November 8, 2012, the Appellate Instance of the Tashkent City Criminal Court allowed Uzdunrobita's appeal challenging the decision of the Tashkent City Criminal Court dated September 17, 2012.
The appeals court found that all damages (taxes, sanctions, unpaid licenses duties and damages to customers) incurred by the State were to be compensated by Uzdunrobita. The amount of damages was calculated on the basis of all of the aforementioned claims against Uzdunrobita, which amounted to RUB 18,375 million to be paid in eight equal monthly instalments (the "Appeal Decision").
In accordanceGroup's promotion campaigns. Inventories have been sold with applicable Uzbek laws, Uzdunrobita petitioned the Deputy General Prosecutor to challenge the Appeal Decision before the Supreme Court of Uzbekistan and grant a stay of enforcement of the Appeal Decision. However, such petitions were rejected by the General Prosecutor's Office on January 8, 2013.
Following this rejection, Uzdunrobita immediately filed a further petition to appeal to the Supreme Court of Uzbekistan with the Chairman of the Supreme Court of Uzbekistan. On January 23, 2013, the Company was notified that the matter had been submitted by the Supreme Court for consideration by the Chairman of the Tashkent City Court. On May 2, 2013, the Chairman of the Tashkent City Court rejected Uzdunrobita's petition.
In order to comply with the Appeal Decision, Uzdunrobita paid two scheduled installments in November and December 2012 totaling RUB 4,584 million. On January 14, 2013, subsequent to the payment of a portion (RUB 242 million) of the third installment due in January 2013 with all cash remaining in Uzdunrobita's bank accounts, Uzdunrobita filed a petition for voluntary bankruptcy with the Tashkent Economic Court due to its inability to meet its further obligations arising out of the Appeal Decision. On January 18, 2013, the Court initiated bankruptcy proceedings and appointed anpositive margin.
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR(Amounts in millions of Russian Rubles unless otherwise stated)
11. PROPERTY, PLANT AND EQUIPMENT
The net book value of property, plant and equipment as of December 31, 2016, December 31, 2015 and January 1, 2015 was as follows:
| Network and base station equipment | Land and buildings | Office equipment, vehicles and other | Construction in progress and equipment for installation | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost | ||||||||||||||||
January 1, 2015 | 498,575 | 25,867 | 48,322 | 44,074 | 616,838 | |||||||||||
| | | | | | | | | | | | | | | | |
Additions | 4,319 | 540 | 317 | 59,794 | 64,970 | |||||||||||
Put into use | 68,661 | 1,042 | 4,590 | (74,293 | ) | — | ||||||||||
Arising on business combinations | (164 | ) | 1,414 | 1,687 | (48 | ) | 2,889 | |||||||||
Transfer to assets held for sale | (1,059 | ) | (2 | ) | (6 | ) | — | (1,067 | ) | |||||||
Disposal | (23,667 | ) | (1,680 | ) | (5,192 | ) | (587 | ) | (31,126 | ) | ||||||
Other | (437 | ) | (84 | ) | 124 | 57 | (340 | ) | ||||||||
Foreign exchange differences | (3,698 | ) | 224 | (150 | ) | (31 | ) | (3,655 | ) | |||||||
| | | | | | | | | | | | | | | | |
December 31, 2015 | 542,530 | 27,321 | 49,692 | 28,966 | 648,509 | |||||||||||
| | | | | | | | | | | | | | | | |
Additions | 1,350 | 32 | — | 47,340 | 48,722 | |||||||||||
Put into use | 47,894 | 1,550 | 5,278 | (54,722 | ) | — | ||||||||||
Disposal of UMS | (4,152 | ) | (1,309 | ) | (452 | ) | (2,444 | ) | (8,357 | ) | ||||||
Transfer to assets held for sale | (1,557 | ) | — | (5 | ) | — | (1,562 | ) | ||||||||
Disposal | (20,321 | ) | (426 | ) | (3,201 | ) | (374 | ) | (24,322 | ) | ||||||
Other | (118 | ) | (200 | ) | 269 | 55 | 6 | |||||||||
Foreign exchange differences | (17,568 | ) | (1,525 | ) | (2,331 | ) | (1,455 | ) | (22,879 | ) | ||||||
| | | | | | | | | | | | | | | | |
December 31, 2016 | 548,058 | 25,443 | 49,250 | 17,366 | 640,117 | |||||||||||
| | | | | | | | | | | | | | | | |
Accumulated amortisation and impairment | ||||||||||||||||
January 1, 2015 | (274,372 | ) | (6,957 | ) | (36,486 | ) | — | (317,815 | ) | |||||||
| | | | | | | | | | | | | | | | |
Charge for the year | (51,967 | ) | (930 | ) | (5,385 | ) | — | (58,282 | ) | |||||||
Arising on business combinations | — | (1,015 | ) | (1,438 | ) | — | (2,453 | ) | ||||||||
Transfer to assets held for sale | 490 | 1 | 3 | — | 494 | |||||||||||
Disposal | 21,269 | 1,623 | 5,068 | — | 27,960 | |||||||||||
Other | (109 | ) | 7 | 230 | — | 128 | ||||||||||
Foreign exchange differences | 4,180 | (184 | ) | 125 | — | 4,121 | ||||||||||
| | | | | | | | | | | | | | | | |
December 31, 2015 | (300,509 | ) | (7,455 | ) | (37,883 | ) | — | (345,847 | ) | |||||||
| | | | | | | | | | | | | | | | |
Charge for the year | (53,371 | ) | (1,262 | ) | (5,323 | ) | — | (59,956 | ) | |||||||
Disposal of UMS | 1,121 | 62 | 214 | — | 1,397 | |||||||||||
Transfer to assets held for sale | 846 | — | 5 | — | 851 | |||||||||||
Disposal | 19,126 | 134 | 2,768 | — | 22,028 | |||||||||||
Other | (222 | ) | (182 | ) | 227 | — | (177 | ) | ||||||||
Foreign exchange differences | 12,061 | 551 | 1,816 | — | 14,428 | |||||||||||
| | | | | | | | | | | | | | | | |
December 31, 2016 | (320,948 | ) | (8,152 | ) | (38,176 | ) | — | (367,276 | ) | |||||||
| | | | | | | | | | | | | | | | |
Net book value | ||||||||||||||||
January 1, 2015 | 224,203 | 18,910 | 11,836 | 44,074 | 299,023 | |||||||||||
| | | | | | | | | | | | | | | | |
December 31, 2015 | 242,021 | 19,866 | 11,809 | 28,966 | 302,662 | |||||||||||
| | | | | | | | | | | | | | | | |
December 31, 2016 | 227,110 | 17,291 | 11,074 | 17,366 | 272,841 | |||||||||||
| | | | | | | | | | | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
4.11. PROPERTY, PLANT AND EQUIPMENT (Continued)
Charge of amortization for 2014 year for Network and base station equipment, Landing and buildings and Office equipment, vehicles and other was RUB 51,155 million, RUB 887 million and RUB 6,781 million, respectively.
The amount of the compensation from third parties for items of property, plant and equipment that were accidentally damaged during construction in Moscow for the years ended December 31, 2016, 2015 and 2014 totaled RUB 1,350 million, RUB 1,010 million and RUB 571 million, respectively, and was included in the accompanying consolidated statements of profit or loss as component of other operating income.
12. GOODWILL
The change in the net carrying amount of goodwill for the years ended December 31, 2016 and 2015 by operating segments was as follows:
| Russia convergent | Moscow fixed line | Ukraine | Armenia | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1, 2015 | ||||||||||||||||
Gross amount of goodwill | 30,275 | 1,083 | 151 | 6,268 | 37,777 | |||||||||||
Accumulated impairment loss | (1,466 | ) | — | — | — | (1,466 | ) | |||||||||
| | | | | | | | | | | | | | | | |
28,809 | 1,083 | 151 | 6,268 | 36,311 | ||||||||||||
| | | | | | | | | | | | | | | | |
Measurement period adjustments (Note 4) | (9 | ) | — | — | — | (9 | ) | |||||||||
Impairment loss | — | — | — | (3,516 | ) | (3,516 | ) | |||||||||
Currency translation adjustment | — | — | (22 | ) | 1,704 | 1,682 | ||||||||||
| | | | | | | | | | | | | | | | |
Balance at December 31, 2015 | ||||||||||||||||
Gross amount of goodwill | 30,266 | 1,083 | 129 | 7,972 | 39,450 | |||||||||||
Accumulated impairment loss | (1,466 | ) | — | — | (3,516 | ) | (4,982 | ) | ||||||||
| | | | | | | | | | | | | | | | |
28,800 | 1,083 | 129 | 4,456 | 34,468 | ||||||||||||
| | | | | | | | | | | | | | | | |
Currency translation adjustment | — | — | (34 | ) | (749 | ) | (783 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Balance at December 31, 2016 | ||||||||||||||||
Gross amount of goodwill | 30,266 | 1,083 | 95 | 7,223 | 38,667 | |||||||||||
Accumulated impairment loss | (1,466 | ) | — | — | (3,516 | ) | (4,982 | ) | ||||||||
| | | | | | | | | | | | | | | | |
28,800 | 1,083 | 95 | 3,707 | 33,685 | ||||||||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
13. IMPAIRMENT REVIEW
Management of the Group performs impairment tests for the goodwill assigned to the cash-generating units at least annually and when there are any indications that the carrying amount of the cash-generating unit ("CGU") is impaired.
When reviewing for indicators of impairment management of the Group considers, among other factors, the relationship between its market capitalization and book value, changes in country risk premiums and other.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
13. IMPAIRMENT REVIEW (Continued)
When the carrying amount of the cash generating unit to which goodwill is allocated exceeds its recoverable amount, goodwill allocated to this cash generating unit must be impaired.
The recoverable amounts of the CGUs are determined based on their value in use. In assessing value in use, the estimated future cash flows are discounted to present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGU.
�� Future cash flows calculations are based on a five-year operations plan, which is prepared and approved by the management of the Group. Estimation of future cash flows requires assumptions to be made in respect of uncertain factors, including management's expectations of the following: OIBDA margin, timing and amount of future capital expenditure, terminal growth rates and appropriate discount rates to reflect the risks involved.
During the year ended December 31, 2016 no impairment charges were recorded in respect of the Group's goodwill balances.
As a result of impairment test as of December 31, 2015 impairment charges of RUB 3.5 billion were recorded in a separate line item within operating profit in the consolidated statement of profit or loss in respect of the Group's investment in operating segment "Armenia". The impairment charges relate solely to goodwill. The impairment reflects the decrease of interconnect traffic and related revenue due to dramatic growth of prices for international calling from Russia to Armenia. The recoverable amount of CGU "Armenia" was RUB 18.5 billion as of 31, December 2015.
During the year ended December 31, 2014 no impairment charges were recorded in respect of the Group's goodwill balances.
Key assumptions used for value in use calculation:
OIBDA margin and capital expenditures were primarily derived from internal sources, were based on past experience and extended to include management expectations.
The table below presents OIBDA margin utilized for value in use calculation of related CGUs:
CGU | December 31, 2016 | December 31, 2015 | ||
---|---|---|---|---|
Russia convergent | 34.6% - 37.0% | 32.3% - 34.9% | ||
Armenia | 42.0% - 45.0% | 44.7% - 46.1% | ||
Moscow fixed line | 42.2% - 51.0% | 48.2% - 53.4% | ||
Ukraine | 40.6% - 46.5% | 35.4% - 41.3% |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
13. IMPAIRMENT REVIEW (Continued)
The table below presents capital expenditure as a percentage of revenue utilized for value in use calculation of related CGUs:
CGU | December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Russia convergent | 18.8 | % | 17.6 | % | |||
Armenia | 11.9 | % | 12.0 | % | |||
Moscow fixed line | 17.5 | % | 15.0 | % | |||
Ukraine | 19.9 | % | 24.4 | % |
The terminal growth rate into perpetuity has been determined based on the nominal gross domestic product rates for the country of operation, adjusted for specific characteristic of the CGUs business.
The table below presents terminal growth rate utilized for value in use calculation of related CGUs:
CGU | December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Russia convergent | 1 | % | 1 | % | |||
Armenia | nil | nil | |||||
Moscow fixed line | 1 | % | 1 | % | |||
Ukraine | 3 | % | 3 | % |
The discount rate, applied to measure free cash flow is the weighted average cost of capital according to the finance structure established for each CGU.
The table below presents pre-tax rates for discounting of cash flows in functional currencies of related CGUs:
CGU | December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Russia convergent | 15.1 | % | 13.9 | % | |||
Armenia | 15.5 | % | 17.7 | % | |||
Moscow fixed line | 13.7 | % | 18.4 | % | |||
Ukraine | 21.6 | % | 26.6 | % |
Management believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of any cash-generating unit to materially exceed its recoverable amount.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
14. OTHER INTANGIBLE ASSETS
Net book value of other intangible assets as at December 31, 2016, December 31, 2015 and January 1, 2015 was as follows:
| Licenses | Right to use radio frequencies | Billing and other software | Client base | Numbering capacity | Other | Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Useful life, years | 1 to 20 | 1 to 15 | 1 to 25 | 4 to 31 | 2 to 15 | 1 to 10 | ||||||||||||||||
Cost | ||||||||||||||||||||||
January 1, 2015 | 13,278 | 8,294 | 91,367 | 8,679 | 3,763 | 9,033 | 134,414 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Additions | 11,705 | 1,262 | 20,624 | — | 107 | 53 | 33,751 | |||||||||||||||
Arising on business combinations | 111 | — | 779 | 86 | — | 368 | 1,344 | |||||||||||||||
Disposal | (1 | ) | (268 | ) | (18,888 | ) | (1,228 | ) | (619 | ) | (240 | ) | (21,244 | ) | ||||||||
Other | (73 | ) | 38 | (376 | ) | — | (14 | ) | (115 | ) | (540 | ) | ||||||||||
Foreign exchange differences | 3,470 | — | (372 | ) | — | (29 | ) | 668 | 3,737 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | 28,490 | 9,326 | 93,134 | 7,537 | 3,208 | 9,767 | 151,462 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Additions | 3,382 | 245 | 27,658 | — | 65 | 232 | 31,582 | |||||||||||||||
Arising on business combinations (Note 4) | 323 | — | — | — | — | — | 323 | |||||||||||||||
Disposal of UMS | — | — | (1,891 | ) | — | — | (3,687 | ) | (5,578 | ) | ||||||||||||
Disposal | (2 | ) | (582 | ) | (10,509 | ) | (164 | ) | (160 | ) | (2,842 | ) | (14,259 | ) | ||||||||
Other | 44 | (40 | ) | (87 | ) | — | (4 | ) | (40 | ) | (127 | ) | ||||||||||
Foreign exchange differences | (5,101 | ) | — | (3,763 | ) | — | (39 | ) | (1,187 | ) | (10,090 | ) | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | 27,136 | 8,949 | 104,542 | 7,373 | 3,070 | 2,243 | 153,313 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Accumulated amortisation and impairment | ||||||||||||||||||||||
January 1, 2015 | (7,245 | ) | (3,317 | ) | (52,422 | ) | (4,155 | ) | (3,524 | ) | (1,542 | ) | (72,205 | ) | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Charge for the year | (1,447 | ) | (1,202 | ) | (16,933 | ) | (692 | ) | (147 | ) | (3,770 | ) | (24,191 | ) | ||||||||
Arising on business combinations | — | — | (424 | ) | — | — | (188 | ) | (612 | ) | ||||||||||||
Disposal | 1 | 268 | 18,528 | 1,228 | 619 | 158 | 20,802 | |||||||||||||||
Other | 64 | (10 | ) | (172 | ) | — | 28 | 99 | 9 | |||||||||||||
Foreign exchange differences | (1,246 | ) | — | 866 | — | 28 | (317 | ) | (669 | ) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | (9,873 | ) | (4,261 | ) | (50,557 | ) | (3,619 | ) | (2,996 | ) | (5,560 | ) | (76,866 | ) | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Charge for the year | (2,092 | ) | (1,170 | ) | (18,002 | ) | (620 | ) | (46 | ) | (1,389 | ) | (23,319 | ) | ||||||||
Disposal of UMS | — | — | 494 | — | — | 2,162 | 2,656 | |||||||||||||||
Disposal | 2 | 582 | 10,193 | 164 | 160 | 2,836 | 13,937 | |||||||||||||||
Other | (7 | ) | 20 | 43 | — | (13 | ) | (42 | ) | 1 | ||||||||||||
Foreign exchange differences | 2,007 | — | 2,697 | — | 34 | 668 | 5,406 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | (9,963 | ) | (4,829 | ) | (55,132 | ) | (4,075 | ) | (2,861 | ) | (1,325 | ) | (78,185 | ) | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Net book value | ||||||||||||||||||||||
January 1, 2015 | 6,033 | 4,977 | 38,945 | 4,524 | 239 | 7,491 | 62,209 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | 18,617 | 5,065 | 42,577 | 3,918 | 212 | 4,207 | 74,596 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | 17,173 | 4,120 | 49,410 | 3,298 | 209 | 918 | 75,128 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
14. OTHER INTANGIBLE ASSETS (Continued)
Charge of amortization for 2014 year for Licenses, Right to use radio frequencies, Billing and other software, Client base, Numbering capacity and Other was RUB 809 million, RUB 991 million, RUB 12,729 million, RUB 689 million, RUB 713 million and RUB 268 million, respectively.
In connection with providing telecommunication services, the Group has been issued various GSM operating licenses by the Russian Ministry of Information Technologies and Communications. In addition to the licenses received directly from the Russian Ministry of Information Technologies and Communications, the Group has been granted access to various telecommunication licenses through acquisitions. In foreign subsidiaries, the licenses are granted by the local communication authorities.
Operating licenses contain a number of requirements and conditions specified by legislation. The requirements generally include the targets for start date of service, territorial coverage and expiration date. Management believes that the Group is in compliance with all material terms of its licenses.
The Group's operating licenses do not provide for automatic renewal. All licenses covering the territories of the Russian Federation expired as of December 31, 2016 were renewed. The cost to renew the licenses was not significant. Weighted-average period until the next renewal of licenses in the Russian Federation is five years.
The license for the provision of telecommunication services in Ukraine was renewed in 2013 and is valid until 2026. The license for the provision of telecommunication services in Armenia is valid until 2019. The license for the provision of telecommunication services in Turkmenistan is valid until 2029.
Contractual obligations to purchase intangible assets are disclosed in the Note 28.
15. BORROWINGS
The Group's borrowings comprise the following:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Notes | 78,186 | 100,034 | |||||
Bank and other loans | 195,088 | 234,040 | |||||
Finance lease obligations | 11,046 | 11,795 | |||||
| | | | | | | |
Total borrowings | 284,320 | 345,869 | |||||
| | | | | | | |
Less: current portion | (47,207 | ) | (53,701 | ) | |||
Total borrowings, non-current | 237,113 | 292,168 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
15. BORROWINGS (Continued)
Notes—The Group's Notes consisted of the following:
| Currency | Interest rate (actual at December 31, 2016) | December 31, 2016 | December 31, 2015 | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
MTS International Notes due 2023 (Note 2) | USD | 5.00% | 28,218 | 33,908 | |||||||
MTS International Notes due 2020 (Note 2) | USD | 8.625% | 18,537 | 42,238 | |||||||
MTS PJSC Notes due 2017 | RUB | 8.70% | 9,995 | 9,990 | |||||||
MTS PJSC Notes due 2031 | RUB | 9.40% | 9,986 | — | |||||||
MTS PJSC Notes due 2023 | RUB | 8.25% | 9,984 | 9,971 | |||||||
MTS PJSC Notes due 2020 | RUB | 9.25% | 1,448 | 2,110 | |||||||
MTS PJSC Notes due 2016 | RUB | 8.75% | — | 1,788 | |||||||
Other Notes due 2015-2022 | RUB | 0.25% - 10% | 18 | 29 | |||||||
| | | | | | | | | | | |
Total notes | 78,186 | 100,034 | |||||||||
| | | | | | | | | | | |
Less: current portion | (11,389 | ) | (3,855 | ) | |||||||
Total notes, non-current | 66,797 | 96,179 | |||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The Group has an unconditional obligation to repurchase certain MTS PJSC Notes at par value if claimed by the noteholders subsequent to the announcement of the sequential coupon. The dates of the announcement for each particular note issue are as follows:
MTS PJSC Notes due 2020 | November 2017 | |
MTS PJSC Notes due 2023 | March 2018 | |
MTS PJSC Notes due 2031 | August 2018 |
The Group discloses these notes as maturing in 2017 (MTS PJSC Notes due 2020) and in 2018 (MTS PJSC Notes due 2023; MTS PJSC Notes due 2031) in the aggregated maturities schedule as the noteholders have the unilateral right to demand repurchase of the notes at par value upon announcement of new coupons.
In November 2016, the Group changed the coupon rate for MTS PJSC Notes due 2020 from 10.75% to 9.25%. Following the announcement of new coupon rates the Group repurchased MTS PJSC Notes due 2020 at the request of eligible noteholders in the amount of RUB 662 million.
As of December 31, 2016 the Group had the following outstanding repurchase transactions with a due date on January 09, 2017:
| No of Notes | Due amount | Unrealized premium | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
MTS PJSC Notes due 2018 | 2,777,440 | 2,588 | — | 2,588 | |||||||||
| | | | | | | | | | | | | |
2,588 | |||||||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
15. BORROWINGS (Continued)
As of December 31, 2015 the Group had the following outstanding repurchase transactions with a due date on January 11, 2016:
| No of Notes | Due amount | Unrealized premium | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
MTS PJSC Notes due 2018 | 223,799 | 200 | — | 200 | |||||||||
MTS PJSC Notes due 2016 | 5,203,825 | 4,921 | (3 | ) | 4,918 | ||||||||
MTS PJSC Notes due 2020 | 5,290,322 | 4,885 | — | 4,885 | |||||||||
| | | | | | | | | | | | | |
10,003 | |||||||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The above balances are included in the short-term portion of bank loans and other debt disclosed below.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
15. BORROWINGS (Continued)
Bank and other loans—The Group's loans from banks and financial institutions consisted of the following:
| Maturity | Interest rate (actual at December 31, 2016) | December 31, 2016 | December 31, 2015 | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
USD-denominated: | |||||||||||
Calyon, ING Bank N.V, Nordea Bank AB, Raiffeisen Zentralbank Osterreich AG | 2017 - 2020 | LIBOR + 1.15% (2.468%) | 25,394 | 39,449 | |||||||
Citibank | 2017 - 2024 | LIBOR + 0.9% (2.218%) | 12,812 | 17,511 | |||||||
Skandinavska Enskilda Banken AB | 2017 | LIBOR + 0.23% – 1.8% (1.543% – 3.118%) | 1,163 | 3,939 | |||||||
| | | | | | | | | | | |
39,369 | 60,899 | ||||||||||
EUR-denominated: |
|
| |||||||||
Credit Agricole Corporate Bank and BNP Paribas | 2017 - 2018 | EURIBOR + 1.65% (1.43%) | 876 | 1,639 | |||||||
LBBW | 2017 | EURIBOR + 1.52% (1.30%) | 296 | 737 | |||||||
| | | | | | | | | | | |
1,172 | 2,376 | ||||||||||
RUB-denominated: |
|
| |||||||||
Sberbank | 2017 - 2021 | 8.45% – Central Bank key rate + 0.90% (10.90%) | 144,813 | 154,660 | |||||||
Gasprombank | 2017 | 10.9% | 4,000 | — | |||||||
Notes in REPO | 2017 | 10.24% – 10.39% | 2,588 | 10,003 | |||||||
Citibank | 2017 | 9.9% | 2,400 | — | |||||||
Other | 2017 - 2025 | Various | 533 | 1,409 | |||||||
| | | | | | | | | | | |
154,334 | 166,072 | ||||||||||
Other currencies: |
|
| |||||||||
Various financial institutions | 2017 - 2020 | Various | 213 | 4,693 | |||||||
| | | | | | | | | | | |
213 | 4,693 | ||||||||||
Total bank and other loans | 195,088 | 234,040 | |||||||||
Less: current portion | (35,188 | ) | (49,282 | ) | |||||||
| | | | | | | | | | | |
Total bank and other loans, non-current | 159,900 | 184,758 | |||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Compliance with covenants—Bank loans and notes of the Group are subject to certain covenants limiting the Group's ability to incur debt, carry on transactions with related parties, create liens on
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
15. BORROWINGS (Continued)
properties, dispose assets, including GSM and 3G licenses for several license areas, issue guaranties, grant loans to employees and entities, delist notes, delay coupon payments, merge or consolidate MTS PJSC with another entity or be a subject to a court decision to pay over $75 million (RUB 4,549 million as of the reporting date), which remains unsatisfied for more than 60 days without being appealed, discharged or waived.
The Group is required to comply with certain financial ratios and maintain ownership in certain subsidiaries.
The noteholders of MTS International Notes due 2020 and MTS International Notes due 2023 have the right to require the Group to redeem the notes at 101% of their principal amount and related interest, if the Group experiences a change in control.
If the Group fails to meet these covenants, after certain notice and cure periods, the debtholders are entitled to accelerate the repayment of the debt.
The Group was in compliance with all existing notes and bank loans covenants as of December 31, 2016.
Available credit facilities—As of December 31, 2016, the Group's total available unused credit facilities amounted to RUB 40,858 million and related to the following credit lines:
| Currency | Maturity | Interest rate | Available till | Available amount | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Sberbank | RUB | To be agreed | Central Bank key rate + max.5.00% | June 2019 | 15,000 | |||||||
Gasprombank | EUR | 2021 | CBR1 auction rate + 0.6% | Sep 2017 | 6,381 | |||||||
China Development Bank | USD | 2022 | 6M Libor + 3.25% | May 2017 | 6,065 | |||||||
China Development Bank | CNY | 2022 | 6M Shibor + 3.52% | May 2017 | 5,412 | |||||||
Rosselhozbank | RUB/USD/EUR | 31 days | To be agreed | November 2017 | 5,000 | |||||||
Absolut Bank | RUB | 2019 | CBR(1) auction rate + 1.25% – 1.8% | December 2019 | 3,000 | |||||||
| | | | | | | | | | | | |
Total | 40,858 | |||||||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
In addition, the Group has a credit facility made available by Citibank at MosPrime + 1.50% interest rate with the available amount set up on request and to be repaid within 182 days.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
15. BORROWINGS (Continued)
The following table presents the aggregated scheduled maturities of principal on notes and bank loans (gross of debt issuance costs) outstanding for the five years ending December 31, 2021 and thereafter:
| As of December 31, 2016 | ||||||
---|---|---|---|---|---|---|---|
| Notes | Bank loans and other debt | |||||
Payments due in the year ending December 31, | |||||||
2017 | 11,448 | 35,632 | |||||
2018 | 20,006 | 46,927 | |||||
2019 | — | 69,963 | |||||
2020 | 18,614 | 23,396 | |||||
2021 | 12 | 15,844 | |||||
Thereafter | 28,301 | 4,620 | |||||
| | | | | | | |
Total | 78,381 | 196,382 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Less: unamortized debt issuance costs | (195 | ) | (1,294 | ) | |||
Total debt | 78,186 | 195,088 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Finance lease obligations—The following table presents a summary of net book value of leased property, plant and equipment:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Network and base station equipment | 6,906 | 6,352 | |||||
Office equipment, vehicles and other | 66 | 54 | |||||
| | | | | | | |
Leased assets, net | 6,972 | 6,406 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Additions under finance lease agreements for the years ended December 31, 2016, 2015 and 2014 amounted to RUB 1,117 million, RUB 1,735 million and RUB 6,228 million respectively. Depreciation of the assets under finance leases for the year ended December 31, 2016, 2015 and 2014 amounted to RUB 603 million, RUB 554 million and RUB 509 million, respectively, and was included in depreciation and amortization expense in the accompanying consolidated statement of profit or loss.
Interest expense accrued on finance lease obligations for the year ended December 31, 2016, 2015 and 2014 amounted to RUB 855 million, RUB 756 million and RUB 370 million, respectively, and was included in finance costs in the accompanying consolidated statement of profit or loss.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
15. BORROWINGS (Continued)
The following tables present future minimum lease payments under capital leases together with the present value of the net minimum lease payments as at December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Minimum lease payments, including: | |||||||
Current portion (less than 1 year) | 1,432 | 1,366 | |||||
More than 1 to 5 years | 6,079 | 6,243 | |||||
Over 5 years | 11,061 | 11,022 | |||||
| | | | | | | |
Total minimum lease payments | 18,572 | 18,631 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Less amount representing interest | (7,526 | ) | (6,836 | ) | |||
Present value of net minimum lease payments, including: | |||||||
Current portion (less than 1 year) | 630 | 564 | |||||
More than 1 to 5 years | 3,055 | 3,334 | |||||
Over 5 years | 7,361 | 7,897 | |||||
Total present value of net minimum lease payments | 11,046 | 11,795 | |||||
| | | | | | | |
Less current portion of lease obligations | (630 | ) | (564 | ) | |||
Non-current portion of lease obligations | 10,416 | 11,231 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Leased assets include transponders which are installed on a satellite and used for provision of satellite television services, network equipment and automobiles. The lease term of the transponders is twelve years. The lease term of network equipment is fifteen years. The average lease term of the automobiles is three years. The Group has an obligation to purchase these automobiles under the respective finance lease agreements at the end of the lease term.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
16. PROVISIONS
The following table summarizes the movement in provisions for the year ended December 31, 2016, 2015 and 2014:
| Tax provisions other than for income tax | Provision for decommissioning and restoration | Employee bonuses and other rewards | Other provisions | Total provisions | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
At 1 January 2014 | (2,388 | ) | (2,970 | ) | (6,611 | ) | (35 | ) | (12,004 | ) | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current 2014 | (2,388 | ) | — | (5,046 | ) | (35 | ) | (7,469 | ) | |||||||
Non-current 2014 | — | (2,970 | ) | (1,565 | ) | — | (4,535 | ) | ||||||||
Arising during the year | (745 | ) | (123 | ) | (9,571 | ) | (9 | ) | (10,448 | ) | ||||||
Utilised | — | 22 | 7,822 | 12 | 7,856 | |||||||||||
Discount rate adjustment and imputed interest (change in estimates) | — | 1,355 | 278 | — | 1,633 | |||||||||||
Unused amounts reversed | 159 | 47 | 1,252 | 25 | 1,483 | |||||||||||
Translation adjustments and other | — | 29 | (71 | ) | — | (42 | ) | |||||||||
| | | | | | | | | | | | | | | | |
At 31 December 2014 | (2,974 | ) | (1,640 | ) | (6,901 | ) | (7 | ) | (11,522 | ) | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current 2014 | (2,974 | ) | — | (5,703 | ) | (7 | ) | (8,684 | ) | |||||||
Non-current 2014 | — | (1,640 | ) | (1,198 | ) | — | (2,838 | ) | ||||||||
At 1 January 2015 | (2,974 | ) | (1,640 | ) | (6,901 | ) | (7 | ) | (11,522 | ) | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Arising during the year | (481 | ) | (107 | ) | (10,478 | ) | (27 | ) | (11,093 | ) | ||||||
Utilised | 24 | — | 8,706 | 7 | 8,737 | |||||||||||
Discount rate adjustment and imputed interest (change in estimates) | — | 256 | 87 | — | 343 | |||||||||||
Unused amounts reversed | 2,951 | 25 | 846 | 6 | 3,828 | |||||||||||
Arising due to subsidiary purchase | (15 | ) | — | (456 | ) | (186 | ) | (657 | ) | |||||||
Translation adjustments and other | (30 | ) | 7 | (41 | ) | — | (64 | ) | ||||||||
| | | | | | | | | | | | | | | | |
At 31 December 2015 | (525 | ) | (1,459 | ) | (8,237 | ) | (207 | ) | (10,428 | ) | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current 2015 | (525 | ) | — | (7,131 | ) | (207 | ) | (7,863 | ) | |||||||
Non-current 2015 | — | (1,459 | ) | (1,106 | ) | — | (2,565 | ) | ||||||||
At 1 January 2016 | (525 | ) | (1,459 | ) | (8,237 | ) | (207 | ) | (10,428 | ) | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Arising during the year | (1,058 | ) | (45 | ) | (14,085 | ) | (275 | ) | (15,463 | ) | ||||||
Utilised | 374 | 8 | 12,482 | 223 | 13,087 | |||||||||||
Discount rate adjustment and imputed interest (change in estimates) | — | (142 | ) | (51 | ) | — | (193 | ) | ||||||||
Unused amounts reversed | 742 | 430 | 1,096 | 34 | 2,302 | |||||||||||
Disposal of a subsidiary | — | 91 | — | 91 | ||||||||||||
Translation adjustments and other | 10 | 17 | 152 | — | 179 | |||||||||||
| | | | | | | | | | | | | | | | |
At 31 December 2016 | (457 | ) | (1,191 | ) | (8,552 | ) | (225 | ) | (10,425 | ) | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current 2016 | (457 | ) | — | (7,393 | ) | (225 | ) | (8,075 | ) | |||||||
Non-current 2016 | — | (1,191 | ) | (1,159 | ) | — | (2,350 | ) |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
17. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Financial assets
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Trade and other receivables (Note 9) | 29,805 | 34,542 | |||||
Accounts receivable, related parties (Note 21) | 8,094 | 9,661 | |||||
Cash and Cash equivalents (Note 5) | 18,470 | 33,464 | |||||
Other financial assets: | |||||||
Financial assets at fair value through profit or loss: | |||||||
Assets in Sistema-Capital trust management | 3,721 | — | |||||
| | | | | | | |
Total financial assets at fair value through profit and loss | 3,721 | — | |||||
| | | | | | | |
Financial assets at fair value through OCI: | |||||||
Notes | 65 | 266 | |||||
Cross-currency swap designated as cash flow hedge | 13,632 | 25,027 | |||||
| | | | | | | |
Total financial assets at fair value through OCI | 13,697 | 25,293 | |||||
| | | | | | | |
Loans and receivables: | |||||||
Bank deposits | 30,906 | 73,169 | |||||
Loans and receivables | 8,221 | 9,341 | |||||
Notes | 804 | 528 | |||||
Other | 1,504 | 1,379 | |||||
| | | | | | | |
Total loans and receivables | 41,435 | 84,417 | |||||
| | | | | | | |
Total other financial assets | 58,853 | 109,710 | |||||
| | | | | | | |
Total financial assets | 115,222 | 187,377 | |||||
Total current financial assets | (61,333 | ) | (124,172 | ) | |||
| | | | | | | |
Total non-current financial assets | 53,889 | 63,205 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
17. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (Continued)
Financial liabilities
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Trade and other payables | 41,473 | 57,756 | |||||
Accounts payable, related parties (Note 21) | 1,014 | 1,809 | |||||
Financial liabilities at amortised cost: | |||||||
Loans and borrowings: | |||||||
Notes | 78,186 | 100,034 | |||||
Bank and other loans | 195,088 | 234,040 | |||||
Finance lease obligations | 11,046 | 11,795 | |||||
| | | | | | | |
Total loans and borrowings | 284,320 | 345,869 | |||||
Guarantee payment received | 2,907 | 6,853 | |||||
| | | | | | | |
Total financial liabilities at amortized cost | 287,227 | 352,722 | |||||
| | | | | | | |
Other financial liabilities at fair value: | |||||||
Financial liabilities at fair value through profit or loss: | |||||||
Deliverable currency forward not designated as hedge | 142 | — | |||||
Liability under put option agreement (Note 27) | 2,243 | 2,925 | |||||
| | | | | | | |
Total financial liabilities at fair value through profit and loss | 2,385 | 2,925 | |||||
| | | | | | | |
Financial liabilities at fair value through OCI: | |||||||
Interest rate swaps designated as cash flow hedges | 531 | 676 | |||||
| | | | | | | |
Total financial liabilities at fair value through OCI | 531 | 676 | |||||
| | | | | | | |
Total other financial liabilities at fair value | 2,916 | 3,601 | |||||
| | | | | | | |
Total financial liabilities | 332,630 | 415,888 | |||||
Total current financial liabilities | (92,743 | ) | (123,044 | ) | |||
| | | | | | | |
Total non-current financial liabilities | 239,887 | 292,844 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Group financial liabilities are represented by trade and other payables, notes and bank loans. The main purpose of these financial liabilities is to finance the Group's operations and capital expenditures. The Group's principal financial assets include loans and investments, trade and other receivables, cash and deposits.
The Group accounts for its financial assets and liabilities at amortized cost, except for derivative instruments, marketable securities, assets in Sistema-Capital trust management and liability under put option agreement, which are accounted for at fair value.
In May 2016, the Group entered into a trust agreement with the asset management company Sistema-Capital, a subsidiary of Sistema. The main purpose of the agreement is short-term profit-taking from operations with securities.
The fair value measurement of the Group's derivative instruments and investments in Sistema-Capital trust management is based on the observable yield curves for similar instruments and represents
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
17. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (Continued)
the estimated amount the Group would receive or pay to terminate these agreements at the reporting date, taking into account current interest rates, foreign exchange spot and forward rates.
The table below presents the fair value of financial instruments:
| Level of inputs | December 31, 2016 | December 31, 2015 | ||||||
---|---|---|---|---|---|---|---|---|---|
Assets | |||||||||
Sistema Notes due in 2016 (series 04) (related party) (Notes 6, 21) | Level 1 | — | 191 | ||||||
Sistema International Funding S.A. Bonds due in 2019 (related party) (Note 6, 21) | Level 1 | 65 | 75 | ||||||
Derivative instruments | Level 2 | 13,632 | 25,027 | ||||||
Cross-currency interest rate swap | 13,632 | 25,027 | |||||||
Assets in Sistema-Capital trust management (related party) (Note 6, 21) | Level 2 | 3,721 | — | ||||||
Liabilities |
| ||||||||
Derivative instruments | Level 2 | (673 | ) | (676 | ) | ||||
Interest rate swap | (531 | ) | (676 | ) | |||||
Deliverable currency forward | (142 | ) | — | ||||||
Liability under put option agreement | Level 3 | (2,243 | ) | (2,925 | ) | ||||
Contingent consideration | Level 3 | (3 | ) | (115 | ) |
For the years ended December 31, 2016, 2015 and 2014, net realized gains and losses of Level 3 liabilities resulting from fair value measurements amounted to RUB 199 million gain, RUB 1,014 million gain and RUB 260 million loss, respectively and were recognized as a part of change in fair value of financial instruments' in consolidated statement of profit or loss. No unrealized gains or losses of Level 3 liabilities resulted from fair value measurements were recognized during the years ended December 31, 2016, 2015 and 2014.
For the year ended December 31, 2016, 2015 and 2014, net realized gains and losses of Level 1 liabilities resulted from fair value measurements amounted to nil, nil and RUB 165 million gain, respectively.
The liability under put option agreement is measured at fair value using a discounted cash flow technique. The most significant quantitative inputs used to measure the fair value of the liability under put option agreement are presented in the table below:
Unobservable inputs | December 31, 2016 | December 31, 2015 | ||
---|---|---|---|---|
Post-tax discount rate | 13% | 15% | ||
Revenue growth rate | (0.9) - (2.9)% (av. –1.8%) | (1.6) - (4.6)% (av. –2.2%) | ||
OIBDA margin | 42.0 - 45.0% (av. 43.5%) | 44.7 - 46.1% (av. 45.4%) |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
17. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (Continued)
The carrying value of the Group's financial instruments accounted for at amortized cost approximates their fair value due to their short-term nature and market interest rates, except for borrowings, gross of debt issuance cost, as disclosed in the table below:
| | December 31, 2016 | December 31, 2015 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level of inputs | Fair value | Carrying value | Fair value | Carrying value | ||||||||||
Notes (Note 15) | Level 1 | (81,462 | ) | (78,381 | ) | (99,704 | ) | (100,269 | ) | ||||||
Bank and other loans | Level 3 | (199,131 | ) | (196,382 | ) | (228,702 | ) | (235,947 | ) | ||||||
| | | | | | | | | | | | | | | |
(280,593 | ) | (274,763 | ) | (328,406 | ) | (336,216 | ) | ||||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
The fair value of the Group's bank and other loans is measured using a discounted cash flow technique. The discount rate used in the discounted cash flow analysis is determined on the base of the market rate for bank loans available to the Group.
While management has used available market information in estimating the fair value of its financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances.
There were no transfers between levels of inputs within the hierarchy during the years ended December 31, 2016, 2015 and 2014.
There were no transfers between the accounting categories of financial instruments during the years ended December 31, 2016, 2015 and 2014.
18. FINANCIAL RISK MANAGEMENT
As part of its business the Group is exposed to several types of financial risks: market risks, credit (or counterparty) risks, and liquidity risks. Risks mitigating activities are mainly performed at the Group headquarters by the corporate finance personnel and are subject to the approval of the Group's supervisory bodies—Board of Directors and Budget committee.
Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. The Group is primarily exposed to the following types of market risks: interest rate risk and currency exchange rates fluctuations. Financial instruments affected by market risk include loans and borrowings, deposits, and derivative financial instruments. The sensitivity analyses in the following sections relate to the financial position as of December 31, 2016, 2015 and 2014.
Interest rate risks
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group manages its interest rate risk by having a balanced portfolio of fixed and variable rate loans and borrowings.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
18. FINANCIAL RISK MANAGEMENT (Continued)
Group's bank loans denominated in US dollars and Euros primarily bear floating interest rate. To eliminate the exposure of changes in variable interest rates related to its debt obligations, the Group enters into variable-to-fixed interest rate swap agreements, so that interest rate swap matches the exact maturity dates of the underlying debt allowing for highly-effective cash flow hedges. In aggregate the Group entered into variable-to-fixed interest rate swap agreements designated to manage the exposure of changes in variable interest rates related to 28.6% and 32.6% of the Group's bank loans with variable rates outstanding as of December 31, 2016 and 2015, respectively.
Group's Notes and bank loans denominated in rubles bear primarily fixed interest rates. To eliminate the exposure of changes in value of debt obligations, the Group enters into fixed-to-variable interest rate swap agreements. In aggregate the Group entered into fixed-to-variable interest rate swap agreements designated to manage the exposure of changes in value of the debt related to 12.9% and 12.9% of the Group's Notes and bank loans with fixed rates outstanding as of December 31, 2016 and 2015, respectively.
The notionals related to interest rate derivative instruments amounted to RUB 49,451 million and RUB 67,338 million as of December 31, 2016 and 2015, respectively.
Sensitivity analysis
A reasonably possible increase of 100 basis points in short term interest rates would have resulted in RUB 704 million, RUB 933 million and RUB 264 million future increases of interest expense for the years ended December 31, 2016, 2015 and 2014, respectively. The same decrease in short term interest rates would have resulted in RUB 704 million, RUB 933 million and RUB 233 million future decreases of finance cost for the years ended December 31, 2016, 2015 and 2014, respectively. There will be no material impact on equity.
The interest rate sensitivity analysis was performed based on a constant position of fixed and floating rate debt.
Foreign currency risks
Foreign currency risk is the risk that the fair value or future cash flows will fluctuate because of changes in foreign exchange rates. The Group's exposure to the risk of changes in foreign exchange rates relates primarily to the Group's financing activities. The Group manages its currency risk by hedging significant foreign currency cash outflows with derivatives and by using money market instruments.
The Group has entered into several cross-currency swap agreements. The contracts designated to manage the exposure of changes in currency exchange rate. The contracts assumed periodic exchange of principal and interest payments from RUB-denominated amounts to USD- and Euro- denominated amounts at a specified rate. The rate was determined by the market spot rate upon issuance. Cross-currency interest rate swap contracts mature in 2019-2020.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
18. FINANCIAL RISK MANAGEMENT (Continued)
In aggregate the Group entered into cross-currency interest rate swap agreements designated to manage the exposure of changes in currency exchange rate for 29.2% of the Group's bank loans denominated in USD- and Euro- denominated bank loans outstanding as of December 31, 2016 and 28.7% of its USD- and Euro- denominated bank loans outstanding as of December 31, 2015.
The notionals related to currency derivative instruments amounted to RUB 25,885 million and RUB 40,049 million as of December 31, 2016 and 2015, respectively.
The Group has entered into deliverable currency forward agreements to minimize foreign currency risk exposure for operating activities. The contracts assumed the purchase or sale of the agreed amount of currency at a specified exchange rate and date. The rate was determined by the market spot rate upon issuance. As the result of deliverable currency forward agreements, unfulfilled as of December 31, 2016, 2015 and 2014, the Group recognized RUB 142 mln loss, nil and nil in the consolidated statement of profit and loss for the years ended December 31, 2016, 2015 and 2014.
The notionals related to deliverable currency forward instruments, unfulfilled as of December 31, 2016 and 2015, amounted to RUB 18,339 mln and nil, respectively.
The following table presents the effect of the Group's swap agreements designated as cash flow hedges in accumulated other comprehensive income for the years ended December 31, 2016, 2015 and 2014.
| 2016 | 2015 | 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Accumulated derivatives income, beginning of the year, net of tax of 209 and 853 and 293, respectively | 1,045 | 4,268 | 1,467 | |||||||
Fair value adjustments on hedging derivatives, net of tax of (1,823) and 590 and 2,894, respectively | (9,116 | ) | 2,952 | 14,469 | ||||||
Amounts reclassified to loss / (profit) for the year during the period, net of tax of 1,594 and (1,235) and (2,334), respectively | 7,968 | (6,175 | ) | (11,668 | ) | |||||
| | | | | | | | | | |
Accumulated derivatives (loss) / income, end of the year, net of tax of (21) and 209 and 853, respectively | (103 | ) | 1,045 | 4,268 | ||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The following tables demonstrate the sensitivity to a reasonably possible change in USD and EUR exchange rates, with all other variables held constant.
| Change in rate | USD—effect on profit before tax RUB mln, | EUR—effect on profit before tax RUB mln | |||||||
---|---|---|---|---|---|---|---|---|---|---|
2016 | +20 | % | (6,722 | ) | 2,274 | |||||
–20 | % | 6,722 | (2,274 | ) | ||||||
2015 | +20 | % | (8,986 | ) | 5,664 | |||||
–20 | % | 8,986 | (5,664 | ) | ||||||
2014 | +20 | % | (12,667 | ) | 5,093 | |||||
–20 | % | 12,667 | (5,093 | ) |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
18. FINANCIAL RISK MANAGEMENT (Continued)
The movement in the pre-tax effect is a result of a change in monetary assets and liabilities denominated in US dollars and Euro, where the functional currency of the entity is a currency other than US dollars and Euro.
There will be no material impact on equity.
The Group's exposure to foreign currency changes for all other currencies is not material.
Liquidity risk
Liquidity risk is the risk of a shortage of funds. The Group's policy is to borrow centrally using a mixture of long-term and short-term borrowing facilities. These borrowings, together with cash generated from operations are utilized to meet anticipated funding requirements. The Group assessed the concentration of risk with respect to refinancing its debt and concluded it to be low.
The Group manages liquidity risk on long-term borrowings by maintaining a varied maturity profile and a required net debt position, therefore minimizing refinancing risk. Long-term borrowings mature between one and 7 years.
As at December 31, 2016, current liabilities exceeded current assets by RUB 36,551 million. Management believes the Group has sufficient existing and continuing access to liquidity through both operating cash flows and the availability of committed credit facilities of RUB 40,858 million (Note 15).
Credit risk
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument, leading to a financial loss. The Group is exposed to credit risk primarily from its investing activities.
The Group considers its exposure to credit risk as of December 31, 2016, and 2015 to be as follows:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Bank deposits | 30,905 | 73,169 | |||||
Trade and other receivables | 29,805 | 34,542 | |||||
Derivative financial instruments | 13,632 | 25,027 | |||||
Loan and notes | 9,090 | 10,135 | |||||
Assets in Sistema-Capital trust management | 3,721 | — |
In accordance with the Group's financial instruments management policy, the aggregate credit risk the Group may have with one counterparty is limited. The Group maintains a mixture of cash and cash equivalents, investments, derivatives and certain other financial instruments with financial institutions. These financial institutions are located in different geographical regions and the Group's policy is designed to limit exposure to any one institutions. As part of its risk management processes, the Group performs periodic evaluations of the relative credit standing of the financial institutions.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
18. FINANCIAL RISK MANAGEMENT (Continued)
On December 15, 2015 Barclays bank and the Group signed an addendum to existing cross currency swap agreements. According to the terms of the addendum parties agreed to set credit exposure limits to one another, which permits to mitigate their credit risk by requiring other party to transfer collateral payments. As of December 31, 2016 and 2015 Barclays bank transferred to the Group collateral payments in the amounts of RUB 2.9 billion and RUB 6.9 billion, respectively.
Concentrations of credit risk with respect to trade receivables are limited given that the Group's customer base is large and unrelated. Therefore management believes there is no further credit risk provision required in excess of the normal provision for bad and doubtful receivables.
19. INCOME TAX
Significant components of income tax expense for the year ended December 31, 2016, 2015 and 2014 was as follows:
| Year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | |||||||
Current income tax charge | 15,177 | 11,865 | 9,478 | |||||||
Adjustments recognised for current tax of prior periods | 98 | 284 | 32 | |||||||
| | | | | | | | | | |
Total current income tax: | 15,275 | 12,149 | 9,510 | |||||||
| | | | | | | | | | |
Deferred tax | (137 | ) | 1,782 | 6,399 | ||||||
| | | | | | | | | | |
Income tax expense on continuing operations | 15,138 | 13,931 | 15,909 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
'Income tax expense on continuing operations' excludes the tax income from the discontinued operations of RUB 192 million, RUB 661 million and tax expense of RUB 75 million for the year ended December 31, 2016, 2015 and 2014, respectively; it has been included in 'profit / (loss) from discontinued operations' (Note 26).
The statutory income tax rates in jurisdictions in which the Group operates for 2016, 2015 and 2014 were as follows: Russia and Armenia –20%, Ukraine –18%, Turkmenistan –8%, Czech
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
19. INCOME TAX (Continued)
Republic –19%. The Russian statutory income tax rate of 20% reconciled to the Group's effective income tax rate for the year ended December 31, 2016, 2015 and 2014 as follows:
| Year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | |||||||
Statutory income tax rate for the year | 20.0 | % | 20.0 | % | 20.0 | % | ||||
Adjustments: | ||||||||||
Expenses not deductible for tax purposes | 2.1 | 3.1 | 0.2 | |||||||
Settlements with tax authorities | 0.1 | 0.5 | 0.6 | |||||||
Different tax rate of foreign subsidiaries | (0.5 | ) | (0.8 | ) | (1.1 | ) | ||||
Earnings distribution from subsidiaries | 0.2 | (1.9 | ) | 4.3 | ||||||
Change in fair value of derivative financial instruments | 0.3 | (0.1 | ) | 1.7 | ||||||
Other | 0.2 | — | 0.1 | |||||||
| | | | | | | | | | |
Effective income tax rate | 22.4 | % | 20.8 | % | 25.8 | % | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As of December 31, 2016 and 2015 the Group reported the following deferred income tax assets and liabilities in the consolidated statement of financial position:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Deferred tax assets | 6,150 | 9,287 | |||||
Deferred tax liabilities | (26,611 | ) | (27,346 | ) | |||
| | | | | | | |
Net deferred tax liabilities | (20,461 | ) | (18,059 | ) | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
19. INCOME TAX (Continued)
Movements in the deferred tax assets and liabilities for the year ended December 31, 2015 were as follows:
| January 1, 2015 | Charged to profit/loss | Charged to other comprehensive income | Effect of acquisitions | December 31, 2015 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets / (liabilities) arising from tax effect of: | ||||||||||||||||
Depreciation of property, plant and equipment | (13,419 | ) | (2,586 | ) | 260 | 97 | (15,648 | ) | ||||||||
Other intangible assets | (6,698 | ) | 410 | (166 | ) | — | (6,454 | ) | ||||||||
Potential distributions from / to Group's subsidiaries / associates | (5,633 | ) | 1,199 | (304 | ) | — | (4,738 | ) | ||||||||
Licenses | (1,118 | ) | (473 | ) | (214 | ) | — | (1,805 | ) | |||||||
Customer base | (905 | ) | 123 | — | — | (782 | ) | |||||||||
Accrued expenses for services | 7,807 | (39 | ) | (109 | ) | 148 | 7,807 | |||||||||
Lease obligations | 1,879 | 472 | — | — | 2,351 | |||||||||||
Loss carryforward | 441 | 718 | 41 | 687 | 1,887 | |||||||||||
Provision for investment in Delta Bank in Ukraine | 925 | 33 | (69 | ) | — | 889 | ||||||||||
Deferred connection fees | 929 | (231 | ) | (59 | ) | — | 639 | |||||||||
Hedge and other | (2,831 | ) | (747 | ) | 855 | 518 | (2,205 | ) | ||||||||
| | | | | | | | | | | | | | | | |
Net deferred tax (liability) / asset | (18,623 | ) | (1,121 | ) | 235 | 1,450 | (18,059 | ) | ||||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
19. INCOME TAX (Continued)
Movements in the deferred tax assets and liabilities for the year ended December 31, 2016 were as follows:
| December 31, 2015 | Charged to profit/loss | Charged to other comprehensive income | Effect of disposal | December 31, 2016 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets / (liabilities) arising from tax effect of: | ||||||||||||||||
Depreciation of property, plant and equipment | (15,648 | ) | (325 | ) | (653 | ) | (2,675 | ) | (19,301 | ) | ||||||
Other intangible assets | (6,454 | ) | (1,241 | ) | 29 | 572 | (7,094 | ) | ||||||||
Potential distributions from / to Group's subsidiaries / associates | (4,738 | ) | 203 | 548 | — | (3,987 | ) | |||||||||
Licenses | (1,805 | ) | (431 | ) | 137 | — | (2,099 | ) | ||||||||
Customer base | (782 | ) | 122 | — | — | (660 | ) | |||||||||
Accrued expenses for services | 7,807 | (1,280 | ) | (131 | ) | (14 | ) | 6,382 | ||||||||
Lease obligations | 2,351 | (152 | ) | — | — | 2,199 | ||||||||||
Loss carryforward | 1,887 | 383 | (49 | ) | (304 | ) | 1,917 | |||||||||
Provision for investment in Delta Bank in Ukraine | 889 | — | (236 | ) | — | 653 | ||||||||||
Deferred connection fees | 639 | (20 | ) | (32 | ) | (47 | ) | 540 | ||||||||
Hedge and other | (2,205 | ) | 3,070 | 131 | (7 | ) | 989 | |||||||||
| | | | | | | | | | | | | | | | |
Net deferred tax liability | (18,059 | ) | 329 | (256 | ) | (2,475 | ) | (20,461 | ) | |||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The Group recognizes deferred income tax on future dividend distributions from foreign subsidiaries and associates which are based on cumulative undistributed earnings of those foreign subsidiaries in accordance with local statutory accounting regulations.
The Group recognizes deferred tax assets in respect of tax losses carried forward to the extent that realization of tax losses against future taxable profit is probable. Deferred tax assets related to tax losses of the Group's subsidiaries are recognized based on the fact that certain tax planning opportunities are available to these subsidiaries that will create taxable profit in the period in which the unused tax losses can be utilized. The amount of the deferred tax asset considered realizable, however, could be remeasured if estimates of future taxable income are changed.
Federal law #401-FZ dated November 30, 2016 allowed for the indefinite carry forward of tax losses, whereas this was restricted to 10 years. Also the law specified that tax base for the years 2017-2020 may not be reduced by tax losses carried forward for the amount exceeding 50% of the
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
19. INCOME TAX (Continued)
base.The following table summarizes the Group's balances for recognized tax losses carried forward as of December 31, 2016 and 2015:
| As of December 31, 2016 | As of December 31, 2015 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating losses | Tax losses | Operating losses | Tax losses | |||||||||
Recognized tax losses carried forward | 9,586 | 1,917 | 13,143 | 1,887 | |||||||||
| | | | | | | | | | | | | |
9,586 | 1,917 | 13,143 | 1,887 | ||||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Temporary differences relating to tax losses, for which deferred tax assets were not recognized in the consolidated statement of financial position as of December 31, 2016 and 2015 amounted to RUB 8,307 million and RUB 11,407 million, respectively.
The Group accrued following amounts for uncertain income tax positions as component of income tax payable:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Uncertain income tax positions | 756 | 551 |
Generally, uncertain income tax positions were originated from results of tax audit.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
20. EARNINGS PER SHARE
The following table sets forth the computation of earnings per share for the year ended December 31, 2016, 2015 and 2014:
| Year ended, December 31, 2016 | Year ended, December 31, 2015 | Year ended, December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Numerator: | ||||||||||
Profit for the year from continuing operations attributable to the owners of the company | 51,841 | 52,323 | 45,086 | |||||||
(Loss) / profit for the year from discontinued operations attributable to the owners of the company | (3,367 | ) | (2,834 | ) | 6,220 | |||||
Denominator, in thousands: | ||||||||||
Weighted-average ordinary shares outstanding | 1,989,282 | 1,988,728 | 1,988,757 | |||||||
Employee stock options | 1,412 | 1,468 | 1,221 | |||||||
| | | | | | | | | | |
Weighted-average diluted shares outstanding | 1,990,694 | 1,990,196 | 1,989,978 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Earnings per share—basic, RUB | 24.37 | 24.88 | 25.80 | |||||||
Basic EPS from continuing operations | 26.06 | 26.31 | 22.67 | |||||||
Basic EPS from discontinued operations | (1.69 | ) | (1,43 | ) | 3.13 | |||||
Earnings per share—diluted, RUB | 24.35 | 24.87 | 25.78 | |||||||
Diluted EPS from continuing operations | 26.04 | 26.29 | 22.66 | |||||||
Diluted EPS from discontinued operations | (1.69 | ) | (1.42 | ) | 3.12 |
21. RELATED PARTIES
Related parties of the Group include entities under common ownership with the Group, affiliated companies and associated companies (see Note 7).
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
21. RELATED PARTIES (Continued)
Accounts receivable from and accounts payable to related parties were as follows:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Accounts receivable: | |||||||
Business Nedvizhimost, a subsidiary of Sistema | 3,693 | 7,511 | |||||
MTS Belarus, the Group's associate | 2,273 | 1,226 | |||||
MTS Bank, the Group's associate | 1,726 | 693 | |||||
Sitronics KASU, subsidiary of Sistema | 51 | 93 | |||||
Sistema, the parent company | 46 | 20 | |||||
Other related parties | 305 | 118 | |||||
| | | | | | | |
Total accounts receivable, related parties | 8,094 | 9,661 | |||||
| | | | | | | |
Less non-current portion | (3,693 | ) | (3,335 | ) | |||
Accounts receivable, related parties—current | 4,401 | 6,326 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Accounts payable: | |||||||
MTS Belarus, the Group's associate | 491 | 380 | |||||
Maxima, a subsidiary of Sistema | 184 | 212 | |||||
MTS Bank, the Group's associate | 134 | 410 | |||||
Sitronics KASU, subsidiary of Sistema | 36 | 407 | |||||
Business Nedvizhimost, a subsidiary of Sistema | 32 | 36 | |||||
Rent-Nedvizhimost, a subsidiary of Sistema | — | 87 | |||||
Sitronics Smart Technology, a subsidiary of Sistema | — | 68 | |||||
Other related parties | 137 | 209 | |||||
| | | | | | | |
Total accounts payable, related parties | 1,014 | 1,809 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
As of December 31, 2016, the outstanding balances of related parties' transactions were unsecured. There have been no guarantees issued or received in respect to any related party receivables or payables.
As of December 31, 2016 and 2015 Group had no impairment as well as expenses recognized during years ended December 31, 2016, 2015 and 2014 in respect to bad or doubtful debts from related parties.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
21. RELATED PARTIES (Continued)
For the year ended December 31, 2016, 2015 and 2014, operating transactions with related parties were as follows:
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Revenues from related parties: | ||||||||||
MTS Bank, the Group's associate (telecommunications and call center services, commission) | 900 | 588 | 787 | |||||||
MTS Belarus, the Group's associate (roaming and interconnect services) | 276 | 266 | 269 | |||||||
Medsi Group, subsidiaries of Sistema (telecommunications and call center services) | 242 | 113 | 83 | |||||||
Management Company, Segezha Group, a subsidiary of Sistema (software supply) | 149 | — | — | |||||||
Detskii Mir, subsidiary of Sistema (connection services) | 129 | 64 | 39 | |||||||
Sistema, parent company (consulting services) | 83 | 61 | 1 | |||||||
ZTV, Group's associate (software supply) | 55 | 3 | — | |||||||
Sitronics KASU, subsidiaries of Sistema (project management, software support) | 40 | 8 | 1 | |||||||
NVision Group, a former subsidiary of Sistema (fixed line services) | — | 119 | 82 | |||||||
Stream, a former Group's associate (SMS notifications) | — | 141 | 29 | |||||||
Other related parties | 304 | 121 | 81 | |||||||
| | | | | | | | | | |
Total revenues from related parties | 2,178 | 1,484 | 1,372 | |||||||
| | | | | | | | | | |
Operating expenses / (income) incurred on transactions with related parties: | ||||||||||
Maxima, a subsidiary of Sistema (advertising) | 1,018 | 1,351 | 1,575 | |||||||
MTS Bank, the Group's associate (commission related (income)/expenses) | 347 | 61 | (406 | ) | ||||||
Rent-Nedvizhimost, a subsidiary of Sistema (Rent) | 308 | 776 | — | |||||||
AB Safety, a subsidiary of Sistema (security services) | 271 | 212 | 292 | |||||||
Business-Nedvizhimost, a subsidiary of Sistema (Rent) | 246 | 224 | 128 | |||||||
Jet Air Group, subsidiaries of Sistema (aircraft maintenance) | 183 | 180 | 127 | |||||||
MTS Belarus, the Group associate (roaming and interconnect services) | 161 | 394 | 395 | |||||||
Elavius, a subsidiary of Sistema (transportation services) | 159 | 328 | 399 | |||||||
Inturavtoservis, subsidiary of Sistema (transport services) | 124 | 44 | 42 | |||||||
Stream, a former Group associate (content services) | — | 2,132 | 1,395 | |||||||
NVision Group, a former subsidiary of Sistema (IT consulting) | — | 575 | 846 | |||||||
Other related parties | 297 | 301 | 285 | |||||||
| | | | | | | | | | |
Total operating expenses incurred on transactions with related parties | 3,114 | 6,578 | 5,078 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
21. RELATED PARTIES (Continued)
The Group provides advances and holds certain investments in related parties which are summarized as follows:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Advances for property, plant and equipment: | |||||||
Kapstroi Telecom, a subsidiary of Sistema | 186 | — | |||||
Intellect Telecom, a subsidiary of Sistema | — | 421 | |||||
Other related parties | 1 | 15 | |||||
| | | | | | | |
Total advances for property, plant and equipment | 187 | 436 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Short-term investments | |||||||
Sistema-Capital, a subsidiary of Sistema (assets management) | 3,721 | — | |||||
Promissory notes of Sistema | 574 | — | |||||
Promissory notes of Intellect Telecom, a subsidiary of Sistema | 230 | — | |||||
Loan receivable from Intellect Telecom, a subsidiary of Sistema | 72 | — | |||||
Sistema International Funding S.A. Bonds due in 2019, a subsidiary of Sistema | 65 | 75 | |||||
Deposits at MTS Bank, the Group's associate | 33 | 128 | |||||
Sistema Notes due in 2016 (series 04) | — | 191 | |||||
Other loans receivable | — | 81 | |||||
| | | | | | | |
Total short-term investments in related parties | 4 695 | 475 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other investments | |||||||
Loan receivable from MTS Bank, the Group's associate (see note 29) | 2,116 | 2,100 | |||||
Promissory notes of Sistema | — | 528 | |||||
Loan receivable from Intellect Telecom, a subsidiary of Sistema | — | 67 | |||||
Other | 60 | 26 | |||||
| | | | | | | |
Total other investments to related parties | 2,176 | 2,721 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other investments in shares | |||||||
Sistema Venture Capital, a subsidiary of Sistema | 117 | 117 | |||||
Other | 32 | 40 | |||||
| | | | | | | |
Total investments in shares of related parties | 149 | 157 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
21. RELATED PARTIES (Continued)
Finance income, which arose from investment transactions with related parties for the year ended December 31, 2016, 2015 and 2014 was the following:
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Finance income from related parties: | ||||||||||
MTS Bank, the Group associate | 285 | 447 | 654 | |||||||
Business Nedvizhimost, a subsidiary of Sistema | 491 | 346 | — | |||||||
Sistema-Capital, a subsidiary of Sistema (assets management) | 128 | — | — | |||||||
Sistema, parent company | 53 | 188 | 135 | |||||||
Other related parties | 28 | 86 | 15 | |||||||
| | | | | | | | | | |
Total finance income from related parties | 985 | 1,067 | 804 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Public Joint-Stock Company "MTS Bank" ("MTS Bank")—The Group has a loan agreement and maintains certain bank accounts with MTS Bank, an associate of the Group. As of December 31, 2016 and December 31, 2015, the Group's cash position at MTS Bank amounted to RUB 5,638 million and RUB 2,564 million, respectively, including short-term deposits in the amount of RUB 532 million and RUB 323 million, respectively.
�� Sistema—In November 2009, the Group accepted a promissory note, issued by Sistema, as repayment of the loan principal and interest accrued to date under an agreement with Sistema-Hals. The note is interest free and repayable in 2017. As of December 31, 2016 and December 31, 2015 the amount receivable of RUB 574 million and RUB 528 million, respectively, was included in short-term and other investments in the accompanying consolidated statements of financial position.
In October 2014, the Group acquired 2,501,350 Sistema Notes due 2016 (series 04) and 1,000 Sistema International Funding S.A. Bonds due in 2019 for RUB 519 million and RUB 32 million, respectively. The acquired bonds were classified as available for sale and accounted for at fair value with changes recognized in other comprehensive income. In March 2015 and May 2015 upon scheduled redemption, the Group received principal and coupon in the amount of RUB 409 million. In March 2016 the Group received principal and coupon of Sistema Notes due 2016 (series 04) in the amount of RUB 201 million.
Business Nedvizhimost—In February 2015 and further in May 2015, the Group sold its 100% stake in Rent Nedvizhimost to Business Nedvizhimost, subsidiary of Sistema, for RUB 8,500 million in total.
As of December 31, 2016 accounts receivable amounted to RUB 3,693 million due before December 31, 2018 and bears interest of 12% p.a. As of December 31, 2015 accounts receivable amounted to RUB 7,511 million.
NVision Group—In December 2015 the Group completed acquisition of shares of NVision Group excluding several non-core subsidiaries (see Note 4).
During the year ended December 31, 2015 and till the date of acquisition the Group purchased from NVision Group, telecommunication equipment, software and billing systems (FORIS) for approximately RUB 5,469 million and incurred expenses under an IT consulting agreement in the amount of RUB 710 million.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
21. RELATED PARTIES (Continued)
During the year ended December 31, 2014 the Group acquired from NVision Group, telecommunication equipment, software and billing systems (FORIS) for approximately RUB 9,819 million and incurred expenses under an IT consulting agreement in the amount of RUB 846 million.
Sistema-Capital—In April 2016 the Group entered into trust agreement with the asset management company Sistema-Capital. As of December 31, 2016 the balance of assets under trust management amounted to RUB 3,721 million.
Remuneration of key management personnel—Key management personnel of the Group are members of the Board of Directors and Management Board. During the year ended December 31, 2016, 2015 and 2014, their total remuneration amounted to RUB 760 million, RUB 835 million and RUB 694 million, respectively. These amounts comprised RUB 470 million, RUB 514 million and RUB 402 million in base salaries and RUB 290 million, RUB 321 million and RUB 292 million in bonuses paid pursuant to a bonus plan, respectively.
Management and directors are also entitled to cash-settled and equity-settled share-based payments. Related compensation accrued during the year ended December 31, 2016, 2015 and 2014 amounted to RUB 481 million, RUB 175 million and RUB 158 million, respectively.
22. STOCKHOLDERS' EQUITY
Share capital (ordinary shares)—The Group had 1,998,381,575 and 2,066,413,562 authorized ordinary shares with par value 0.1 RUB as of December 31, 2016 and 2015 respectively. Preferred shares have not been issued. In 2016 annual general meeting of shareholders approved the decrease in share capital by cancelling 68,031,987 treasury shares.
As of December 31, 2016, the total shares in treasury stock comprised 11,482,047, and 1,986,899,528 shares were outstanding. As of December 31, 2015, the total shares in treasury stock comprised 77,521,163, and 1,988,892,399 shares were outstanding.
Mobile TeleSystems' Level III American Depositary Shares (ADS) were successfully placed during the Company's initial public offering on the New York Stock Exchange on June 30, 2000. Each ADS represents 2 ordinary shares. As of December 31, 2015 the Group repurchased 33,997,667 ADSs, which were used to decrease the Group's charter capital in 2016.
MTS ordinary shares have been traded on the Moscow Exchange (previously, Moscow Interbank Currency Exchange (MICEX)) since October 2003 under the ticker symbol MTSI.
In 2016, the Group launched a Tender Offer, aiming to return cash of up to RUB 4,935 million to the holders of ordinary shares and ADS. Through the Tender Offer, as of December 31, 2016, the Group has repurchased 3,060,409 ordinary shares for RUB 747 million (including 1,550,495 ordinary shares purchased from Sistema for RUB 335 million).
Nature and purpose of reserves
Additional paid in capital reserve is used to recognize equity-settled share-based payment transactions, results of capital transactions under common control; changes in ownership interest in
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
22. STOCKHOLDERS' EQUITY (Continued)
subsidiaries that do not result in gain/loss of control; the excess of cash received over the acquisition cost of treasury shares.
Foreign currency translation reserve is used to record exchange differences arising from the translation of foreign subsidiaries financial statements from functional to presentation currency.
Investments revaluation reserve is used to record the accumulated impact of derivatives designated as cash flow hedges and revaluation of investments available for sale.
Remeasurements of the net defined benefit liability is used to recognize actuarial gains and losses related to the pension program set for employees of the Group's subsidiary MGTS.
The following table represents roll forward of reserves balances for the years ended December 31, 2016, 2015 and 2014:
| Foreign currency translation reserve | Investments revaluation reserve | Remeasurements of the net defined benefit liability | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balances at January 1, 2014 | — | 1,604 | 129 | |||||||
| | | | | | | | | | |
Other comprehensive income / (loss) for the year | 8,803 | (10,804 | ) | 278 | ||||||
Less: tax benefit | — | 1,801 | — | |||||||
— | — | — | ||||||||
Amounts reclassified to profit for the year | — | 14,002 | — | |||||||
Less: tax expense | — | (2,335 | ) | — | ||||||
— | — | — | ||||||||
Net other comprehensive income for the year | 8,803 | 2,664 | 278 | |||||||
| | | | | | | | | | |
Balances at December 31, 2014 | 8,803 | 4,268 | 407 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other comprehensive income for the year | 835 | 3,253 | 86 | |||||||
Less: tax expense | — | (542 | ) | — | ||||||
Amounts reclassified to profit for the year | — | (7,121 | ) | — | ||||||
Less: tax benefit | — | 1,187 | — | |||||||
Net other comprehensive income / (loss) for the year | 835 | (3,223 | ) | 86 | ||||||
| | | | | | | | | | |
Balances at December 31, 2015 | 9,638 | 1,045 | 493 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other comprehensive (loss) / income for the year | (13,970 | ) | (11,324 | ) | 50 | |||||
Less: tax benefit | — | 2,219 | — | |||||||
Amounts reclassified to profit for the year | (2,086 | ) | 9,897 | — | ||||||
Less: tax expense | — | (1,992 | ) | — | ||||||
Net other comprehensive (loss) / income for the year | (16,056 | ) | (1,200 | ) | 50 | |||||
| | | | | | | | | | |
Balances at December 31, 2016 | (6,418 | ) | (155 | ) | 543 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
22. STOCKHOLDERS' EQUITY (Continued)
Non-controlling interest
In the years ended December 31, 2016, 2015 and 2014 two Group subsidiaries that are material to the Group, MGTS Group and UMS (prior to disposal), had non-controlling interests.
The summarised financial information of MGTS Group is presented as follows:
| Year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | |||||||
Non-controlling interest opening balance | (5,191 | ) | (4,399 | ) | (3,970 | ) | ||||
Profit for the year attributable to non-controlling interest | (727 | ) | (782 | ) | (636 | ) | ||||
Dividends to non-controlling interest | 1,120 | 257 | 356 | |||||||
Other | 11 | (267 | ) | (149 | ) | |||||
Non-controlling interest closing balance | (4,787 | ) | (5,191 | ) | (4,399 | ) |
| December 31 | ||||||
---|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||
Current assets | 25,301 | 15,609 | |||||
Non-current assets | 50,130 | 67,364 | |||||
Current liabilities | (7,653 | ) | (6,989 | ) | |||
Non- current liabilities | (7,965 | ) | (8,454 | ) |
| Year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | |||||||
Revenue, gross of intercompany | (40,210 | ) | (41,144 | ) | (42,648 | ) | ||||
Profit for the year, gross of intercompany | (12,167 | ) | (13,322 | ) | (11,388 | ) |
The summarised financial information of UMS is presented as follows (please see also Note 26):
December 31 | |||||||
---|---|---|---|---|---|---|---|
2016 | 2015 | ||||||
Current assets | — | 1,614 | |||||
Non-current assets | — | 7,620 | |||||
Current liabilities | — | (2,166 | ) | ||||
Non- current liabilities | — | (4,709 | ) | ||||
Non- controlling interest | — | (3,042 | ) |
Dividends
As a leading telecommunications group with a home base in developing markets, MTS' primary need is to maintain sufficient resources and flexibility to meet financial and operational requirements. At the same time, the Group continually seeks ways to create shareholder value through both its commercial and financial strategies, including organic and non organic development as well as the Group's capital management practices.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
22. STOCKHOLDERS' EQUITY (Continued)
MTS continues to include dividend payments as part of its commitment to maximizing shareholder value. Decisions on dividends are proposed by the Board of Directors and voted upon thereafter at a general meeting of shareholders. In determining the Company's dividend payout, the Board of Directors considers a variety of factors, including:
In 2016, the Board of Directors approved a dividend policy for the calendar years 2016 - 2018, committing to a minimum cumulative dividend payout of RUB 20.0 per ordinary share through two semi-annual payments. In addition, the Group will aim for a target payout of RUB 25.0 - 26.0 per ordinary share in each calendar year.
The Group may take decisions on dividend payout based not only on annual results but also on interim results for three, six or nine months of the fiscal year. Annual and interim dividend payments, if any, must be recommended by the Board of Directors and approved by the shareholders.
In accordance with Russian laws, earnings available for dividends are limited to profits determined under Russian statutory accounting regulations, denominated in Russian Rubles, after certain deductions. The net income of MTS PJSC for the years ended December 31, 2016, 2015 and 2014 that is distributable under Russian legislation totaled RUB 50,659 million, RUB 6,590 million and RUB 28,159 million, respectively.
The following table summarizes the Group's declared cash dividends for the years ended December 31, 2016, 2015 and 2014:
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Dividends declared (including dividends on treasury shares of 220, 1,950 and 1,922 respectively) | 51,958 | 52,011 | 51,247 | |||||||
Dividends, RUB per ADS | 52.00 | 50.34 | 49.60 | |||||||
Dividends, RUB per share | 26.00 | 25.17 | 24.80 |
As of December 31, 2016 and 2015 dividends payable were RUB 87.0 and 32.0 million, respectively, and included in the trade and other payables within the statement of financial position.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
23. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31, 2016, 2015 and 2014 comprised the following:
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Salaries and social contributions | 44,347 | 40,026 | 36,990 | |||||||
Advertising and marketing expenses | 10,480 | 9,543 | 8,399 | |||||||
Utilities and maintenance | 9,092 | 6,817 | 6,017 | |||||||
General and administrative expenses | 7,007 | 6,762 | 7,024 | |||||||
Dealers commission | 6,740 | 8,960 | 10,752 | |||||||
Taxes other than income tax | 3,806 | 1,970 | 5,897 | |||||||
Universal service fund | 3,412 | 3,441 | 3,379 | |||||||
Cash collection commission | 3,311 | 2,906 | 2,832 | |||||||
Consulting expenses | 1,618 | 2,392 | 2,189 | |||||||
Billing and data processing | 1,485 | 1,829 | 2,056 | |||||||
Other | 2,748 | 2,694 | 2,560 | |||||||
| | | | | | | | | | |
Total | 94,046 | 87,340 | 88,095 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
24. FINANCE INCOME AND COSTS
Finance income and costs for the year ended December 31, 2016; 2015 and 2014 comprised the following:
| Year ended December 31, 2016 | Year ended December 31, 2015 | Year ended December 31, 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Interest expense: | ||||||||||
—Loans and notes | 22,982 | 25,154 | 16,287 | |||||||
—Amortization of debt issuance costs | 683 | 732 | 647 | |||||||
—Finance lease obligations | 855 | 756 | 370 | |||||||
—Provisions: unwinding of discount | 94 | 77 | 182 | |||||||
| | | | | | | | | | |
Total interest expense | 24,614 | 26,719 | 17,486 | |||||||
| | | | | | | | | | |
Loss / (gain) on financial instruments | 25 | 210 | (142 | ) | ||||||
Other finance costs(2) | 2,885 | 378 | 698 | |||||||
| | | | | | | | | | |
Total finance costs | 27,524 | 27,307 | 18,042 | |||||||
| | | | | | | | | | |
Less: amounts capitalized on qualifying assets(1) | (388 | ) | (885 | ) | (790 | ) | ||||
Finance costs | 27,136 | 26,422 | 17,252 | |||||||
Finance income on loans and receivables | ||||||||||
—Interest income on bank deposits | 4,277 | 7,187 | 3,960 | |||||||
—Interest income on loans | 510 | 728 | 433 | |||||||
—Other finance income | 486 | 453 | 126 | |||||||
Finance income | 5,273 | 8,368 | 4,519 | |||||||
| | | | | | | | | | |
Net finance costs | 21,863 | 18,054 | 12,733 | |||||||
| | | | | | | | | | |
25. SEGMENT INFORMATION
Management analyzes and reviews results of the Company's operating segments separately based on the nature of products and services, regulatory environments and geographic areas. MTS Group's management evaluates the segments' performance based on revenue and operating profit, excluding depreciation and amortization. Management does not analyze assets or liabilities by reportable segments.
The Group identified the following reportable segments:
Russia convergent: represents the results of mobile and fixed line operations, which encompasses services rendered to customers across regions of Russia, including voice and data services, transmission, broadband, pay-TV and various value-added services and retail operations.
Moscow fixed line: represents the results of fixed line operations carried out in Moscow by the Group's subsidiary MGTS. MGTS is the only licensed PSTN operator in Moscow and is considered a
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
25. SEGMENT INFORMATION (Continued)
natural monopoly under Russian antimonopoly regulations. Consequently, substantial part of services provided by MGTS are subject to governmental regulation.
Ukraine: represents the results of mobile and fixed line operations carried out across multiple regions of Ukraine.
The "Other" category does not constitute a reportable segment. It includes the results of a number of other operating segments that do not meet the quantitative thresholds for separate reporting, such as Turkmenistan, Armenia, System Integrator, Sputnikovoe TV and Belarus.
In 2016, the Group ceased presenting Russia convergent and System Integrator as one reportable segment. Management has come to a conclusion that disaggregation may assist users of the financial statements better understand the Group's performance. Related financial information has, therefore, been retrospectively restated.
System Integrator includes NVision Group and SITRONICS Telecom Solutions, Ukraine, which develop and supply unique solutions and services in Russia's and Ukraine's information technology market.
The results of operations of UMS are reported as discontinued operations in the accompanying consolidated statements of profit or loss for all periods presented. The segment reporting for the years ended December 31, 2015 and 2014 was restated accordingly. The consolidated statement of financial position is not required to be retrospectively restated with respect to discontinued operations and therefore as of December 31, 2015 statement of financial position captions in the "Other" category of the following presentation include UMS.
The intercompany eliminations presented below primarily consist of sales transactions between segments conducted under the normal course of operations.
Financial information by reportable segments is presented below:
Year ended December 31, 2016:
| Russia convergent | Moscow fixed line | Ukraine | Total | Other | HQ and elimination | Consolidated | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenue | ||||||||||||||||||||||
External customers | 358,750 | 34,796 | 27,026 | 420,572 | 14,995 | 125 | 435,692 | |||||||||||||||
Intersegment | 4,928 | 4,871 | 2,161 | 11,960 | 10,394 | (22,354 | ) | — | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total revenue | 363,678 | 39,667 | 29,187 | 432,532 | 25,389 | (22,229 | ) | 435,692 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Operating profit | 82,374 | 10,850 | 3,599 | 96,823 | 2,717 | (11,871 | ) | 87,669 | ||||||||||||||
Depreciation and amortization | 60,285 | 10,900 | 6,304 | 77,489 | 4,207 | (114 | ) | 81,582 | ||||||||||||||
Other disclosure: | ||||||||||||||||||||||
Capital expenditures | 61,455 | 7,316 | 7,666 | 76,437 | 3,748 | — | 80,185 |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
25. SEGMENT INFORMATION (Continued)
Year ended December 31, 2015:
| Russia convergent | Moscow fixed line | Ukraine | Total | Other | HQ and elimination | Consolidated | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenue | ||||||||||||||||||||||
External customers | 353,167 | 34,770 | 25,590 | 413,527 | 12,957 | 155 | 426,639 | |||||||||||||||
Intersegment | 4,351 | 4,836 | 2,604 | 11,791 | 4,102 | (15,893 | ) | — | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total revenue | 357,518 | 39,606 | 28,194 | 425,318 | 17,059 | (15,738 | ) | 426,639 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Operating profit | 82,691 | 13,737 | 4,715 | 101,143 | 2,272 | (9,492 | ) | 93,923 | ||||||||||||||
Depreciation and amortization | 61,266 | 7,715 | 5,199 | 74,180 | 3,732 | (69 | ) | 77,843 | ||||||||||||||
Other disclosure: | ||||||||||||||||||||||
Capital expenditures | 64,364 | 9,303 | 19,955 | 93,622 | 5,099 | — | 98,721 |
Year ended December 31, 2014:
| Russia convergent | Moscow fixed line | Ukraine | Total | Other | HQ and elimination | Consolidated | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenue | ||||||||||||||||||||||
External customers | 336,099 | 35,938 | 29,088 | 401,125 | 9,476 | 77 | 410,678 | |||||||||||||||
Intersegment | 4,633 | 4,886 | 3,722 | 13,241 | 1,541 | (14,782 | ) | — | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total revenue | 340,732 | 40,824 | 32,810 | 414,366 | 11,017 | (14,705 | ) | 410,678 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Operating profit | 86,310 | 13,568 | 3,409 | 103,287 | 5,683 | (9,112 | ) | 99,858 | ||||||||||||||
Depreciation and amortization | 57,647 | 7,609 | 6,779 | 72,035 | 2,760 | (61 | ) | 74,734 | ||||||||||||||
Other disclosure: | ||||||||||||||||||||||
Capital expenditures | 85,786 | 13,649 | 5,103 | 104,538 | 8,234 | — | 112,772 |
The consolidated operating profit is reconciled to the consolidated profit before tax on the face of the consolidated statement of profit or loss.
Financial information by geographic areas is presented below:
| For the year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Revenue | 2016 | 2015 | 2014 | |||||||
Russia | 396,531 | 388,504 | 372,080 | |||||||
Other | 39,161 | 38,135 | 38,598 | |||||||
| | | | | | | | | | |
Total revenue | 435,692 | 426,639 | 410,678 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
25. SEGMENT INFORMATION (Continued)
Non-current assets(1) | As of December 31, 2016 | As of December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Russia | 341,585 | 347,173 | |||||
Other | 40,069 | 64,553 | |||||
| | | | | | | |
Total non-current assets: | 381,654 | 411,726 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Revenues from external customers and non-current assets are allocated to individual countries based on location of operations. No single customer represents 10% or more of the consolidated revenue.
26. OPERATIONS IN UZBEKISTAN (Continued)
external temporary supervisorUzdunrobita
In June 2012, the authorities of the Republic of Uzbekistan commenced audits of the financial and operating activities of MTS' wholly-owned subsidiary Uzdunrobita. Further various claims for violation of tax, antimonopoly and industry legislation were made against Uzdunrobita, which resulted in significant amounts of fines and penalties, revocation of all licenses and suspension of services. Fines and penalties amounted to approximately RUB 18,375 million payable in equal installments over eight months.
Uzdunrobita paid two scheduled installments in November and scheduledDecember 2012 totaling approximately RUB 4,583.4 million. On January 14, 2013, further to its partial payment of the third installment due in January 2013 totaling approximately RUB 481 million and constituting the remaining amount of cash held in its bank accounts, then Uzdunrobita filed a petition with the Tashkent Economic Court for voluntary bankruptcy on the grounds of its inability to meet further bankruptcy hearing which took place on April 22, 2013.payment obligations.
Considering the adverse impact of such circumstances on the Group's ability to conduct operations in Uzbekistan, the Group tested goodwill and other long-lived assets attributable to Uzbekistan for impairment upon first receiving notification of the investigations. As a result, an impairment loss on the long-lived assets presented in the table belowamount of RUB 20,037 million was recorded in the consolidated statements of operations and comprehensive incomeprofit or loss for the year ended December 31, 2012. In 2013 these losses were assigned to discontinued operations:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
The Group used a probability-weighted valuation technique to determine the fair value of the long-lived assets as of December 31, 2012, which was determined based on unobservable inputs ("Level 3" of the hierarchy established by U.S. GAAP guidance). In calculating the future cash flows for use in the assessment of the fair value of long-lived assets, the Group used forecasts for the Uzbekistan telecommunication market and Uzdunrobita's position in that market. The forecasts were based on all available internal and external information, including growth projections and industry experts' estimates.
Separate to the impairments recognized, a liability of RUB 12,706 million relating to the claims was recorded with an associated charge to the consolidated statements of operations and comprehensive income for the year ended December 31, 2012.operations.
On April 22, 2013, the Tashkent Economic Court declared Uzdunrobita bankrupt and initiated six-montha liquidation procedures. In accordance with the terms of local liquidation procedures, Uzdunrobita's CEO was relieved of his duties and all of the oversight and governance overprocess. Uzdunrobita was transferred to the liquidation administrator.later liquidated. As a result the Group lost control over the subsidiary and deconsolidated Uzdunrobita. Uzdunrobita was later liquidated.
The resultsIn 2012, the Group filed a claim against the Republic of operationsUzbekistan with the International Center for Settlement of Uzdunrobita are reported as discontinued operationsInvestment Disputes ("ICSID"), part of the World Bank Group, in Washington, D.C.
On July 31, 2014, MTS and the accompanying consolidated statementsRepublic of operations and comprehensive income and consolidated statementsUzbekistan signed a settlement agreement (the "Settlement Agreement") on the basis of cash flows for all periods presented. The consolidated statementwhich MTS to reentered the market of financial position was not retrospectively adjusted on discontinued operations. The gain on disposal recognized in the amount of RUB 3,682 million related to the recycling from accumulated other comprehensive income of theUzbekistant. A joint
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
4.26. OPERATIONS IN UZBEKISTAN (Continued)
cumulative translation adjustment attributableenterprise, Universal Mobile Systems LLC ("UMS"), was established with MTS holding a 50.01% in the charter capital of the entity, while the remaining 49.99% in UMS belonged to Uzdunrobita. The resultsa state-owned unitary enterprise established and managed by the State Committee for Communications, Development of discontinued operationsInformation Systems and Telecommunications Technologies of Uzdunrobita for the year ended December 31, 2013 and 2012 were as follows:
| 2013 | 2012 | |||||
---|---|---|---|---|---|---|---|
Total revenues | — | 8,357 | |||||
Income / (loss) before income tax | 1,109 | (34,171 | ) | ||||
Income tax (expense) / benefit | (1,058 | ) | 1,325 | ||||
Gain on disposal, net of tax | 3,682 | — | |||||
| | | | | | | |
Income / (loss) from discontinued operations, net of tax | 3,733 | (32,846 | ) | ||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
In July 2013, two rounds of auctions were set and held in relation to the sale of assets of Uzdunrobita and all of its branches. All auctions were recognized as having failed due to the absence of applications by any interested bidders.
The Group filed a claim against the Republic of Uzbekistan in the International Center for Settlement of Investment Disputes ("ICSID"), which is part of the World Bank Group, in Washington, D.C. The claim was registered on November 15, 2012. A tribunal was formed on August 29, 2013 and the first procedural hearings took place in November 2013.
In July 2014 the dispute between MTS and the Republic of Uzbekistan was resolved. The parties signed a settlement agreement (the "Settlement Agreement") and according to its terms all mutual claims were eliminated.Uzbekistan. The Settlement Agreement iswas governed by English law and providesprovided for resolution of any disputes arising out of the Settlement agreementAgreement in the International Court of Arbitration under the International Chamber of Commerce in Paris.Paris (ICC).
On November 2014, ICSID has discontinued international arbitration proceedings between the GroupMTS and the Republic of Uzbekistan following the submission of a joint application by both partiesparties.
Universal Mobile Systems LLC ("UMS")
TheOn September 24, 2014, in accordance with the Settlement Agreement, primarily addressed two separate elements—the aforementioned elimination of all mutual claims filed by MTS and the Republic of Uzbekistan and, certain guarantees granted to MTS in connection with its re-entry into the Republic of Uzbekistan. Consideration received, in total, had a fair value of RUB 6,734 million (see below for further details).
Following unsuccessful tenders on sale of Uzdunrobita equipment, the representativesauthorities of the Republic of Uzbekistan and MTS commenced negotiations in relation to MTS' return to the market. The government authorities provided certain guarantees to MTS in relation to the protection of any future investment in the Republic of Uzbekistan to encourage the return of MTS to the market. Also, the Republic of Uzbekistan established a legal entity, Universal Mobile Systems LLC ("UMS"), with such entity having no legal connection to the previously liquidated entity, Uzdunrobita.granted UMS was granted 2G, 3G and LTE licenses, valid till 2029,provided necessary frequencies and received frequencies, numbering capacity, fostered entrance into lease agreements for communication channels and other permitsissued all permissions required to UMS so it could operate and offer full telecommunications services throughout Uzbekistan. UMS has also received certain guaranties for the launchinvestment protection and return of operations. On September 24, 2014, a 50.01% ownership interest in UMS was transferred to the Groupinvestments stipulated by the State Unitary Enterprise "Center of radio communications, radio broadcasting and television" on behalflaws of the Republic of Uzbekistan. Independent appraisers hired by the Group determined the total fair value of UMS to be RUB 9,062 million as of the transfer date.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
4. OPERATIONS IN UZBEKISTAN (Continued)
Based on the aforementioned fair value assessment of a 50.01% stake in UMS, the Group recognized a gain from reentrance into Uzbekistan pursuant to the Settlement Agreement in the amount of RUB 6,734 million. Management concluded that this consideration related to, in its entirety, a financial incentive to encourage re-entry into the Republic of Uzbekistan and as such, recognition in continuing operations was appropriate. No element was allocated to the non-satisfaction and elimination of mutual claims as this was deemed to have minimal value.
The allocation of consideration received between elements where the settlement of litigation is involved is highly judgmental. In this case, management considered, among other things the terms of the settlement arrangement as well as the development of the negotiations process itself, in which members of MTS management were involved.
The Group consolidatesconsolidated UMS in accordance with FASB ASC 810, Consolidation, starting from September 24, 2014, representing the date of transfer of ownership. Below is the summary of fair value allocation regarding the incentive arrangement:
Current assets | 26 | |||
Property, plant and equipment | 3,848 | |||
Other intangible assets | 5,161 | |||
Other non-current assets | 1,327 | |||
Current liabilities | (30 | ) | ||
Non-current liabilities | (25 | ) | ||
Non-controlling interest | (3,573 | ) | ||
Gain from | (6,734 | ) | ||
| | | | |
Consideration paid | — | |||
| | | | |
| | | | |
| | | | |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
26. OPERATIONS IN UZBEKISTAN (Continued)
The fair value of non-controlling interest as of the date of consolidation in the amount of RUB 3,573 million was determined based on a discounted cash flow technique utilizing significant unobservable inputs ("Level 3" significant unobservable inputs ofin the hierarchy established by the U.S. GAAP guidance)IFRS). The key assumptions in the fair value calculations included a discount rate of 24.1% and average price per minute of voice services amounting to RUB 0.56.
5. POLITICAL AND ECONOMIC CRISIS IN UKRAINEDisposal of UMS
On August 5, 2016, the Group due to a variety of business reasons and other circumstances sold its 50.01% stake in UMS for USD 1 to another UMS shareholder—the State Unitary Enterprise Centre of Radio Communication, Radio Broadcasting and Television of The Ministry of Development of Information Technologies and Communications of the Republic of Uzbekistan.
The results of UMS operations were reported as discontinued operations in the accompanying consolidated statements of profit or loss. The consolidated statements of financial position and consolidated statements of cash flows for all periods presented were not retrospectively restated on discontinued operations.
UMS's summary of financial information:
Results of discontinued operation
| For the year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | |||||||
Revenue | 5,115 | 4,610 | 104 | |||||||
Expenses | (6,602 | ) | (10,939 | ) | (988 | ) | ||||
Loss before tax | (1,487 | ) | (6,329 | ) | (884 | ) | ||||
Income tax gain / (loss) (note 19) | 192 | 661 | (75 | ) | ||||||
Loss for the period | (1,295 | ) | (5,668 | ) | (959 | ) | ||||
Loss on sale of discontinued operations | (2,726 | ) | — | — | ||||||
Gain from re-entrance into Uzbekistan | — | — | 6,734 | |||||||
(Loss) / profit from discontinued operations | (4,021 | ) | (5,668 | ) | 5,775 | |||||
Loss attributable to non-controlling interests | (654 | ) | (2,834 | ) | (445 | ) | ||||
(Loss) / profit to owners of the Company | (3,367 | ) | (2,834 | ) | 6,220 | |||||
Basic (loss) / earnings per share | (1.69 | ) | (1.43 | ) | 3.13 | |||||
Diluted (loss) / earnings per share | (1.69 | ) | (1.42 | ) | 3.12 |
Cash flows from (used in) discontinued operation
| For the year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | |||||||
Net cash used in operating activities | (543 | ) | (1,121 | ) | (558 | ) | ||||
Net cash used in investing activities | (1,253 | ) | (2,195 | ) | (1 | ) | ||||
Net cash provided by financing activities | 1,234 | 3,492 | 693 |
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
26. OPERATIONS IN UZBEKISTAN (Continued)
As of August 5, 2016, the carrying amounts of UMS net assets and reconciliation of the loss on disposal were as follows:
Property, plant and equipment | (6,960 | ) | ||
Other intangible assets | (2,922 | ) | ||
Other non-current assets | (2,577 | ) | ||
Cash and cash equivalents | (378 | ) | ||
Other current assets | (1,359 | ) | ||
Non-current liabilities | 5,113 | |||
Current liabilities | 2,484 | |||
Non-controlling interest | 1,787 | |||
Accumulated other comprehensive income | 2,086 | |||
Consideration received | — | |||
Loss on disposal of UMS | (2,726 | ) |
27. LIABILITY UNDER PUT OPTION AGREEMENT
In September 2007, the Group acquired an 80% stake in International Cell Holding Ltd (ICH), the 100% indirect owner of K-Telecom, Armenia's mobile phone operator, and signed a call and put option agreement to acquire the remaining 20% stake. In 2016 ICH was liquidated and all its legal rights were assigned to Aramayo Investments Limited, a subsidiary of the Group. December 2010, the Group signed an amendment to the put and call option agreement. According to the amended option agreement, the price for the remaining 20% stake option will be determined by an independent investment bank subject to a cap of EUR 200 million. The put option can be exercised during the period from the next business day following the date of settlement of all liabilities under the loan agreement up to December 31, 2018. The call option can be exercised during the period from July 1, 2010 up to December 31, 2018. If both the call notice and the put notice are served on the same day then the put notice shall be deemed exercised in priority to the call notice. The liability under put option agreement amounted to RUB 2,243 million and RUB 2,925 million as of December 31, 2016 and December 31, 2015 respectively (Note 17).
28. COMMITMENTS AND CONTINGENCIES
Capital commitments—As of December 31, 2016, the Group had executed purchase agreements of approximately RUB 26,448 million to acquire property, plant and equipment, intangible assets and costs related thereto.
Operating leases—The Group has entered into non-cancellable agreements to lease space for telecommunications equipment, offices and transmission channels, which expire in various years up to 2066. Rental expenses under the operating leases of RUB 7,581 million, RUB 6,093 million and RUB 5,624 million for the years ended December 31, 2016, 2015 and 2014, respectively, are included in selling, general and administrative expenses in the accompanying consolidated statement of profit or loss. Rental expenses under the operating leases of RUB 18,955 million, RUB 19,549 million and RUB 17,638 million for the years ended December 31, 2016, 2015 and 2014, respectively, are included
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
28. COMMITMENTS AND CONTINGENCIES (Continued)
in cost of services in the accompanying consolidated statement of profit or loss. Future minimum lease payments due under these leases at December 31, 2016 are as follows:
Payments due in | | |||
---|---|---|---|---|
2017 | 9,491 | |||
2018 | 918 | |||
2019 | 516 | |||
2020 | 301 | |||
2021 | 165 | |||
Thereafter | 3,659 | |||
| | | | |
Total | 15,050 | |||
| | | | |
| | | | |
| | | | |
Taxation—Russia and other CIS countries currently have a number of laws related to various taxes imposed by both federal and regional governmental authorities. Applicable taxes include VAT, corporate income tax (profits tax), a number of turnover-based taxes, and payroll (social) taxes. Laws related to these taxes have not been in force for significant periods, in contrast to more developed market economies; therefore, the government's implementation of these regulations is often inconsistent or non-existent. Accordingly, few precedents with regard to tax rulings have been established. Tax declarations, together with other legal compliance areas (for example, customs and currency control matters), are subject to review and investigation by a number of authorities, which are enabled by law to impose extremely severe fines, penalties and interest charges. These facts create tax risks in Russia and the CIS countries that are more significant than those typically found in countries with more developed tax systems.
Generally, according to Russian and Ukrainian tax legislation, tax declarations remain open and subject to inspection for a period of three years following the tax year. As of December 31, 2016, tax declarations of MTS PJSC and other subsidiaries in Russia and Ukraine for the preceding three fiscal years were open for further review.
In 2016, the Russian tax authorities completed a tax audit of MTS PJSC for the years ended December 31, 2013 and 2012. Based on the results of this audit additional taxes, penalties and fines in the amount of RUB 586 million were accrued in the consolidated financial statements for the year ended December 31, 2016. The Group is preparing an appeal to the Federal Tax Service.
Pricing of goods and services provided within the Group is subject to transfer pricing rules.
Management believes that it has adequately provided for tax liabilities in the accompanying consolidated financial statements. However, the risk remains that the relevant tax authorities could take different positions with regard to interpretive issues and the effect could be significant.
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
28. COMMITMENTS AND CONTINGENCIES (Continued)
The Group assessed the following contingent liabilities in respect of additional tax settlements:
| December 31, 2016 | December 31, 2015 | |||||
---|---|---|---|---|---|---|---|
Contingent liabilities for additional taxes other than income tax | 354 | 419 | |||||
Contingent liabilities for additional income taxes | 2,588 | 413 |
Licenses—In May 2007, the Federal Service for Supervision in the Area of Communications, Information Technologies and Mass Media awarded MTS a license to provide 3G services in Russia. The 3G license was granted subject to certain capital and other commitments.
In July 2012, the Federal Service for Supervision in the Area of Communications, Information Technologies and Mass Media allocated MTS the necessary license and frequencies to provide LTE telecommunication services in Russia. Under the terms and conditions of the LTE license, the Group is obligated to fully deploy LTE networks within seven years, commencing from January 1, 2013, and deliver LTE services in each population center with over 50,000 inhabitants in Russia by 2019. Also, the Group is obligated to invest at least RUB 15 billion annually toward the LTE roll-out until the network is fully deployed.
In March 2015, upon winning a tender, MTS-Ukraine has acquired a nationwide license for the provision of UMTS (3G) telecommunications services. The license with the cost of UAH 2,715 million (RUB 6,015 million at the acquisition date) has been granted for 15 years. In accordance with the terms of the license MTS-Ukraine is required to launch 3G services in Ukraine by October, 2015, and provide coverage across Ukraine by April, 2020.
In accordance with the terms of the license, MTS-Ukraine also concluded agreements on conversion of provided frequencies with the Ministry of Defense of Ukraine, Ministry of Internal Affairs of Ukraine and State Service of Special Communications and Information Protection of Ukraine. As of December 31, 2015, MTS-Ukraine has paid UAH 358 million (RUB 865 million as of the payment date) for conversion of frequencies and is liable to pay UAH 267 million (RUB 596 million as of December 31, 2016) adjusted for the rate of inflation in the years 2017-2018.
Management believes that as of December 31, 2016 the Group complied with conditions of aforementioned licenses.
Litigation—In the ordinary course of business, the Group is a party to various legal, tax and customs proceedings, and subject to claims, certain of which relate to developing markets and evolving fiscal and regulatory environments in which MTS operates. Management believes that the Group's liability, if any, in all such pending litigation, other legal proceeding or other matters will not have a material effect upon its financial condition, results of operations or liquidity of the Group.
Potential adverse effects of economic instability and sanctions in Russia—In 2014 political and economic sanctions were introduced by the EU, US and other countries targeting certain Russian economic sectors. There is significant uncertainty regarding the extent and timing of further sanctions. Also, Russian Ruble has materially depreciated against the U.S. Dollar and Euro and ruble interest rates have increased significantly after the Central Bank of Russia raised its key rate to 17% in
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in millions of Russian Rubles unless otherwise stated)
28. COMMITMENTS AND CONTINGENCIES (Continued)
December, 2014. The decline of Russian Ruble continued in 2015 and partly reversed in 2016. The Central Bank of Russia has decreased its key rate to 11% as of December 31, 2015 and further to 10% as of December 31, 2016. However, the key rate remains higher than in the beginning of the year 2014, when it was equal to 5.5%. Russia sovereign credit ratings also were decreased.
These factors resulted in a higher cost of capital, increased inflation and uncertainty regarding further economic growth, which could have a negative impact on the Group's business including ability to obtain financing on commercially reasonable terms. Management believes it is taking the appropriate measures to support the sustainability of the Group's business in the current circumstances. The Group has a hedging policy in place, which partly mitigated variability of cash outflows, denominated in foreign currencies.
Political and economic crisis in Ukraine—During the year ended December 31, 2014, a deterioration in the political environment of Ukraine has led to general instability, economic deterioration and armed conflict in eastern Ukraine. The deterioration has further exacerbated the country's already weak macroeconomic trends, which have led to reduced credit ratings, significant depreciation of its national currency and increased inflation. During 2014, the Ukrainian Parliament adopted a law allowing for the imposition of sanctions against countries, persons and companies deemed by the Ukrainian government to threaten Ukrainian national interests, national security, sovereignty or the territorial integrity of Ukraine. The National Bank of Ukraine (NBU)("NBU") passed a decree prohibiting Ukrainian companies to pay dividends to foreign investors. The decree was extended for a few times and its edition effective as of December 31, 2016 allows payment of dividends from the profit earned in 2014-2015, subject to certain restrictions. These circumstances, combined with continued political and economic instability in the country, could result in further negative impact on ourthe Group's business including our financial position and results of
Table of Contents operations.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
5. POLITICAL AND ECONOMIC CRISIS IN UKRAINE (Continued)
operations (refer to Note 29 for segment data on Ukraine). Such risks especially apply to funds deposited in Ukrainian banks, whose liquidity is affected by the economic downturn. As of December 31, 2014, the Group held RUB 21,203 million in current accounts and deposits in Ukrainian banks, including RUB 5,072 million in Delta Bank. In December 2014, Delta Bank delayed customer payments and put limits on cash withdrawals. On March 2, 2015, NBU adopted a resolution declaring Delta Bank to be insolvent. The Group treated this declaration as a recognized subsequent event and reserved the full amount of deposited funds (RUB 5,072 million) and related interest (RUB 66 million) as of December 31, 2014.
6. CASH AND CASH EQUIVALENTS During the year ended December 31, 2015, the Group created additional reserve of RUB 1,698 million for cash balances deposited in distressed Ukrainian banks (including RUB 185 million for cash balances deposited in Delta Bank, RUB 868 million for cash balances deposited in bank Kyivska Rus and RUB 645 million for cash balances deposited in Platinum Bank) that was included as a component of operating expenses in the accompanying consolidated statement of profit or loss.
Cash and cash equivalents asAs of December 31, 20142016, the Group held RUB 3,617 million in current accounts and 2013 compriseddeposits in Ukrainian banks.
Anti-terror law—On July 7, 2016 a series of anti-terror laws (also known as "Yarovaya-Ozerov bundle of laws") was enacted by the following:signature of the President of Russia. In general terms, the laws mandate that operators store and record phone conversations, text messages of subscribers, images, sounds, video and other types of communications by telecommunications operators for defined periods of time. These requirements are to become effective starting July 1, 2018. Compliance with the laws
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Russian Ruble current accounts | 9,767 | 5,900 | |||||
Russian Ruble deposit accounts | 19,272 | 14,215 | |||||
U.S. Dollar current accounts | 11,412 | 1,336 | |||||
U.S. Dollar deposit accounts | 7,404 | 7,503 | |||||
Euro current accounts | 3,579 | 395 | |||||
Euro deposit accounts | 1,901 | 136 | |||||
Hryvna current accounts | 1,471 | 87 | |||||
Hryvna deposit accounts | 4,973 | 276 | |||||
Uzbek som current accounts | 341 | — | |||||
Turkmenian manat current accounts | 1,162 | 697 | |||||
Armenian dram current accounts | 72 | 67 | |||||
Armenian dram deposit accounts | 56 | — | |||||
| | | | | | | |
Total cash and cash equivalents | 61,410 | 30,612 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
OJSCPJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles unless otherwise stated)
7. SHORT-TERM INVESTMENTS
Short-term investments as of December 31, 2014 comprised the following:
Type of investment | Classification | Annual interest rate | Maturity date | Amount | ||||||
---|---|---|---|---|---|---|---|---|---|---|
Loan receivable from Mr. P. Fattouche and Mr. M. Fattouche (Note 16) | Held to maturity | 6% | December 2015 | 5,533 | ||||||
Deposits | Held to maturity | 4 - 16% | January 2015 - December 2015 | 3,534 | ||||||
Sistema Notes due in 2016 (series 04) (related party) (Note 25) | Available for sale | 7.65% | — | 534 | ||||||
Loan receivable from Navigation Information Systems (related party) (Note 25) | Held to maturity | 8.5 - 10.0% | March 2015 - July 2015 | 132 | ||||||
Loan receivable from Moscow Business Incubator (related party) (Note 25) | Held to maturity | 10.5% | December 2015 | 52 | ||||||
Sistema International Funding S.A. Bonds due 2019 (related party) (Note 25) | Available for sale | 6.95% | — | 42 | ||||||
Other loans | Held to maturity | — | — | 22 | ||||||
| | | | | | | | | | |
Total short-term investments | 9,849 | |||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Short-term investments as of December 31, 2013 comprised of the following:
Type of investment | Classification | Annual interest rate | Maturity date | Amount | ||||||
---|---|---|---|---|---|---|---|---|---|---|
Deposits | Held to maturity | 4.2 - 14.0% | February 2014 - July 2014 | 5,377 | ||||||
Deposits at MTS Bank (related party) (Note 25) | Held to maturity | 8.7% | June 2014 | 5,081 | ||||||
Mutual investment fund "Reservnyi", managed by DIK (related party) (Note 25) | Available for sale | — | Upon request | 4,154 | ||||||
Other loans | Held to maturity | — | — | 21 | ||||||
| | | | | | | | | | |
Total short-term investments | 14,633 | |||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The Group considers credit risk for short-term investments to be low due to the strong financial position of counterparties.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
8. TRADE RECEIVABLES, NET
Trade receivables as of December 31, 2014 and 2013 comprised the following:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Roaming | 13,892 | 15,875 | |||||
Subscribers | 10,722 | 12,548 | |||||
Interconnect | 3,802 | 2,847 | |||||
Dealers | 1,931 | 2,127 | |||||
Other | 4,784 | 4,910 | |||||
Allowance for doubtful accounts | (2,165 | ) | (3,753 | ) | |||
| | | | | | | |
Trade receivables, net | 32,966 | 34,554 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table summarizes the changes in the allowance for doubtful accounts receivable for the years ended December 31, 2014, 2013 and 2012:
| 2014 | 2013 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance, beginning of the year | 3,753 | 3,461 | 3,122 | |||||||
Allowance for doubtful accounts charge | 2,933 | 3,366 | 2,257 | |||||||
Accounts receivable written off | (4,521 | ) | (3,074 | ) | (1,918 | ) | ||||
| | | | | | | | | | |
Balance, end of the year | 2,165 | 3,753 | 3,461 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
9. INVENTORY AND SPARE PARTS
Inventory and spare parts as of December 31, 2014 and 2013 comprised the following:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Handsets and accessories | 5,971 | 7,436 | |||||
SIM cards and prepaid phone cards | 897 | 395 | |||||
Spare parts for telecommunication equipment | 301 | 305 | |||||
Advertising and other materials | 341 | 362 | |||||
| | | | | | | |
Total inventory and spare parts | 7,510 | 8,498 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other materials mainly consist of stationary, fuel and auxiliary materials.
Obsolescence expense for the years ended December 31, 2014, 2013 and 2012 amounted to RUB 357 million, RUB 660 million and RUB 759 million, respectively, and was included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income. Spare parts for base stations included in inventory are expected to be utilized within the twelve months following the statements of financial position date.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
10. DISPOSAL GROUP HELD FOR SALE
| |||||||
| |||||||
| |||||||
Disposal of Rent Nedvizhimost—In February 2015, the Group lost control over Rent Nedvizhimost CJSC as a result of the sale of a 51% stake to Business-Nedvizhimost, a subsidiary of Sistema, for RUB 4.3 billion of which 3.8 billion is due before December 31, 2018 and bears interest of 12%-interest p.a. The results of this transaction will be included in the financial statements of the Group for the year ended December 31, 2015. Following the sale of its 51% stake, the Group retained a 49% stake in Rent Nedvizhimost allowing it to exercise significant influence over the operating and financing activities of the entity. Consequently, the results of operations and cash flows of Rent Nedvizhimost were not reported as discontinued operations in the consolidated financial statements. The related assets and liabilities of a disposal group were classified as "held for sale" and measured at carrying value as of December 31, 2014. Balances were attributable to "Moscow fixed line" reportable segment and comprised of the following:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
Disposal of network equipment in Crimea—In October 2014, the Group's subsidiary MTS Ukraine sold base stations, network infrastructure, IT and telecom equipment and certain other assets located in Crimea, through an open tender procedure, to two private investors for RUB 922 million (EUR 17.7 million as of the date of transaction). Previously, on August 6, 2014, MTS suspended its operations in Crimea due to technical issues, which have curtailed its ability to provide telecommunications services for its customers. The gain recognized upon the sale of the base stations, network infrastructure, IT and telecom equipment amounting to RUB 317 million was recognized as operating income in the accompanying consolidated statements of operations and comprehensive income for the year ended December 31, 2014.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
11. PROPERTY, PLANT AND EQUIPMENT
The net book value of property, plant and equipment as of December 31, 2014 and 2013 was as follows:
| | December 31, | |||||||
---|---|---|---|---|---|---|---|---|---|
| Useful lives, years | ||||||||
| 2014 | 2013 | |||||||
Network, base station equipment and related leasehold improvements (including leased assets of 6,427 and nil, respectively) | 5 - 17 | 499,101 | 445,857 | ||||||
Office equipment, computers and other | 3 - 15 | 43,640 | 42,121 | ||||||
Buildings and related leasehold improvements (including leased assets of nil and 28, respectively) | 20 - 59 | 24,362 | 25,496 | ||||||
Vehicles (including leased assets of 73 and 942, respectively) | 3 - 7 | 3,271 | 3,139 | ||||||
| | | | | | | | | |
Property, plant and equipment, at cost (including leased assets of 6,500 and 970, respectively) | 570,374 | 516,613 | |||||||
Accumulated depreciation (including leased assets of 438 and 793, respectively) | (313,623 | ) | (293,389 | ) | |||||
Construction in progress and equipment for installation | 42,728 | 47,436 | |||||||
| | | | | | | | | |
Property, plant and equipment, net | 299,479 | 270,660 | |||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Depreciation expense during the years ended December 31, 2014, 2013 and 2012 amounted to RUB 58,511 million, RUB 58,599 million and RUB 54,766 million, respectively.
12. LICENSES
In connection with providing telecommunication services, the Group has been issued various GSM operating licenses by the local communication authorities.
As of December 31, 2014 and 2013, the value of the Group's telecommunications licenses was as follows:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Armenia | 8,782 | 5,982 | |||||
Russia | 1,825 | 291 | |||||
Ukraine | 117 | 123 | |||||
| | | | | | | |
Licenses, at cost | 10,724 | 6,396 | |||||
Accumulated amortization | (5,226 | ) | (3,194 | ) | |||
| | | | | | | |
Licenses, net | 5,498 | 3,202 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Amortization expense for the years ended December 31, 2014, 2013 and 2012 amounted to 598 million, RUB 544 million and RUB 662 million, respectively.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
12. LICENSES (Continued)
The Group's operating licenses do not provide for automatic renewal. As of December 31, 2014, all licenses covering the territories of the Russian Federation were renewed. The cost to renew the licenses was not significant. The weighted-average period until the next renewal of licenses in the Russian Federation is four years.
The license for the provision of telecommunications services in Ukraine was renewed in 2013 and is valid until 2026. The license for the provision of telecommunication services in Armenia is valid until 2019. The license in Turkmenistan was suspended by the Turkmenistan Ministry of Communications in December 2010 which resulted in the cessation of the Group's operational activity in Turkmenistan. However, in July 2012, the Turkmenistan Ministry of Communications granted the Group GSM and 3G licenses for a three-year term and the Group recommenced its operations in Turkmenistan. For a description of matters related to licenses for the provision of telecommunication services in Uzbekistan see Note 4.
Based on the cost of amortizable operating licenses existing at December 31, 2014 and current exchange rates, the estimated future amortization expenses for the five years ending December 31, 2019 and thereafter are as follows:
Estimated amortization expense in the year ended December 31, | ||||
2015 | 970 | |||
2016 | 973 | |||
2017 | 970 | |||
2018 | 970 | |||
2019 | 849 | |||
Thereafter | 766 | |||
| | | | |
Total | 5,498 | |||
| | | | |
| | | | |
| | | | |
The actual amortization expense reported in future periods could differ from these estimates as a result of new intangible assets acquisitions, changes in useful lives and other relevant factors.
Operating licenses contain a number of requirements and conditions specified by legislation. The requirements generally include targets for service start date, territorial coverage and expiration date. Management believes that the Group is in compliance with all material terms of its licenses.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
13. GOODWILL
The change in the net carrying amount of goodwill for the years ended December 31, 2014 and 2013 by reportable and operating segments was as follows:
| Russia convergent | Moscow fixed line | Ukraine | Uzbekistan(1) | Other | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1, 2013 | |||||||||||||||||||
Gross amount of goodwill | 28,668 | 1,083 | 162 | 3,523 | 3,981 | 37,417 | |||||||||||||
Accumulated impairment loss | (1,466 | ) | — | — | (3,523 | ) | — | (4,989 | ) | ||||||||||
| | | | | | | | | | | | | | | | | | | |
27,202 | 1,083 | 162 | — | 3,981 | 32,428 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Disposals | (23 | ) | — | — | — | — | (23 | ) | |||||||||||
Currency translation adjustment | — | — | 12 | — | 287 | 299 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2013 | |||||||||||||||||||
Gross amount of goodwill | 28,645 | 1,083 | 174 | — | 4,268 | 34,170 | |||||||||||||
Accumulated impairment loss | (1,466 | ) | — | — | — | — | (1,466 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | |
27,179 | 1,083 | 174 | — | 4,268 | 32,704 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Acquisitions (Note 3) | 1,630 | — | — | — | — | 1,630 | |||||||||||||
Currency translation adjustment | — | — | (23 | ) | — | 2,000 | 1,977 | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2014 | |||||||||||||||||||
Gross amount of goodwill | 30,275 | 1,083 | 151 | — | 6,268 | 37,777 | |||||||||||||
Accumulated impairment loss | (1,466 | ) | — | — | — | — | (1,466 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | |
28,809 | 1,083 | 151 | — | 6,268 | 36,311 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
14. OTHER INTANGIBLE ASSETS
Intangible assets as of December 31, 2014 and 2013 comprised the following:
| | December 31, 2014 | December 31, 2013 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Useful lives, years | Gross carrying value | Accumulated amortization | Net carrying value | Gross carrying value | Accumulated amortization | Net carrying value | |||||||||||||||
Amortized intangible assets | ||||||||||||||||||||||
Billing and telecommunication software | 1 to 20 | 67,238 | (41,853 | ) | 25,385 | 53,225 | (37,265 | ) | 15,960 | |||||||||||||
Office software | 1 to 10 | 12,713 | (5,695 | ) | 7,018 | 9,309 | (3,582 | ) | 5,727 | |||||||||||||
Rights to use radio frequencies | 1 to 15 | 11,444 | (5,684 | ) | 5,760 | 9,850 | (4,905 | ) | 4,945 | |||||||||||||
Acquired customer base | 4 to 31 | 7,690 | (3,166 | ) | 4,524 | 8,757 | (3,622 | ) | 5,135 | |||||||||||||
Accounting software | 1 to 5 | 3,637 | (2,641 | ) | 996 | 4,330 | (3,021 | ) | 1,309 | |||||||||||||
Numbering capacity | 2 to 15 | 3,746 | (3,508 | ) | 238 | 3,623 | (2,849 | ) | 774 | |||||||||||||
Credit line | 1 to 3 | 3,238 | — | 3,238 | — | — | — | |||||||||||||||
Other | 1 to 15 | 10,671 | (3,238 | ) | 7,433 | 7,090 | (2,909 | ) | 4,181 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total amortized intangible assets | 120,377 | (65,785 | ) | 54,592 | 96,184 | (58,153 | ) | 38,031 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Prepayments for intangible assets | 2,379 | — | 2,379 | 392 | — | 392 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total other intangible assets | 122,756 | (65,785 | ) | 56,971 | 96,576 | (58,153 | ) | 38,423 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Amortization expense for the years ended December 31, 2014, 2013 and 2012 amounted to RUB 15,601 million, RUB 14,110 million and RUB 12,482 million, respectively. Based solely on the cost of amortizable intangible assets existing at December 31, 2014 the estimated future amortization expenses for the five years ending December 31, 2019 and thereafter are as follows:
Estimated amortization expense in the year ending December 31, | ||||
2015 | 16,901 | |||
2016 | 13,740 | |||
2017 | 9,601 | |||
2018 | 5,036 | |||
2019 | 2,301 | |||
Thereafter | 7,013 | |||
| | | | |
Total | 54,592 | |||
| | | | |
| | | | |
| | | | |
The actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible assets acquisitions, changes in useful lives, exchange rates and other relevant factors.
The weighted-average amortization period for billing and telecommunications software acquired during the years ended December 31, 2014 and 2013 is four years.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
15. INVESTMENTS IN AND ADVANCES TO ASSOCIATES
As of December 31, 2014 and 2013, the Group's investments in and advances to associates comprised the following:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
MTS Belarus—equity investment | 6,033 | 5,013 | |||||
MTS Bank—equity investment | 4,858 | 5,476 | |||||
MTS Bank—loan | 2,100 | 2,100 | |||||
OZON Holdings Limited—equity investment | 2,708 | — | |||||
Business-Nedvizhimost—equity investment | — | 410 | |||||
Intellect Telecom—equity investment | 78 | 163 | |||||
Intellect Telecom—loan | 168 | — | |||||
Stream—equity investment | 332 | 231 | |||||
| | | | | | | |
Total investments in and advances to associates | 16,277 | 13,393 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Business-Nedvizhimost—In September 2013, the Group spun off Business-Nedvizhimost CJSC from its wholly-owned subsidiary MGTS-Nedvizhimost and, in December 2013, sold a 51% stake in Business-Nedvizhimost to Sistema. After the loss of control over the subsidiary, the Group deconsolidated Business-Nedvizhimost and accounted for the investment using the equity method of accounting. In April 2014 the Group sold the remaining 49% stake in Business-Nedvizhimost to Sistema for RUB 3.1 billion, payable in arrears till July 31, 2015 and bearing interest of 9.0% p.a. The disposal was accounted for as a transaction under common control directly in equity.
MTS Bank—In April 2013, the Group acquired a 25.1% stake in MTS Bank OJSC ("MTS Bank") for RUB 5,089 million. As a result of the transaction, the Group's effective ownership in MTS Bank increased to 26.3%. In September 2012, the Group provided a 10-year subordinated loan to MTS Bank in the amount of RUB 2,100 million at 8.8% p.a. In October 2014 the Group contributed RUB 1,266 million to MTS Bank. MTS Bank has no obligation to pay the amount back. In December 2014 the Group had increased its interest in MTS Bank from 26.3% to 27.0% through participation in an additional share issue of MTS Bank, and paid RUB 3,639 million for shares acquired.
In 2014, an impairment charge of RUB 3,225 million related to equity investment in MTS Bank was recognized as an element of equity in net loss / (income) of associates in the accompanying consolidated statements of operations and comprehensive income. As a result a difference arose between the amount at which the investment is carried and the amount of underlying equity in net assets.
OZON Holdings Limited—In April 2014 the Group acquired a 10.82% stake in OZON Holdings Limited through the purchase of OZON Holdings Limited's additional share issuance for RUB 2,702 million ($75 million). The Group concluded that it is able to exercise significant influence over OZON Holdings Limited based on direct and indirect ownership of equity shares, representation on the investee's Board of Directors and certain veto rights related to matters intersecting with the Group's interests. The difference between the equity investment carrying amount of RUB 2,708 million
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
15. INVESTMENTS IN AND ADVANCES TO ASSOCIATES (Continued)
and underlying equity in net assets as of December 31, 2014 of RUB 739 million represents equity-method goodwill, mainly attributable to the expected synergies from commercial arrangements and co-branding programs.
The financial position and results of operations of MTS Bank as of and for the years ended December 31, 2014 and 2013 (since acquisition) were as follows:
| 2014 | 2013 | |||||
---|---|---|---|---|---|---|---|
Total assets | 215,070 | 224,446 | |||||
Total liabilities | (181,724 | ) | (201,077 | ) | |||
Noncontrolling interest | (4,061 | ) | (1,924 | ) | |||
Total interest income | (25,107 | ) | (18,266 | ) | |||
Total interest expense | 9,868 | 7,737 | |||||
Operating loss/(profit) | 14,915 | (1,036 | ) | ||||
Net loss/(income) | 12,585 | (868 | ) |
Summarized financial position and results of operations of other equity method investees as of and for the year ended December 31, 2014 were as follows:
| MTS Belarus | Intellect Telecom | Stream | OZON Holdings Limited | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total current assets | 9,022 | 237 | 974 | 7,888 | |||||||||
Total non-current assets | 8,042 | 458 | 91 | 2,962 | |||||||||
| | | | | | | | | | | | | |
Total assets | 17,064 | 695 | 1,065 | 10,850 | |||||||||
Total current liabilities | (5,126 | ) | (506 | ) | (341 | ) | (3,640 | ) | |||||
Total non-current liabilities | (168 | ) | (17 | ) | — | (377 | ) | ||||||
| | | | | | | | | | | | | |
Total liabilities | (5,294 | ) | (523 | ) | (341 | ) | (4,017 | ) | |||||
Revenue | (17,639 | ) | (198 | ) | (1,280 | ) | (11,097 | ) | |||||
Gross profit | (12,910 | ) | (4 | ) | (566 | ) | (2,369 | ) | |||||
Net (income) / loss | (7,466 | ) | 170 | (226 | ) | 2,494 |
Revenue, gross profit and net income of Business-Nedvizhimost from January 1, 2014 till the date of its disposal amounted to RUB 196 million, RUB 90 million and RUB 17 million, respectively.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
15. INVESTMENTS IN AND ADVANCES TO ASSOCIATES (Continued)
Summarized financial position and results of operations of equity method investees as of and for the year ended December 31, 2013 were as follows:
| MTS Belarus | Intellect Telecom | Stream | Business- Nedvizhimost (since deconsolidation) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total current assets | 5,867 | 140 | 485 | 313 | |||||||||
Total non-current assets | 6,539 | 483 | 214 | 749 | |||||||||
| | | | | | | | | | | | | |
Total assets | 12,406 | 623 | 699 | 1,062 | |||||||||
Total current liabilities | (3,161 | ) | (267 | ) | (206 | ) | (181 | ) | |||||
Total non-current liabilities | — | (14 | ) | — | (50 | ) | |||||||
| | | | | | | | | | | | | |
Total liabilities | (3,161 | ) | (281 | ) | (206 | ) | (231 | ) | |||||
Revenue | (14,310 | ) | (357 | ) | (738 | ) | (13 | ) | |||||
Gross profit | (10,271 | ) | (66 | ) | (253 | ) | (8 | ) | |||||
Net (income) / loss | (4,649 | ) | 81 | (9 | ) | (5 | ) |
For the years ended December 31, 2014, 2013 and 2012 the Group's share in the earnings or losses of associates amounted to a loss of RUB 2,880 million, gain of RUB 2,472 million and gain of RUB 869 million, respectively and was included in other expense/(income) in the accompanying consolidated statements of operations and comprehensive income.
16. OTHER INVESTMENTS
As of December 31, 2014 and 2013, the Group's other investments comprised the following:
| | | | December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Annual interest rate | Maturity date | |||||||||||
| Classification | 2014 | 2013 | |||||||||||
Deposits | Held to maturity | 6.15 - 6.25% | 2016 | 13,671 | — | |||||||||
Loan receivable from Mr. P. Fattouche and Mr. M. Fattouche(1) | Held to maturity | 6% | 2015 | — | 2,946 | |||||||||
Loan Participation Notes EMIS BV | Held to maturity | 6% | 2015 | — | 699 | |||||||||
Promissory notes of Sistema (related party) (Note 25) | Held to maturity | 0.0% | 2017 | 618 | 618 | |||||||||
Investments in ordinary shares (related party) (Note 25) | At cost | — | — | 125 | 125 | |||||||||
Other | At cost / held to maturity | — | — | 555 | 4 | |||||||||
| | | | | | | | | | | | | | |
Total other investments | 14,969 | 4,392 | ||||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
16. OTHER INVESTMENTS (Continued)
The Group does not discount promissory notes and loans granted to related parties, interest rates on which are different from market rates. Accordingly, fair value of such notes and loans may be different from their carrying value.
In December 2010, the Group granted a $90.0 million (RUB 2,777 million at the date of transaction) loan to Mr. Pierre Fattouche and Mr. Moussa Fattouche, the holders of a 20% noncontrolling stake in K-Telecom, the Group's subsidiary in Armenia. Simultaneously, the Group signed an amendment to the put and call option agreement for the acquisition of noncontrolling stake. According to the amendment, the call exercise price shall be reduced by deducting any outstanding balance on the loan amount and all accrued and unpaid interest and any other sums due and outstanding under the loan agreement at the time of exercise (Note 27). Interest accrued on the loan to Mr. Pierre Fattouche and Mr. Moussa Fattouche for the years ended December 31, 2014, 2013 and 2012 amounted to RUB 212.8 million, RUB 172.7 million and RUB 174.1 million, respectively, and was included as a component of interest income in the accompanying consolidated statements of operations and comprehensive income. The fair value of the loan approximates its carrying value.
In August 2013, the Group invested $21.3 million (RUB 703 million at the date of transaction) in Loan Participation Notes issued by EMIS BV (effective issuer—Renaissance Capital). The Notes were sold before the maturity date due to deteriorating credit quality for $22.3 million (RUB 764 million at the date of transaction) including realized interest of $1 million (RUB 34 million at recognition date).
The Group considers credit risk for other investments in loans receivable and deposits to be low.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
17. BORROWINGS
Notes—As of December 31, 2014 and 2013, the Group's notes consisted of the following:
| | | December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Interest rate | ||||||||||
| Currency | 2014 | 2013 | |||||||||
MTS International Notes due 2020 (Note 2) | USD | 8.625 | % | 35,057 | 24,547 | |||||||
MTS International Notes due 2023 (Note 2) | USD | 5.00 | % | 26,920 | 16,365 | |||||||
MTS OJSC Notes due 2020 | RUB | 8.15 | % | 15,000 | 15,000 | |||||||
MTS OJSC Notes due 2014 | RUB | 7.60 | % | — | 13,619 | |||||||
MTS OJSC Notes due 2017 | RUB | 8.70 | % | 10,000 | 10,000 | |||||||
MTS OJSC Notes due 2023 | RUB | 8.25 | % | 10,000 | 10,000 | |||||||
MTS OJSC Notes due 2015 | RUB | 7.75 | % | 7,537 | 7,537 | |||||||
MTS OJSC Notes due 2016 | RUB | 8.75 | % | 1,788 | 1,788 | |||||||
MTS OJSC Notes due 2018 | RUB | 12.00 | % | 136 | 3,844 | |||||||
MTS OJSC Notes due 2015 (A series) | RUB | 0.67 | % | 12 | 12 | |||||||
MTS OJSC Notes due 2015 - 2016 (B series) | RUB | 0.54 | % | 12 | 12 | |||||||
MTS OJSC Notes due 2021 - 2022 (V series) | RUB | 0.25 | % | 12 | 12 | |||||||
Plus: unamortized premium | 3 | 8 | ||||||||||
| | | | | | | | | | | | |
Total notes | 106,477 | 102,744 | ||||||||||
| | | | | | | | | | | | |
Less: current portion | (22,701 | ) | (17,462 | ) | ||||||||
| | | | | | | | | | | | |
Total notes, long-term | 83,776 | 85,282 | ||||||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
The Group has an unconditional obligation to repurchase certain MTS OJSC Notes at par value if claimed by the noteholders subsequent to the announcement of sequential coupon. The dates of the announcement for each particular note issue are as follows:
| ||
| ||
|
The notes therefore can be defined as callable obligations under the FASB ASC 470, Debt, as the holders have the unilateral right to demand repurchase of the notes at par value upon announcement of new coupons. This guidance requires callable obligations to be disclosed as maturing in the reporting period, when the demand for repurchase could be submitted disregarding the expectations of the Group about the intentions of the noteholders. The Group discloses the notes as maturing in 2015 (MTS OJSC Notes due 2018 and 2020) and in 2018 (MTS OJSC Notes due 2023) in the aggregated maturities schedule as these are the reporting periods when the noteholders will have the unilateral right to demand repurchase.
In December 2014, the Group changed the coupon rate for MTS OJSC Notes due 2018 from 7.50% to 12.00%. Following the announcement of new coupon rates the Group repurchased MTS OJSC Notes due 2018 at the request of eligible noteholders in the amount of RUB 3,710 million.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
17. BORROWINGS (Continued)
As of December 31, 2014 the Group had the following unclosed repurchase transactions with a due date on January 14, 2015:
| Number of Notes | Due Amount | Unrealized Premium | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
MTS OJSC Notes due 2015 | 2,420,000 | 1,670 | (5 | ) | 1,665 | ||||||||
MTS OJSC Notes due 2018 | 2,928,358 | 1,760 | — | 1,760 | |||||||||
| | | | | | | | | | | | | |
3,425 | |||||||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The above balance is included in the short-term portion of bank loans and other debt disclosed below.
The fair values of notes based on the market quotes as of December 31, 2014 at the stock exchanges where they are traded were as follows:
| Stock exchange | % of par | Fair value | ||||||
---|---|---|---|---|---|---|---|---|---|
MTS International Notes due 2020 | Frankfurt stock exchange | 95.85 | 33,602 | ||||||
MTS International Notes due 2023 | Frankfurt stock exchange | 75.00 | 20,190 | ||||||
MTS OJSC Notes due 2020 | Moscow Exchange | 96.33 | 14,450 | ||||||
MTS OJSC Notes due 2017 | Moscow Exchange | 90.10 | 9,010 | ||||||
MTS OJSC Notes due 2023 | Moscow Exchange | 100.19 | 10,019 | ||||||
MTS OJSC Notes due 2015 | Moscow Exchange | 96.81 | 7,297 | ||||||
MTS OJSC Notes due 2016 | Moscow Exchange | 85.30 | 1,525 | ||||||
MTS OJSC Notes due 2018 | Moscow Exchange | 95.06 | 129 | ||||||
| | | | | | | | | |
Total notes | 96,222 | ||||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
17. BORROWINGS (Continued)
Bank loans and other debt—As of December 31, 2014 and 2013, the Group's loans from banks and other companies consisted of the following:
| | | December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| | Interest rate (actual at December 31, 2014) | |||||||||
| Maturity | 2014 | 2013 | ||||||||
USD-denominated: | |||||||||||
Calyon, ING Bank N.V, Nordea Bank AB, Raiffeisen Zentralbank Osterreich AG | 2015 - 2020 | LIBOR + 1.15% (1.51%) | 37,901 | 26,132 | |||||||
Skandinavska Enskilda Banken AB | 2015 - 2017 | LIBOR + 0.23 - 1.8% (0.59 - 2.16%) | 5,175 | 4,238 | |||||||
HSBC Bank plc and ING BHF Bank AG | 2015 | LIBOR + 0.3% (0.66%) | — | 394 | |||||||
Other | 2015 | 15% | 164 | 258 | |||||||
| | | | | | | | | | | |
43,240 | 31,022 | ||||||||||
EUR-denominated: |
|
| |||||||||
Bank of China | 2015 | EURIBOR + 1.95% (2.12%) | — | 2,435 | |||||||
Credit Agricole Corporate Bank and BNP Paribas | 2015 - 2018 | EURIBOR + 1.65% (1.82%) | 1,893 | 1,557 | |||||||
LBBW | 2015 - 2017 | EURIBOR +1.52% (1.69%) | 956 | 839 | |||||||
| | | | | | | | | | | |
2,849 | 4,831 | ||||||||||
RUB-denominated: |
|
| |||||||||
Sberbank | 2015 - 2021 | 8.45 - 12.05% | 125,000 | 80,000 | |||||||
Notes in REPO | 2015 | 19.36% | 3,425 | — | |||||||
SMM | 2015 | 0 - 15% | 556 | — | |||||||
Other | 2015 - 2023 | Various | 456 | 395 | |||||||
| | | | | | | | | | | |
129,437 | 80,395 | ||||||||||
AMD-denominated: |
|
| |||||||||
ASHIB | 2015 | 13% | 176 | 108 | |||||||
| | | | | | | | | | | |
176 | 108 | ||||||||||
UZS-denominated: | — | ||||||||||
Aloqabank | 2019 - 2022 | 12% | 759 | — | |||||||
Uzbektelecom | 2015 | 10% | 58 | — | |||||||
| | | | | | | | | | | |
817 | |||||||||||
| | | | | | | | | | | |
Total bank loans and other debt | 176,519 | 116,356 | |||||||||
| | | | | | | | | | | |
Less: current portion | (19,435 | ) | (7,564 | ) | |||||||
| | | | | | | | | | | |
Total bank loans and other debt, long-term | 157,084 | 108,792 | |||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
In 2014, the Group negotiated changes in interest rates and maturity dates for several credit facilities. None of these modifications were considered to be substantial.
Borrowing costs and interest capitalized—Borrowing costs include interest incurred on existing indebtedness and debt issuance costs. Interest expense incurred during the construction phase of property, plant and equipment is capitalized as part of the value of the constructed assets until they are ready for use. The capitalized interest costs for the years ended December 31, 2014, 2013 and 2012
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
17. BORROWINGS (Continued)
amounted to RUB 1,460 million, RUB 1,942 million and RUB 1,792 million, respectively. Debt issuance costs are capitalized and amortized using the effective interest method over the terms of the related loans.
Interest expense, net of amounts capitalized and amortization of debt issuance costs, for the years ended December 31, 2014, 2013 and 2012 was RUB 15,808 million, RUB 14,714 million and RUB 16,721 million, respectively.
Compliance with covenants—Bank loans and notes of the Group are subject to certain covenants limiting the Group's ability to incur debt, carry on transactions with related parties, create liens on properties, dispose assets, including GSM and 3G licenses for several license areas, issue guaranties, grant loans to employees and entities, delist notes, delay coupon payments, merge or consolidate MTS OJSC with another entity or be a subject to a court decision to pay over $10 million (RUB 563 million as of the reporting date), which is remained unsatisfied for more than 60 days without being appealed, discharged or waived.
The Group is required to comply with certain financial ratios and maintain ownership in certain subsidiaries.
The noteholders of MTS International Notes due 2020 and MTS International Notes due 2023 have the right to require the Group to redeem the notes at 101% of their principal amount and related interest, if the Group experiences a change in control.
If the Group fails to meet these covenants, after certain notice and cure periods, the debtholders are entitled to accelerate the repayment of the debt.
The Group was in compliance with all existing notes and bank loan covenants as of December 31, 2014.
Pledges—The non-revolving credit facility agreement between UMS and Aloqabank with total amount as of December 31, 2014 of RUB 759 million is secured by telecommunication equipment and premises with carrying value of RUB 2,038 million.
Available credit facilities—As of December 31, 2014, the Group's total available unused credit facilities amounted to RUB 44,378 million and related to the following credit lines:
| Maturity | Interest rate | Available till | Available amount | ||||||
---|---|---|---|---|---|---|---|---|---|---|
Sberbank | 2018 - 2021 | 16% | June 2015 | 25,000 | ||||||
CitiBank Europe | 2024 | LIBOR 6M+ 0.9% | April 2015 | 16,878 | ||||||
ING Bank Eurasia | 2015 | MosPrime / LIBOR / EURIBOR + 1.50% | July 2015 | 2,500 | ||||||
| | | | | | | | | | |
Total | 44,378 | |||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
In addition, the Group has a credit facility made available by Citibank at MosPrime + 1.50% interest rate with the available amount set up on request and to be repaid within 182 days.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
17. BORROWINGS (Continued)
The following table presents the aggregated scheduled maturities of principal on notes and bank loans outstanding for the five years ending December 31, 2019 and thereafter:
| Notes | Bank loans and other debt | |||||
---|---|---|---|---|---|---|---|
Payments due in the year ending December 31, | |||||||
2015 | 22,701 | 19,435 | |||||
2016 | 1,788 | 33,821 | |||||
2017 | 10,000 | 39,937 | |||||
2018 | 10,000 | 28,527 | |||||
2019 | — | 31,695 | |||||
Thereafter | 61,988 | 23,104 | |||||
| | | | | | | |
Total | 106,477 | 176,519 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
18. CAPITAL LEASE OBLIGATION
The following table presents a summary of assets under capital lease and accumulated depreciation as of December 31, 2014 and 2013:
| December 31, 2014 | December 31, 2013 | |||||
---|---|---|---|---|---|---|---|
Network and base station equipment | 6,427 | — | |||||
Vehicles | 73 | 942 | |||||
Buildings | — | 28 | |||||
Leased assets, at cost | 6,500 | 970 | |||||
Accumulated depreciation | (438 | ) | (793 | ) | |||
| | | | | | | |
Leased assets, net | 6,062 | 177 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Depreciation of assets under capital leases for the years ended December 31, 2014, 2013 and 2012 amounted to RUB 509 million, RUB 276 million and RUB 288 million, respectively and was included in depreciation and amortization expense in the accompanying consolidated statements of operations and comprehensive income.
Interest expense on capital lease obligations for the years ended December 31, 2014, 2013 and 2012 amounted to RUB 340 million, RUB 182 million and RUB 135 million, respectively.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
18. CAPITAL LEASE OBLIGATION (Continued)
The following table presents future minimum lease payments under capital leases together with the present value of the net minimum lease payments:
Payments due for the year ended December 31, | ||||
2015 | 1,119 | |||
2016 | 1,108 | |||
2017 | 1,153 | |||
2018 | 1,159 | |||
2019 | 1,159 | |||
Thereafter | 7,687 | |||
| | | | |
Total minimum lease payments (undiscounted) | 13,385 | |||
Less amount representing interest | (3,990 | ) | ||
| | | | |
Present value of net minimum lease payments | 9,395 | |||
Less current portion of lease obligations | (538 | ) | ||
| | | | |
Non-current portion of lease obligations | 8,857 | |||
| | | | |
| | | | |
| | | | |
Leased assets include automobiles, network equipment and transponders which are installed on a satellite. The average lease term of the automobiles is three years. The Group has an obligation to purchase these automobiles under the respective capital lease agreements at the end of the lease term. The lease term of network equipment is fifteen years. The lease term of the transponders is twelve years. The Group is planning to use the transponders for providing satellite television services.
19. ASSET RETIREMENT OBLIGATIONS
As of and for the years ended December 31, 2014 and 2013, the estimated present value of the Group's asset retirement obligations and related change in liabilities were as follows:
| 2014 | 2013 | |||||
---|---|---|---|---|---|---|---|
Balance, beginning of the year | 2,743 | 2,763 | |||||
Liabilities incurred in the current period | 73 | 303 | |||||
Accretion expense | 251 | 97 | |||||
Revisions in estimated cash flows | 26 | (453 | ) | ||||
Disposal of assets | (41 | ) | — | ||||
Currency translation adjustment | (30 | ) | 33 | ||||
| | | | | | | |
Balance, end of the year | 3,022 | 2,743 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Revisions in estimated cash flows are attributable to the change in the estimated inflation rate and cost of dismantling of assets.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
20. DEFERRED CONNECTION FEES
Deferred connection fees as of and for the years ended December 31, 2014 and 2013, were as follows:
| 2014 | 2013 | |||||
---|---|---|---|---|---|---|---|
Balance, beginning of the year | 3,649 | 3,817 | |||||
Payments received and deferred during the year | 1,763 | 1,714 | |||||
Amounts amortized and recognized as revenue during the year | (1,912 | ) | (1,921 | ) | |||
Currency translation adjustment | (63 | ) | 39 | ||||
| | | | | | | |
Balance, end of the year | 3,437 | 3,649 | |||||
Less: current portion | (1,677 | ) | (1,604 | ) | |||
| | | | | | | |
Non-current portion | 1,760 | 2,045 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Group defers initial connection fees paid by subscribers for the activation of network service as well as one-time activation fees received for connection to various value added services. These fees are recognized as revenue over the estimated average subscriber life (Note 2).
21. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Group regularly enters into variable-to-fixed interest rate swap agreements to manage the exposure of changes in variable interest rate related to its debt obligations. The instruments qualify for cash flow hedge accounting under U.S. GAAP requirements. Each interest rate swap matches the exact maturity dates of the underlying debt allowing for highly-effective hedges. Interest rate swap contracts outstanding as of December 31, 2014 mature in 2015, 2018 and 2020.
In aggregate the Group entered into interest rate swap agreements designated to manage the exposure of changes in variable interest rate related to 0.12% of the Group's USD- and Euro- denominated bank loans outstanding as of December 31, 2014.
In addition to the above, the Group has also entered into several cross-currency interest rate swap agreements. These contracts hedged the risk of both interest rate and currency fluctuations and assumed periodic exchanges of both principal and interest payments from RUB-denominated amounts to USD- and Euro- denominated amounts to be exchanged at a specified rate. The rate was determined by the market spot rate upon issuance. Cross-currency interest rate swap contracts mature in 2019-2020.
The Group entered into cross-currency interest rate swap agreements designated to manage the exposure of changes in variable interest rate and currency exchange rate for 35.1% of its USD- and Euro- denominated bank loans and Eurobonds outstanding as of December 31, 2014.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
21. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
The following table presents the fair value of the Group's derivative instruments designated as hedges in the consolidated statements of financial position December 31, 2014 and 2013.
| | December 31, | |||||||
---|---|---|---|---|---|---|---|---|---|
| Statements of financial position location | 2014 | 2013 | ||||||
Asset derivatives | |||||||||
Cross-currency interest rate swaps | Other non-current assets | 21,936 | 1,825 | ||||||
Interest rate swaps | Other non-current assets | 8 | 12 | ||||||
| | | | | | | | | |
Total | 21,944 | 1,837 | |||||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Liability derivatives | |||||||||
Interest rate swaps | Other long-term liabilities | (522 | ) | (389 | ) | ||||
Interest rate swaps | Other payables | (2,028 | ) | (32 | ) | ||||
| | | | | | | | | |
Total | (2,550 | ) | (421 | ) | |||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The following table presents the effect of the Group's derivative instruments designated as hedges in the consolidated statements of operations and comprehensive income for the years ended December 31, 2014, 2013 and 2012. The amounts presented include the ineffective portion of derivative instruments and the amounts reclassified into earnings from accumulated other comprehensive income.
| | Years ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Location of gain / (loss) recognized | 2014 | 2013 | 2012 | ||||||||
Interest rate swaps | Interest income/(expense) | 231 | (184 | ) | (429 | ) | ||||||
Including ineffective portion | Interest income/(expense) | 173 | (28 | ) | (183 | ) | ||||||
| | | | | | | | | | | | |
Cross-currency interest rate swaps | Currency exchange and transaction gain/ (loss) | 15,288 | (777 | ) | (235 | ) | ||||||
| | | | | | | | | | | | |
Including ineffective portion | Currency exchange and transaction gain/(loss) | (2,315 | ) | — | — | |||||||
| | | | | | | | | | | | |
Total | 15,519 | (961 | ) | (664 | ) | |||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
In May 2013, the Group repaid the full amount due under the HSBC bank credit facility granted to MTS OJSC in 2004 with an original maturity in November 2013. The voluntary prepayment of principal and interest in the amount of RUB 102 million ($3.2 million) resulted in an immediate termination of the hedging relationship between designated interest rate swap agreements and the credit facility.
In May 2013, the Group repaid the full amount due under the Citibank credit facility granted to MTS OJSC in 2005 with an original maturity in May 2014. The voluntary prepayment of principal and interest in the amount of RUB 686 million ($21.8 million) resulted in an immediate termination of the hedging relationship between designated interest rate swap agreements and the credit facility.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
21. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
In April 2013, the Group repaid the full amount due under the HSBC bank credit facility granted to MTS OJSC in 2004 with an original maturity in October 2013. The voluntary prepayment of principal and interest of RUB 132 million ($4.2 million) resulted in an immediate termination of the hedging relationship between designated interest rate swap agreements and the credit facility.
In March 2013, the Group repaid the full amount due under the HSBC bank credit facility granted to MTS OSJC in 2004 with an original maturity in September 2013. The voluntary prepayment of principal and interest in the amount of RUB 276 million ($8.9 million) resulted in an immediate termination of the hedging relationship between designated interest rate swap agreements and the credit facility.
After the termination of hedging relationships any amounts accumulated in other comprehensive income and associated with the prepaid debt have been reclassified into earnings, going forward those derivatives are marked to market through earnings.
The following table presents the amount of accumulated other comprehensive loss reclassified into earnings during the years ended December 31, 2014, 2013 and 2012 due to termination of hedging relationships.
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The following table presents the effect of the Group's interest rate swap agreements designated as hedges in accumulated other comprehensive income for the years ended December 31, 2014, 2013 and 2012.
| 2014 | 2013 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Accumulated derivatives income / (loss), beginning of the year, net of tax of 293 and 4 and (60), respectively | 1,467 | 21 | (241 | ) | ||||||
Fair value adjustments on hedging derivatives, net of tax of 2,894 and 138 and (29), respectively | 14,468 | 691 | (204 | ) | ||||||
Amounts reclassified into earnings during the period, net of tax of (2,334) and 151 and 93, respectively | (11,668 | ) | 755 | 466 | ||||||
| | | | | | | | | | |
Accumulated derivatives income, end of the year, net of tax of 853 and 293 and 4, respectively | 4,267 | 1,467 | 21 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As of December 31, 2014, the outstanding hedging instruments were highly effective. Approximately RUB 1,011 million of accumulated gain is expected to be reclassified into net income during the next twelve months.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
21. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Cash inflows and outflows related to hedging instruments were included in cash flows from operating and financing activities in the consolidated statements of cash flows for the years ended December 31, 2014, 2013 and 2012.
Fair value of derivative instruments
The Group measured assets and liabilities associated with derivative agreements at fair value Level 2 on a recurring basis. There were no assets and liabilities associated with derivative agreements measured at fair value Level 1 and Level 3 as of December 31, 2014 and 2013 (Note 2 and 22).
The following fair value hierarchy table presents information regarding the Group's assets and liabilities associated with derivative agreements as of December 31, 2014 and 2013:
| Significant other observable inputs (Level 2) as of December 31, 2014 | Significant other observable inputs (Level 2) as of December 31, 2013 | |||||
---|---|---|---|---|---|---|---|
Assets | |||||||
Interest rate swap agreements | 8 | 12 | |||||
Cross-currency interest rate swap agreements | 21,936 | 1,825 | |||||
Liabilities | |||||||
Interest rate swap agreements | (2,550 | ) | (421 | ) |
22. FAIR VALUE MEASUREMENTS
According to U.S. GAAP requirements the Group records derivative instruments, redeemable noncontrolling interest, contingent consideration and available-for-sale investments at fair value on a recurring basis.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
22. FAIR VALUE MEASUREMENTS (Continued)
The following tables summarize those assets and liabilities measured at fair value on a recurring basis:
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Changes in the Group's net assets and earnings resulted from recurring fair value measurements of Level 3 assets and liabilities were not significant for the years ended December 31, 2014 and 2013. There were no realized and unrealized gains and losses on Level 3 assets and liabilities for the years ended December 31, 2014 and 2013.
The fair value measurement of the Group's derivative instruments is based on the observable yield curves for similar instruments. The redeemable noncontrolling interest was measured at fair value using a discounted cash flow technique. The fair value of contingent consideration was determined as the best estimate of all possible outcomes of the contingency. The inputs are based on all available internal and external information, including growth projections and industry experts' estimates, where applicable.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
22. FAIR VALUE MEASUREMENTS (Continued)
The most significant quantitative inputs used to measure the fair value of redeemable noncontrolling interest as of December 31, 2014 and 2013 are presented in the table below:
| December 31, | |||
---|---|---|---|---|
Unobservable inputs | 2014 | 2013 | ||
Discount rate | 15% | 12% | ||
Revenue growth rate | 0.02 - 0.2% (av. 0.1%) | 0.7 - 1.2% (av. 0.9%) | ||
OIBDA margin | 44.7 - 46.5% (av. 45.4%) | 49.4 - 50.7% (av. 49.8%) |
There were no transfers between levels within the hierarchy for the years ended December 31, 2014 and 2013.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Group records assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. In 2014, an impairment charge of RUB 3,225 million related to equity investment in MTS Bank was recognized in equity net loss / (income) of associates in the accompanying consolidated statements of operations and comprehensive income (Note 15). The impairment reflects the review of the development prospects associated with an economic downturn in Russia. The fair value of equity investment in the amount of RUB 4,857 million was determined based on a discounted cash flow technique utilizing significant unobservable inputs ("Level 3" significant unobservable inputs of the hierarchy established by the U.S. GAAP guidance). The key assumptions in the fair value calculations included discount rate of 23.3% and average OIBDA margin of 5%.
No impairment charges were recognized in the consolidated statements of operations and comprehensive income for the year ended December 31, 2013.
An impairment loss of RUB 20,037 million on Uzdunrobita goodwill and long-lived assets was recognized in the consolidated statements of operations and comprehensive income for the year ended December 31, 2012 (Note 4). In 2013 this loss was assigned to discontinued operations.
The carrying amounts of cash and cash equivalents; short-term investments; accounts receivable; accounts payable and accrued expenses approximate their fair values because of the relatively short-term maturities of these financial instruments.
The fair value of notes payable is estimated based on quoted prices for those instruments ("Level 1" of the hierarchy established by the U.S. GAAP guidance). As of December 31, 2014 and 2013, the fair value of notes payable, including the current portion, amounted to RUB 96,222 million and RUB 106,668 million, respectively.
The fair value of bank loans and other debt is estimated using discounted cash flows and market-based expectations for interest rates, credit risk and the contractual terms of the debt instruments ("Level 2" of the hierarchy established by the U.S. GAAP guidance). As of December 31, 2014 and 2013 the fair value of bank loans and other debt, including the current portion, amounted to RUB 162,914 million and RUB 116,356 million, respectively.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
23. ACCRUED LIABILITIES
Accrued liabilities as of December 31, 2014 and 2013 comprised the following:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Accruals for services | 10,870 | 9,911 | |||||
Accrued payroll and vacation | 7,670 | 7,247 | |||||
Accruals for taxes | 6,703 | 8,355 | |||||
Interest payable on debt | 1,830 | 1,792 | |||||
Accruals for payments to social funds | 547 | 369 | |||||
| | | | | | | |
Total accrued liabilities | 27,620 | 27,674 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
24. INCOME TAX
The provision for income taxes for the years ended December 31, 2014, 2013 and 2012 was as follows:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | 2012 | |||||||
Income from continuing operations before provision for income taxes | ||||||||||
Russia | 55,424 | 77,502 | 71,626 | |||||||
Other jurisdictions | 13,316 | 19,186 | 11,216 | |||||||
| | | | | | | | | | |
Total income from continuing operations before provision for income taxes | 68,740 | 96,688 | 82,842 | |||||||
| | | | | | | | | | |
Current income tax expense | ||||||||||
Russia | 5,764 | 7,557 | 13,790 | |||||||
Other jurisdictions | 4,043 | 2,405 | 2,304 | |||||||
| | | | | | | | | | |
Total current income tax expense | 9,807 | 9,962 | 16,094 | |||||||
| | | | | | | | | | |
Deferred income tax expense/(benefit) | ||||||||||
Russia | 8,330 | 8,487 | 2,312 | |||||||
Other jurisdictions | (1,790 | ) | 1,184 | 978 | ||||||
| | | | | | | | | | |
Total deferred income tax expense | 6,540 | 9,671 | 3,290 | |||||||
| | | | | | | | | | |
Total provision for income taxes | 16,347 | 19,633 | 19,384 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The statutory income tax rates in jurisdictions in which the Group operates for the fiscal years of 2014, 2013 and 2012 were as follows: Russia, Armenia—20.0%, Uzbekistan, Turkmenistan—8.0%. During the years ended December 31, 2014, 2013 and 2012 the Ukraine tax rate was 18.0%, 19.0% and 21.0%, respectively.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
24. INCOME TAX (Continued)
The Russia statutory income tax rate reconciled to the Group's effective income tax rate for the years ended December 31, 2014, 2013 and 2012 was as follows:
| 2014 | 2013 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Statutory income tax rate for the year | 20.0 | % | 20.0 | % | 20.0 | % | ||||
Adjustments: | ||||||||||
(Income) / expenses not accepted for tax purposes | 2.0 | (0.5 | ) | 2.0 | ||||||
Change in unrecognized tax benefits | — | — | (0.5 | ) | ||||||
Settlements with tax authorities | 0.6 | (0.3 | ) | 0.4 | ||||||
Earnings distribution from subsidiaries | 4.0 | 1.8 | 1.5 | |||||||
Effect of change in tax rate in Ukraine | — | (0.1 | ) | 0.2 | ||||||
Loss carryforward utilisation | — | — | (0.3 | ) | ||||||
Tax rate differential of foreign subsidiaries | (1.9 | ) | (0.5 | ) | — | |||||
Recognised change in fair value of derivative financial instruments | (1.0 | ) | 0.1 | — | ||||||
Other | 0.1 | (0.2 | ) | 0.1 | ||||||
| | | | | | | | | | |
Effective income tax rate | 23.8 | % | 20.3 | % | 23.4 | % | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
24. INCOME TAX (Continued)
Temporary differences between the tax and accounting bases of assets and liabilities gave rise to the following deferred tax assets and liabilities as of December 31, 2014 and 2013:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Assets / (liabilities) arising from tax effect of: | |||||||
Deferred tax assets | |||||||
Accrued expenses for services | 7,757 | 6,291 | |||||
Depreciation of property, plant and equipment | 4,015 | 1,229 | |||||
Deferred connection fees | 929 | 1,115 | |||||
Provision for investment in Delta Bank in Ukraine | 925 | — | |||||
Inventory obsolescence | 192 | 265 | |||||
Other | — | 1,242 | |||||
Loss carryforward | 8,879 | 5,880 | |||||
Valuation allowance | (8,438 | ) | (5,504 | ) | |||
| | | | | | | |
Total deferred tax assets | 14,259 | 10,518 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Deferred tax liabilities | |||||||
Depreciation of property, plant and equipment | (17,489 | ) | (12,735 | ) | |||
Other intangible assets | (6,906 | ) | (2,995 | ) | |||
Potential distributions from / to Group's subsidiaries / associates | (5,817 | ) | (4,553 | ) | |||
Licenses acquired | (1,118 | ) | (774 | ) | |||
Customer base | (905 | ) | (1,027 | ) | |||
Debt issuance cost | (348 | ) | (405 | ) | |||
Other | (138 | ) | (436 | ) | |||
| | | | | | | |
Total deferred tax liabilities | (32,721 | ) | (22,925 | ) | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net deferred tax liability | (18,462 | ) | (12,407 | ) | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net deferred tax asset, current | 11,206 | 7,933 | |||||
Net deferred tax asset, non-current | 3,610 | 862 | |||||
Net deferred tax liability, long-term | (33,278 | ) | (21,202 | ) |
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
24. INCOME TAX (Continued)
The Group has the following significant balances of income tax losses carryforward with related operating losses as of December 31, 2014 and 2013:
| | December 31, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2014 | 2013 | |||||||||||||
Jurisdiction | Period for carry-forward | Operating losses | Tax losses | Operating losses | Tax losses | |||||||||||
Luxembourg (MGTS Finance S.A.) | Unlimited | 24,183 | 7,017 | 14,064 | 4,101 | |||||||||||
Russia (Comstar-Regions and other) | 2015 - 2024 | 9,313 | 1,862 | 8,897 | 1,779 | |||||||||||
| | | | | | | | | | | | | | | | |
Total | 33,496 | 8,879 | 22,961 | 5,880 | ||||||||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Management established the following valuation allowances against deferred tax assets where it was more likely than not that some portion of such deferred tax assets will not be realized:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
Valuation allowances | 2014 | 2013 | |||||
Sale of investment in Svyazinvest | 2,875 | 2,160 | |||||
Operating loss in Luxemburg (MGTS Finance S.A.) | 5,305 | 3,086 | |||||
Other | 258 | 258 | |||||
| | | | | | | |
Total | 8,438 | 5,504 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table summarizes the changes in the allowance against deferred tax assets for the years ended December 31, 2014, 2013 and 2012:
| Balance, beginning of the period | Charged to Income tax expense | Impact of foreign currency translation adjustments | Balance, end of the period | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31, 2014 | 5,504 | — | 2,934 | 8,438 | |||||||||
Year ended December 31, 2013 | 4,952 | 258 | 294 | 5,504 | |||||||||
Year ended December 31, 2012 | 5,250 | — | (298 | ) | 4,952 |
For the remaining balances for income tax losses carryforward realization is dependent on generating sufficient taxable income prior to expiration of the losses carryforward. Although realization is not assured, management believes that it is more likely than not that all of the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
As of December 31, 2014 and 2013, the Group recognized deferred income tax liabilities of RUB 3,118 million and RUB 2,511 million, respectively, for income taxes on future dividend
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
24. INCOME TAX (Continued)
distributions from foreign subsidiaries (MTS Ukraine and K-Telecom) which are based on RUB 40,383 million and RUB 36,245 million cumulative undistributed earnings of those foreign subsidiaries in accordance with local statutory accounting regulations (unaudited) because such earnings are intended to be repatriated.
As of December 31, 2014, 2013 and 2012, the Group included accruals for uncertain tax positions in the amount of RUB 285 million, RUB 518 million and RUB 321 million, respectively, as a component of income tax payable.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2014 | 2013 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance, beginning of the year | 518 | 321 | 526 | |||||||
Additions based on tax position related to the current year | 37 | 366 | — | |||||||
Additions based on tax positions related to prior years | 22 | 1 | 66 | |||||||
Additions based on tax of acquired entities | — | — | 10 | |||||||
Reduction in tax positions related to prior years | (267 | ) | (170 | ) | (220 | ) | ||||
Settlements with tax authorities | (25 | ) | — | (61 | ) | |||||
| | | | | | | | | | |
Balance, end of the year | 285 | 518 | 321 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Accrued penalties and interest related to unrecognized tax benefits as a component of income tax expense for the years ended December 31, 2014, 2013 and 2012 amounted to a reversal of RUB 40 million, a reversal of RUB 53 million and a reversal of RUB 36 million, respectively, and were included in income tax expense in the accompanying consolidated statements of operations and comprehensive income. Accrued interest and penalties were included in income tax payable in the accompanying consolidated statements of financial position and totaled RUB 58 million and RUB 97 million as of December 31, 2014 and 2013, respectively. The Group does not expect the unrecognized tax benefits to change significantly over the next twelve months (Note 30).
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
25. RELATED PARTIES
Related parties include entities under common ownership and control with the Group, affiliated companies and associated companies.
As of December 31, 2014 and 2013, accounts receivable from and accounts payable to related parties were as follows:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Accounts receivable: | |||||||
Sistema, parent company (Note 15) | 3,215 | — | |||||
MTS Belarus, the Group associate | 514 | 304 | |||||
MTS Bank, the Group associate | 510 | 128 | |||||
Sitronics N, a subsidiary of Sistema | 121 | 337 | |||||
Stream, the Group associate | 42 | 59 | |||||
NVision Group, subsidiaries of Sistema | 16 | 33 | |||||
Other related parties | 107 | 104 | |||||
| | | | | | | |
Total accounts receivable, related parties | 4,525 | 965 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Accounts payable: | |||||||
NVision Group, subsidiaries of Sistema | 3,311 | 1,605 | |||||
MTS Bank, the Group associate | 377 | 697 | |||||
MTS Belarus, the Group associate | 213 | 208 | |||||
Stream, the Group associate | 211 | 99 | |||||
Maxima, a subsidiary of Sistema | 162 | 307 | |||||
Smart Cards Group, subsidiaries of Sistema | 72 | 201 | |||||
Other related parties | 328 | 198 | |||||
| | | | | | | |
Total accounts payable, related parties | 4,674 | 3,315 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Group has neither the intent nor the ability to offset the outstanding accounts payable and accounts receivable with related parties under the terms of existing agreements.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
25. RELATED PARTIES (Continued)
For the years ended December 31, 2014, 2013 and 2012, operating transactions with related parties are as follows:
| 2014 | 2013 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Revenues from related parties: | ||||||||||
MTS Bank, the Group associate (telecommunications and call center services, bank cards distribution commission) | 787 | 378 | 88 | |||||||
MTS Belarus, the Group associate (roaming and interconnect services) | 269 | 149 | 209 | |||||||
Medsi Group, subsidiaries of Sistema (telecommunications and call center services) | 83 | 48 | 28 | |||||||
NVision Group, subsidiaries of Sistema (fixed line services) | 82 | 75 | 77 | |||||||
Sitronics N, a subsidiary of Sistema (construction of fiber optic link) | 7 | 288 | 26 | |||||||
Jet Air Group, subsidiaries of Sistema (rent) | 4 | 60 | — | |||||||
Other related parties | 140 | 115 | 64 | |||||||
| | | | | | | | | | |
Total revenues from related parties | 1,372 | 1,113 | 492 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating expenses incurred on transactions with related parties | ||||||||||
Maxima, a subsidiary of Sistema (advertising) | 1,575 | 1,757 | 1,902 | |||||||
Stream, the Group associate (content services) | 1,395 | 711 | — | |||||||
NVision Group, subsidiaries of Sistema (IT consulting) | 846 | 1,083 | 1,115 | |||||||
MTS Bank, the Group's associate (commission related (income)/expenses) | (406 | ) | 413 | 55 | ||||||
Elavius, a subsidiary of Sistema (transportation services) | 399 | 347 | 351 | |||||||
MTS Belarus, the Group associate (roaming and interconnect services) | 395 | 278 | 424 | |||||||
AB Safety, a subsidiary of Sistema (security services) | 292 | 354 | 344 | |||||||
Jet Air Group, subsidiaries of Sistema (aircraft maintenance) | 127 | — | — | |||||||
Other related parties | 455 | 513 | 423 | |||||||
| | | | | | | | | | |
Total operating expenses incurred on transactions with related parties | 5,078 | 5,456 | 4,614 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
25. RELATED PARTIES (Continued)
Investing and financing transactions
During the years ended December 31, 2014 and 2013 the Group made certain investments in related parties. Respective balances are summarized as follows:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Loans to, promissory notes and investments in shares of related parties: | |||||||
Short-term investments (Note 7) | |||||||
Deposits at MTS Bank | — | 5,081 | |||||
Mutual investment fund "Reservnyi", managed by DIK, a subsidiary of Sistema | — | 4,154 | |||||
Sistema Notes due in 2016 (series 04) | 534 | — | |||||
Sistema International Funding S.A. Bonds due 2019, a subsidiary of Sistema | 42 | — | |||||
Loan receivable from Navigation Information Systems, a subsidiary of Sistema | 132 | — | |||||
Loan receivable from Moscow Business Incubator, a subsidiary of Sistema | 52 | — | |||||
| | | | | | | |
Total short-term investments in related parties | 760 | 9,235 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other investments (Note 16) | |||||||
Promissory notes of Sistema | 618 | 618 | |||||
Loan receivable from Navigation Information Systems, a subsidiary of Sistema | 92 | — | |||||
| | | | | | | |
Total other investments to related parties | 710 | 618 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Investments in shares (Note 16) | |||||||
Sistema Mass Media, a subsidiary of Sistema | 117 | 117 | |||||
Other | 8 | 8 | |||||
| | | | | | | |
Total investments in shares of related parties | 125 | 125 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Open Joint-Stock Company "MTS Bank" ("MTS Bank")—The Group has of loan agreement and maintains certain bank accounts with MTS Bank, an associated company of the Group. As of December 31, 2014 and 2013, the Group's cash position at MTS Bank amounted to RUB 11,687 million and RUB 11,297 million, respectively, including short-term deposits in the amount of RUB 3,482 million and RUB 5,081 million, respectively. Interest accrued on loan receivable, the deposits and cash on current accounts for the years ended December 31, 2014, 2013 and 2012 amounted to RUB 654 million, RUB 742 million and RUB 172 million, respectively, and was included as a component of interest income in the accompanying consolidated statements of operations and comprehensive income. Interest expense on the funds raised from MTS Bank during the years ended December 31, 2014, 2013 and 2012 amounted to RUB nil, RUB nil and RUB 363 million, respectively, and was included as a component of interest expense in the accompanying consolidated statements of operations and comprehensive income.
During the years ended December 31, 2014, 2013 and 2012, the Group provided telecommunications and call center services to MTS Bank and recognized related revenues in the amount of RUB 787 million, RUB 378 million and RUB 88 million, respectively.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
25. RELATED PARTIES (Continued)
During the year ended December 31, 2014 the Group provided services related to bank cards distribution and granting of consumer credits to MTS Bank customers and recognized the related income in the amount of RUB 541 million in the accompanying consolidated statements of operations and comprehensive income. The amount represents agency fees after the cross-fines deduction. During the year ended December 31, 2013 the Group incurred expenses under the same contract in the amount of RUB 331 million which represent the excess of cross-fines over agency fees.
During the years ended December 31, 2014, 2013 and 2012, the Group incurred commission expenses and cash collection fees in the amount of RUB 135 million, RUB 82 million and RUB 55 million, respectively.
Sistema—In November 2009, the Group accepted a promissory note, issued by Sistema, as repayment of the loan principal and interest accrued to date under an agreement with Sistema-Hals (Note 16). The note is interest free and repayable in 2017. As of December 31, 2014 and 2013, the amount receivable of RUB 618 million and RUB 618 million was included in other investments in the accompanying consolidated statements of financial position.
In April 2014 the Group sold a 49% stake in Business-Nedvizhimost to Sistema for a consideration of RUB 3.1 billion to be paid by the end of July 2015 (Note 15). As of December 31, 2014, the accounts receivable in the accompanying consolidated statements of financial position amounted to RUB 3.2 billion. The related interest accrued in the amount of RUB 125 million was included as a component of interest income in the accompanying consolidated statements of operations and comprehensive income for the year ended December 31, 2014.
In October 2014 the Group acquired 2,501,350 Sistema Notes due 2016 (series 04) and 1,000 Sistema International Funding S.A. Bonds due in 2019 for RUB 519 million and RUB 32 million, respectively. The acquired bonds were classified as available for sale and accounted for at fair value with changes recognized in accumulated other comprehensive income. For the year ended December 31, 2014, the unrealized gain recognized in accumulated other comprehensive income amounted to RUB 6 million. The interest income accrued for the year ended December 31, 2014 amounted to RUB 9 million and was included as a component of interest income in the accompanying consolidated statements of operations and comprehensive income.
Leader-Invest—In October 2014, the Group sold a building to Leader-Invest, a subsidiary of Sistema, for a cash consideration of RUB 508 million. The disposal was accounted for as a transaction under common control with a RUB 245 million gain recognized directly in equity.
Disposal group held for sale to related party—In February 2015, the Group sold a 51% stake in Rent Nedvizhimost to Sistema, for RUB 4.3 billion of which RUB 3.8 billion is due before December 31, 2018 and bears interest of 12%-interest p.a. As of December 31, 2014 the Group classified the assets and liabilities of Rent Nedvizhimost as held for sale (Note 10).
Doveritelnaja Investizionnaja Kompanija ("DIK")—In April and May 2013, the Group invested RUB 4.0 billion in Mutual investment fund "Reservnyi" managed by DIK, a subsidiary of Sistema. The investment was sold in April 2014 for RUB 4,165 million. The realized gain of RUB 165 million was
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
25. RELATED PARTIES (Continued)
recognized as a component of other expenses (net) in the accompanying consolidated statements of operations and comprehensive income.
Investments in ordinary shares—As of December 31, 2014 and 2013 the Group had several investments in shares of subsidiaries and affiliates of Sistema totaling RUB 125 million and RUB 125 million, respectively, included in other investments in the accompanying consolidated statements of financial position. The most significant investment is a 2.356% stake in Sistema Mass-Media, a subsidiary of Sistema.
Liabilities to related parties—As of December 31, 2014 the Group held several bills of exchange and loans issued by Sistema Mass-Media in the amount of RUB 867 million. Interest accrued in the amount of RUB 41 million was included in the accompanying consolidated statements of operations and comprehensive income for the year ended December 31, 2014.
Smart Cards Group—During the years ended December 31, 2014, 2013 and 2012, the Group purchased from Smart Cards Group, subsidiaries of Sistema, SIM cards and prepaid phone cards for approximately RUB 267 million, RUB 765 million and RUB 842 million, respectively.
NVision Group—During the years ended December 31, 2014, 2013 and 2012, the Group acquired from NVision Group, subsidiaries of Sistema, telecommunications equipment, software and billing systems (FORIS) for approximately RUB 9,819 million, RUB 13,394 million, RUB 12,898 million, respectively, and incurred expenses of RUB 846 million, RUB 1,083 million, RUB 1,115 million, respectively, under an IT consulting agreement.
As of December 31, 2014 and 2013, the advances given to NVision Group amounted to RUB 274 million and RUB 496 million, respectively. These amounts were included into property, plant and equipment and intangible assets in the accompanying consolidated statements of financial position.
26. STOCKHOLDERS' EQUITY
Share capital—The Company's charter capital is composed of 2,066,413,562 ordinary shares of which 1,988,912,130 and 1,988,831,184 were outstanding as of December 31, 2014 and 2013, respectively. The total shares in treasury stock comprised 77,501,432 and 77,582,378 as of December 31, 2014 and 2013, respectively.
Each ADS represents 2 ordinary shares. As of December 31, 2014, the Group had repurchased 33,997,667 ADSs.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
26. STOCKHOLDERS' EQUITY (Continued)
Noncontrolling interest—The Group's equity was affected by changes in the respective subsidiaries' ownership interests as follows:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | 2012 | |||||||
Net income attributable to the Group | 51,822 | 79,839 | 29,642 | |||||||
Transfers from the noncontrolling interest | ||||||||||
Increase in own equity due to acquisition of own shares by MGTS | — | — | 57 | |||||||
Decrease in own equity due to acquisition of noncontrolling interest in Teleservice | (23 | ) | — | — | ||||||
| | | | | | | | | | |
Net transfers from the noncontrolling interest | (23 | ) | — | 57 | ||||||
| | | | | | | | | | |
Net income attributable to the Group and transfers from the noncontrolling interest | 51,799 | 79,839 | 29,699 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Accumulated other comprehensive loss—The following table represents changes in the balances of accumulated other comprehensive loss by components for the year ended December 31, 2014 and 2013:
| Currency translation adjustment | Unrealized (gains) / losses on derivatives | Unrecognized actuarial (gains) / losses | Accumulated other comprehensive (income) / loss | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1, 2013 | 13,224 | (21 | ) | 473 | 13,676 | ||||||||
Other comprehensive loss / (income) | 6,657 | (861 | ) | — | 5,796 | ||||||||
Less: tax expense | — | 172 | — | 172 | |||||||||
Amounts reclassified to net income | (3,682 | )(1) | (945 | ) | (220 | ) | (4,847 | ) | |||||
Less: tax expense | — | 189 | 44 | 233 | |||||||||
| | | | | | | | | | | | | |
Net other comprehensive loss / (income) | 2,975 | (1,445 | ) | (176 | ) | 1,354 | |||||||
| | | | | | | | | | | | | |
Balance at December 31, 2013 | 16,199 | (1,466 | ) | 297 | 15,030 | ||||||||
Other comprehensive income | (5,925 | ) | (17,363 | ) | (82 | ) | (23,370 | ) | |||||
Less: tax expense | — | 2,894 | 16 | 2,910 | |||||||||
— | |||||||||||||
Amounts reclassified to net income | — | 14,002 | 70 | 14,072 | |||||||||
Less: tax expense | — | (2,334 | ) | (14 | ) | (2,348 | ) | ||||||
| | | | | | | | | | | | | |
Net other comprehensive loss / (income) | (5,925 | ) | (2,801 | ) | (10 | ) | (8,736 | ) | |||||
| | | | | | | | | | | | | |
Balance as of December 31, 2014 | 10,274 | (4,267 | ) | 287 | 6,294 | ||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Dividends—In 2013, the Board of Directors approved a dividend policy, whereby the Group shall aim to make minimum dividend distribution payments to shareholders for the calendar years 2013-2015 in the amount of at least 75% of free cash flow for the relevant financial period but not less than RUB 40.0 billion per year. Free cash flow is defined by cash flows from operating activities less cash
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
26. STOCKHOLDERS' EQUITY (Continued)
paid (received) for acquisition or disposal of property, plant and equipment, intangible assets and other adjustments.
The dividend can vary depending on a number of factors, including the outlook for earnings growth, capital expenditure requirements, cash flows from operations, potential acquisition opportunities, as well as the Group's debt position.
The Group may take decisions on dividend payout based not only on financial year-end results but also based on interim results for three, six or nine months of the fiscal year. Annual dividend payments, if any, must be recommended by the Board of Directors and approved by the shareholders.
In accordance with Russian laws, earnings available for dividends are limited to profits determined under Russian statutory accounting regulations, denominated in Russian Rubles, after certain deductions. The net income of MTS OJSC for the years ended December 31, 2014, 2013 and 2012 that is distributable under Russian legislation totaled RUB 28,373 million,RUB 55,999 million and RUB 42,949 million, respectively.
The following table summarizes the Group's declared cash dividends in 2014, 2013 and 2012 years:
| 2014 | 2013 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Dividends declared (including dividends on treasury shares of 1,922 and 1,538 and 1,140, respectively) | 51,247 | 40,956 | 30,397 | |||||||
Dividends, RUB per ADS | 49.60 | 39.64 | 29.42 | |||||||
Dividends, RUB per share | 24.80 | 19.82 | 14.71 |
As of December 31, 2014 and 2013, dividends payable were RUB 19.5 million and RUB 57.0 million, respectively.
MGTS' preferred stock—MGTS, a subsidiary of MTS, had 15,574,492 preferred shares outstanding as of December 31, 2014 and 2013.
MGTS' preferred shares carry guaranteed non-cumulative dividend rights amounting to the higher of (a) 10% of MGTS' net profit as determined under Russian accounting regulations and (b) the dividends paid on common shares. No dividends may be declared on common shares before dividends on preferred shares are declared. If the preferred dividend is not paid in full in any year the preferred shares also obtain voting rights, which will lapse after the first payment of the dividend in full. Otherwise, preferred shares carry no voting rights except on resolutions regarding liquidation or reorganization of MGTS and changes / amendments to MGTS' charter restricting the rights of holders of preferred shares. Such resolutions require the approval of 75% of the preferred shareholders. In the event of liquidation, dividends to preferred shareholders that have been declared but not paid have priority over ordinary shareholders.
In June 2014 at MGTS' annual shareholders meeting the decision was made to pay dividends on preferred and common shares for 2013 in the amounts of RUB 1,216 million and RUB 1,217 million, respectively.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
26. STOCKHOLDERS' EQUITY (Continued)
In June 2013 and 2012, at MGTS' annual shareholders meeting the decision was made not to pay dividends on preferred shares for 2012 and 2011. Therefore the holders of preferred shares obtained voting rights.
As of December 31, 2014 and 2013, dividends payable were RUB 17.8 million and RUB 48.6 million, respectively.
27. REDEEMABLE NONCONTROLLING INTEREST
In September 2007, the Group acquired an 80% stake in International Cell Holding Ltd, the 100% indirect owner of K-Telecom, Armenia's mobile phone operator, and signed a call and put option agreement to acquire the remaining 20% stake. In December 2010, the Group signed an amendment to the put and call option agreement. According to the amended option agreement, the price for the remaining 20% stake option will be determined by an independent investment bank subject to a cap of EUR 200 million. The put option can be exercised during the period from the next business day following the date of settlement of all liabilities under the loan agreement (Note 16) up to December 31, 2016. The call option can be exercised during the period from July 1, 2010 up to December 31, 2016. If both the call notice and the put notice are served on the same day then the put notice shall be deemed exercised in priority to the call notice. The noncontrolling interest was measured at fair value using a discounted cash flow technique and amounted to RUB 3,192 million and RUB 2,932 million as of December 31, 2014 and 2013, respectively (Note 22). The fair value was determined based on unobservable inputs ("Level 3" of the hierarchy established by the U.S. GAAP guidance).
28. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the years ended December 31, 2014, 2013 and 2012 comprised the following:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | 2012 | |||||||
Salaries and social contributions | 49,113 | 45,790 | 40,486 | |||||||
Rent | 16,220 | 14,677 | 13,334 | |||||||
General and administrative | 8,057 | 7,955 | 8,016 | |||||||
Repair and maintenance | 6,875 | 6,217 | 6,364 | |||||||
Taxes other than income | 5,913 | 6,374 | 5,422 | |||||||
Consulting expenses | 2,192 | 1,569 | 1,689 | |||||||
Billing and data processing | 2,070 | 2,035 | 1,726 | |||||||
Inventory obsolescence | 357 | 660 | 759 | |||||||
Insurance | 174 | 181 | 181 | |||||||
| | | | | | | | | | |
Total general and administrative expenses | 90,971 | 85,458 | 77,977 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
29. SEGMENT INFORMATION
The Group identified the following reportable segments:
Russia convergent: represents the results of mobile and fixed line operations, which encompasses services rendered to customers across regions of Russia, including voice and data services, transmission, broadband, pay-TV and various value-added services.
Moscow fixed line: represents the results of fixed line operations carried out in Moscow by the Group's subsidiary MGTS. MGTS is the only licensed PSTN operator in Moscow and is considered a natural monopoly under Russian antimonopoly regulations. Consequently, substantial part of services provided by MGTS are subject to governmental regulation.
Ukraine: represents the results of mobile and fixed line operations carried out across multiple regions of Ukraine.
The segments are organized and managed separately based on the nature of products and services, regulatory environments and geographic areas.
The "Other" category does not constitute a reportable segment. It includes the results of a number of other operating segments that do not meet the quantitative thresholds for separate reporting, such as Armenia, Uzbekistan, Turkmenistan, Sputnikovoe TV and the headquarters.
Other unallocated expenses such as interest (income) / expense, equity in net income of associates, other (income) / expenses and currency exchange and transaction loss / (gain) are shown for purposes of reconciling the Group's segment measure, segment net operating income, to the Group's consolidated total for each of the periods presented.
The intercompany eliminations presented below primarily consist of sales transactions between segments conducted under the normal course of operations.
In 2014, the Group ceased presenting Russia convergent and Moscow fixed line as one reporting segment. Management has determined that disaggregation may help users of the financial statements better understand the Group's future performance. Related financial information has, therefore, been retrospectively restated.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
29. SEGMENT INFORMATION (Continued)
Financial information by reportable segment is presented below:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | 2012 | |||||||
Net operating revenues from external customers: | ||||||||||
Russia convergent | 336,099 | 317,437 | 303,478 | |||||||
Moscow fixed line | 35,938 | 35,493 | 33,293 | |||||||
Ukraine | 29,064 | 37,665 | 36,118 | |||||||
Other | 9,657 | 7,848 | 5,351 | |||||||
| | | | | | | | | | |
Total net operating revenues from external customers | 410,758 | 398,443 | 378,240 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Including revenue from mobile services | 352,964 | 339,883 | 322,517 | |||||||
Including revenue from fixed line services | 57,794 | 58,560 | 55,723 | |||||||
| | | | | | | | | | |
Intersegment operating revenues: | ||||||||||
Russia convergent | 4,633 | 3,638 | 2,513 | |||||||
Moscow fixed line | 4,886 | 4,831 | 4,563 | |||||||
Ukraine | 3,722 | 2,067 | 1,604 | |||||||
Other | 1,541 | 1,281 | 1,031 | |||||||
| | | | | | | | | | |
Total intersegment operating revenues | 14,782 | 11,817 | 9,711 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Depreciation and amortization expense: | ||||||||||
Russia convergent | 57,773 | 57,655 | 51,994 | |||||||
Moscow fixed line | 7,609 | 5,182 | 4,251 | |||||||
Ukraine | 6,780 | 8,896 | 9,571 | |||||||
Other | 2,619 | 1,588 | 2,104 | |||||||
Intercompany eliminations | (71 | ) | (68 | ) | (10 | ) | ||||
| | | | | | | | | | |
Total depreciation and amortization expense | 74,710 | 73,253 | 67,910 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Segment net operating income: | ||||||||||
Russia convergent | 85,964 | 79,199 | 76,832 | |||||||
Moscow fixed line | 13,601 | 15,678 | 14,938 | |||||||
Ukraine | 3,390 | 11,745 | 9,647 | |||||||
Other | (559 | ) | (4,810 | ) | (7,625 | ) | ||||
Intercompany eliminations | (47 | ) | (54 | ) | (8 | ) | ||||
| | | | | | | | | | |
Segment net operating income | 102,349 | 101,758 | 93,794 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net operating income | 102,349 | 101,758 | 93,794 | |||||||
Currency exchange and transaction loss / (gain) | 18,024 | 5,473 | (3,952 | ) | ||||||
Interest income | (4,519 | ) | (2,793 | ) | (2,588 | ) | ||||
Interest expense | 16,453 | 15,498 | 17,673 | |||||||
Equity in net loss / (income) of associates | 2,880 | (2,472 | ) | (869 | ) | |||||
Other expense / (income), net | 771 | (10,636 | ) | 688 | ||||||
| | | | | | | | | | |
Income from continuing operations before provision for income taxes | 68,740 | 96,688 | 82,842 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
29. SEGMENT INFORMATION (Continued)
| Years ended December, 31 | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Additions to long-lived assets: | |||||||
Russia convergent | 86,456 | 55,939 | |||||
Moscow fixed line | 13,649 | 14,121 | |||||
Ukraine | 5,103 | 8,856 | |||||
Other | 8,234 | 1,951 | |||||
| | | | | | | |
Total additions to long-lived assets | 113,442 | 80,867 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Long-lived assets(1): | |||||||
Russia convergent | 276,896 | 246,422 | |||||
Moscow fixed line | 64,992 | 61,812 | |||||
Ukraine | 18,546 | 24,107 | |||||
Other | 37,825 | 12,648 | |||||
| | | | | | | |
Total long-lived assets | 398,259 | 344,989 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total assets: | |||||||
Russia convergent | 439,950 | 355,203 | |||||
Moscow fixed line | 78,468 | 75,929 | |||||
Ukraine | 42,988 | 38,586 | |||||
Other | 47,521 | 15,806 | |||||
| | | | | | | |
Total assets | 608,927 | 485,524 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Financial information by geographic areas is presented below:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | 2012 | |||||||
Net operating revenues from external customers: | ||||||||||
Russia | 372,080 | 352,930 | 336,771 | |||||||
Other | 38,678 | 45,513 | 41,469 | |||||||
| | | | | | | | | | |
Total net operating revenues from external customers | 410,758 | 398,443 | 378,240 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
29. SEGMENT INFORMATION (Continued)
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2013 | |||||
Long-lived assets: | |||||||
Russia | 347,994 | 308,336 | |||||
Other | 50,265 | 36,653 | |||||
| | | | | | | |
Total long-lived assets | 398,259 | 344,989 | |||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Revenues from external customers and long-lived assets are allocated to individual countries by location of operations.
None of the MTS Group's customers exceeds 10% of consolidated revenue.
30. COMMITMENTS AND CONTINGENCIES
Capital commitments—As of December 31, 2014, the Group had entered into purchase agreements of approximately RUB 41,798 million to acquire property, plant and equipment, intangible assets and costs related thereto.
Operating leases—The Group has entered into non-cancellable agreements to lease space for telecommunications equipment, offices and transmission channels, which expire in various years up to 2064. Rental expenses under the operating leases of RUB 16,220 million, RUB 14,677 million and RUB 13,334 million for the years ended December 31, 2014, 2013 and 2012, respectively, are included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income. Rental expenses under the operating leases of RUB 7,860 million, RUB 7,583 million and RUB 7,207 million for the years ended December 31, 2014, 2013 and 2012, respectively, are included in cost of services in the accompanying consolidated statements of operations and comprehensive income. Future minimum lease payments due under these leases for the five years ending December 31, 2019 and thereafter are as follows:
Payments due in the years ended December 31, | ||||
2015 | 5,172 | |||
2016 | 691 | |||
2017 | 384 | |||
2018 | 269 | |||
2019 | 222 | |||
Thereafter | 1,700 | |||
| | | | |
Total | 8,438 | |||
| | | | |
| | | | |
| | | | |
Taxation—Russia and other CIS countries currently have a number of laws related to various taxes imposed by both federal and regional governmental authorities. Applicable taxes include VAT, corporate income tax (profits tax), a number of turnover-based taxes, and payroll (social) taxes. Laws related to these taxes have not been in force for significant periods, in contrast to more developed market economies; therefore, the government's implementation of these regulations is often
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
30. COMMITMENTS AND CONTINGENCIES (Continued)
inconsistent or nonexistent. Accordingly, few precedents with regard to tax rulings have been established. Tax declarations, together with other legal compliance areas (for example, customsmay require the construction of additional storage, processing and currency control matters),indexing centers and a significant increase in the Group capital expenditures. This may adversely impact Group's financial indicators, in particular free cash flow.
The requirements of the anti-terror laws are subject to reviewcurrently being reviewed and investigation by a numberclarified. The Group will estimate the potential impact of authorities, which are enabled by law to impose extremely severe fines, penalties and interest charges. These facts create tax risks in Russia and the CIS countries that are more significant than those typically found in countries with more developed tax systems.
Generally, according to Russian and Ukrainian tax legislation, tax declarations remain open and subject to inspection for a period of three years following the tax year. As of December 31, 2014, tax declarations of MTS OJSC and other subsidiaries in Russia and Ukraine for the preceding three fiscal years were open for further review. In December 2014 tax authorities commenced review of tax declarations of MTS OJSC and Comstar-Regions CJSC for the years ended December 31, 2013 and 2012.
In December 2010, the Russian tax authorities completed a tax audit of MTS OJSC for the years ended December 31, 2007 and 2008. Basedlaws on the results of this audit, the Russian tax authorities determined that RUB 353.9 million in additional taxes, penalties and fines were payable by the Group. The resolution did not come into force as the Group prepared and filed a petition with the Federal Tax Service to declare the tax authorities' resolution to be invalid. In September 2011, the Federal Tax Service partially satisfied the Group's petition, decreasing the amount of additional taxes, penalties and fines payable by the Group by RUB 173.9 million. The Group filed an appeal for RUB 84.2 million of the remaining RUB 180.0 million with the Moscow Arbitrate Court. In August 2013, the Moscow Arbitrate Court issued a ruling to partly grant the Group's claim, which was subsequently confirmed by the Arbitrate Appeal Court in November 2013. However, the Group appealed the decision of the Arbitrate Appeal Court in the Federal Arbitrate Court of Moscow District, which issued a ruling to partly grant the Group's claim in March 2014. No further actions were taken by the Group in respect of remaining RUB 137.1 million.
In June 2013, the Russian tax authorities completed a tax audit of MTS OJSC for the years ended December 31, 2009, 2010 and 2011. Based on the results of this audit, the Russian tax authorities determined that RUB 253.4 million in additional taxes, penalties and fines were payable by the Group. The claim was accrued in full amount in the consolidated financial statements, for the year ended December 31, 2013, including RUB 83.0 million in provision for income taxesadditional provisions, when requirements and RUB 170.4 million in other operating expense and final amounts due were paid in January 2014. In December 2013, the Group appealed the resolution of this assessment to the Federal Tax Service. The Federal Tax Service refused to grant the appeal. The Group did not submit further appeals.
The Group purchases supplemental software from foreign suppliers of telecommunications equipment in the ordinary course of business, which is subject to customs regulation. In addition pricing of revenue and expenses between each of the Group's subsidiaries and various discounts and bonuses to the Group's subscribers in the course of performing its marketing activities may be subject to transfer pricing rules. Management believes that it has adequately provided for tax and customs liabilities in the accompanying consolidated financial statements. As of December 31, 2014 and 2013, the provision accrued for taxes other than income tax and customs settlements amounted to
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
30. COMMITMENTS AND CONTINGENCIES (Continued)
RUB 2,999 million and RUB 2,278 million, respectively, and was included in accrued liabilities in the accompanying consolidated statements of financial position. In addition, the accrual for unrecognized income tax benefits, potential penalties and interest recorded in accordance with FASB ASC 740, Income Taxes, totaled RUB 342 million and RUB 615 million as of December 31, 2014 and 2013, respectively, and was included in income tax payable in the accompanying consolidated statements of financial position. However, the risk remains that the relevant tax and customs authorities could take differing positions with regard to interpretive issues and the effect could be significant. The Federal Customs Service is currently reviewing MTS OJSC activities, whichany obligations are subject to customs regulations, for the years ended December 31, 2014, 2013 and 2012.
Licenses—In July 2012, the Federal Service for Supervision in the Area of Communications, Information Technologies and Mass Media allocated MTS the necessary license and frequencies to provide LTE telecommunication services in Russia. Under the terms and conditions of the LTE license, the Group is obligated to fully deploy LTE networks within seven years, commencing from January 1, 2013, and deliver LTE services in each population center with over 50,000 inhabitants in Russia by 2019. Also, the Group is obligated to invest at least RUB 15 billion annually toward the LTE roll-out until the network is fully deployed. Management believes that as of December 31, 2014 the Group is in compliance with these conditions.
In May 2007, the Federal Service for Supervision in the Area of Communications, Information Technologies and Mass Media awarded MTS a license to provide 3G services in Russia. The 3G license was granted subject to certain capital and other commitments. Management believes that as of December 31, 2014 the Group complied with these conditions.
Bitel—In December 2005, MTS Finance acquired a 51.0% stake in Tarino Limited ("Tarino"), from Nomihold Securities Inc. ("Nomihold"), for RUB 4,322 million ($150.0 million at exchange rate for December 2005) in cash based on the belief that Tarino was at that time the indirect owner, through its wholly owned subsidiaries, of Bitel LLC ("Bitel"), a Kyrgyz company holding a GSM 900/1800 license for the entire territory of Kyrgyzstan.
Following the purchase of the 51.0% stake, MTS Finance entered into a put and call option agreement with Nomihold for the remaining 49.0% interest in Tarino shares and a proportional interest in Bitel shares ("Option Shares"). The call option was exercisable by MTS Finance from November 22, 2005 to November 17, 2006, and the put option was exercisable by Nomihold from November 18, 2006 to December 8, 2006. The call and put option price was RUB 4,898 million ($170.0 million at exchange rate for December 2005).
Following a decision of the Kyrgyz Supreme Court on December 15, 2005, Bitel's corporate offices were seized by a third party. As the Group did not regain operational control over Bitel's operations in 2005, it accounted for its 51.0% investment in Bitel at cost as at December 31, 2005. The Group appealed the decision of the Kyrgyz Supreme Court in 2006, but the court did not act within the time period permitted for appeal. The Group subsequently sought the review of this dispute over the ownership of Bitel by the Prosecutor General of Kyrgyzstan to determine whether further investigation could be undertaken by the Kyrgyz authorities.
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
30. COMMITMENTS AND CONTINGENCIES (Continued)
In January 2007, the Prosecutor General of Kyrgyzstan informed the Group that there were no grounds for involvement by the Prosecutor General's office in the dispute and that no legal basis existed for the Group to appeal the decision of the Kyrgyz Supreme Court. Consequently, the Group wrote off the costs relating to the purchase of the 51.0% stake in Bitel, which was reflected in its annual consolidated financial statements for the year ended December 31, 2006. Furthermore, with the impairment of the underlying asset, a liability of RUB 4,476 million ($170.0 million as of December 31, 2006) was recorded with an associated charge to non-operating expenses.
In November 2006, MTS Finance received a letter from Nomihold purporting to exercise the put option and sell the Option Shares for RUB 4,526 million ($170.0 million at exchange rate for November 2006) to MTS Finance. In January 2007, Nomihold commenced an arbitration proceeding against MTS Finance in the London Court of International Arbitration ("LCIA") in order to compel MTS Finance to purchase the Option Shares. Nomihold sought specific performance of the put option, unspecified monetary damages, interest, and costs. In January 2011, LCIA made an award in favor of Nomihold satisfying Nomihold's specific performance request and ordered MTS Finance to pay to Nomihold the award ("Award") including RUB 5,115 million ($170.0 million at exchange rate for January 2011) for the Option Shares and RUB 178 million ($5.9 million at exchange rate for January 2011) in damages, bearing interest until Award is satisfied. In addition to the RUB 4,476 million ($170.0 million as of December 31, 2006) liability related to this case and accrued in the year ended December 31, 2006, the Group recorded an additional loss in the amount of RUB 224 million ($7.2 million at exchange rate for the year ended December 31, 2012), RUB 94 million ($3.2 million at exchange rate for the year ended December 31, 2011) and RUB 1,239 million ($40.8 million at exchange rate for the year ended December 31, 2010) in the consolidated financial statements for the years ended December 31, 2012, 2011, and 2010, respectively, representing damages, other costs and interest accrued on the awarded sums. The total liability accrued amounted to RUB 7,236 million ($221 million as of June 22, 2013).
In June 2013, an agreement was reached between Altimo, Altimo Holdings, MTS OJSC, MTS Finance, Nomihold and other associated parties to settle all disputes that have arisen from investments in Bitel ("the Agreement"). The Agreement covers matters involving a number of parties and legal proceedings, including those in the Isle of Man, London, Luxembourg and other jurisdictions. Pursuant to the Agreement all proceedings between the parties and their associated parties have been discontinued and waived, and MTS OJSC received a total payment of RUB 4,909 million ($150 million at exchange rates at the dates of payments) ("Settlement Payment"). All parties made the necessary submissions to the respective courts and tribunals to document the settlement, which, among other actions, fully discharged any and all outstanding obligations under the Award rendered by LCIA against MTS Finance in January 2011, as well as settled the tripartite LCIA arbitration between MTS OJSC, MTS Finance and Nomihold and a tort action filed by Nomihold against MTS OJSC in the English Courts.
The Group released provision of RUB 7,236 million ($221 million), comprising RUB 5,566 million ($170 million) set by LCIA to exercise the put option for acquisition of the remaining 49% stake in Bitel plus RUB 1,670 million ($51 million) in damages, interest and other costs that had been provided for in relation to the dispute with Nomihold. The release of the provision was recognized as
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
30. COMMITMENTS AND CONTINGENCIES (Continued)
non-operating income in the accompanying consolidated statements of operations and comprehensive income for the year ended December 31, 2013, being the same line item through which the initial charge was taken.
The Group recognized a gain of RUB 4,911 million ($150 million) with respect to the Settlement Payment in the consolidated statement of operations and comprehensive income for the year ended December 31, 2013, of which RUB 1,060 million ($32.4 million) was recognized as operating income, and RUB 3,851 million ($117.6 million) as non-operating income on a pro-rata basis with respect to the expenses previously incurred and recognized in relation to the Bitel dispute.
Other litigation—In the ordinary course of business, the Group is a party to various legal, tax and customs proceedings, and subject to claims, certain of which relate to developing markets and evolving fiscal and regulatory environments in which MTS operates. Management believes that the Group's liability, if any, in all such pending litigation, other legal proceeding or other matters will not have a material effect upon its financial condition, results of operations or liquidity of the Group.
Potential adverse effects of economic instability and sanctions—In 2014 political and economic sanctions were introduced by the EU, US and other countries targeting certain Russian economic sectors. There is significant uncertainty regarding the extent and timing of further sanctions. Also, Russian Ruble has materially depreciated against the U.S. Dollar and Euro and ruble interest rates have increased significantly after the Central Bank of Russia raised its key rate to 17%.
These factors resulted in a higher cost of capital, increased inflation and uncertainty regarding further economic growth, which could have a negative impact on the Group's business including ability to obtain financing on commercially reasonable terms. Management believes it is taking the appropriate measures to support the sustainability of the Group's business in the current circumstances. The Group has a hedging policy in place, which partly mitigated variability of cash outflows, denominated in foreign currencies.sufficiently specified.
Investigations into former operations in Uzbekistan—In March 2014, the Group received requests for the provision of information from the United States Securities and Exchange Commission ("SEC") and the United States Department of Justice ("DOJ") relating to ana currently conducted investigation of the Group's former subsidiary in Uzbekistan.
In 2015, activities related to the Group's former operations in Uzbekistan (Note 4).have been referenced in a civil forfeiture complaints ("The Complaints"), filed by DOJ in the U.S. District Court, Southern District of New York (Manhattan), directed at certain assets of an unnamed Uzbek government official. The Complaints allege among other things that MTS and certain other parties made corrupt payments to the unnamed Uzbek official to assist their entering and operating in the Uzbekistan telecommunications market. The Complaints are solely directed towards assets held by the unnamed Uzbek official, and none of MTS's assets are affected by the Complaints.
The Company continues to cooperate with these investigations. The Company cannot predict the outcome of the investigations, including any fines or penalties that may be imposed, and such fines or penalties could be significant.
31.29. SUBSEQUENT EVENTS
DisposalTender Offer announcement—On January 17, 2017, the Group announced details of Intellect Telecoma tender offer (the "Tender Offer") to repurchase its ordinary shares (including shares represented by ADSs) for up to RUB 4,647 million and completed the repurchase in March 2017. Under the Tender Offer, the Group purchased a total of 16,022,364 shares at a price per share of RUB 290.00, for a total cost of RUB 4,646 million. Simultaneously, the Group purchased 16,038,892 shares from Sistema Finance under the Sistema Purchase Agreement for an aggregate purchase price of RUB 4,651 million.
Early repayment of MTS Bank subordinated debt—In January 2015,2017 MTS Bank, an associate of the Group, soldfully repaid its investment10-year subordinated loan, received from the Group in Intellect Telecom to Sistema for a cash considerationSeptember 2012 in the amount of RUB 3442,100 million.
Disposal of Rent-NedvizhimostNotes issuance—In February 2015,2017 the Group sold 51% stake in Rent-Nedvizhimost to Sistema forissued Notes due 2022 at par value of RUB 4.3 billion. The Group classified the associated assets10,000 million and liabilities as "held for sale" ascoupon rate of December 31, 2014 (Note 10)9.00%.
Acquisition of Navigation Information Systems—In January 2015, the Group acquired 89.53% of Navigation Information Systems from Sistema for RUB 44 million. NIS is the leading systems
OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
(Amounts in millions of Russian Rubles, unless otherwise stated)
31. SUBSEQUENT EVENTS (Continued)
integrator for GLONASS satellite projects. The acquisition allows the Group to develop its proprietary technological platform for machine-to-machine solutions.
Acquisition of 3G license in Ukraine—In February 2015, MTS-Ukraine won a tender to acquire a nationwide license for the provision of 3G telecommunications services. The license with the cost of UAH 2,715 million (RUB 6,015 million at the acquisition date) has been granted for 15 years. In accordance with the terms of the license MTS-Ukraine is required to launch provision of 3G services in all of the regional centers across Ukraine within 18 months upon allocation of the license.
Insolvency of Kyivska Rus Bank in Ukraine—On March 19, 2015, The National Bank of Ukraine adopted a resolution declaring Kyivska Rus Bank to be insolvent. As of December 31, 2014, the Group held RUB 1,170 million in deposits in the bank. Management determined that this announcement did not provide evidence related to conditions existing as of December 31, 2014, and therefore consider the announcement to be a nonrecognized subsequent event.