UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
☐ | Registration Statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 |
or
☒ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 31, 2021
or
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
or
☐ | Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 333-12032
MOBILE TELESYSTEMS PUBLIC JOINT STOCK COMPANY
(Exact name of Registrant as specified in its charter)
RUSSIAN FEDERATION
(Jurisdiction of incorporation or organization)
4 Marksistskaya Street, Moscow 109147 Russian Federation
(Address of principal executive offices)
Polina V. Ugryumova
Director, Investor Relations
5 Vorontsovskaya Street, bldg. 2, 109147 Moscow Russian Federation
Phone: +7 495 223 20 25, 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 |
| Trading Symbol(s) |
| Name of Each Exchange on Which Registered |
COMMON AMERICAN DEPOSITARY SHARES, EACH COMMON ADS REPRESENTING TWO COMMON SHARES | | MBT | | NEW YORK STOCK EXCHANGE |
| |
| | NEW YORK STOCK EXCHANGE(1) |
COMMON SHARES, PAR VALUE 0.10 RUSSIAN RUBLES PER SHARE | |
| |
(1) | Listed, not for trading or quotation purposes, but only in connection with the registration of common ADSs pursuant to the requirements of the Securities and Exchange Commission. |
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. 1,129,245,695 ordinary shares, par value 0.10 Russian rubles each and 391,398,362 American Depositary Shares as of December 31, 2021
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ 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. Yes ☐ 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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Emerging growth company ◻ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
†The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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 | Other ☐ |
| 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. Item 17 ☐ 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). Yes ◻ No ☒
Table of Contents
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Material Modifications to the Rights of Security Holders and Use of Proceeds | 210 | |
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 214 | |
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Unless otherwise indicated or unless the context requires otherwise, references in this document to (i) “MTS,” “the Group,” “the Company,” “we,” “us,” or “our” are to Mobile TeleSystems Public Joint Stock Company individually or together with its
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subsidiaries as the context may require; (ii) “Vodafone Ukraine” and “VF Ukraine” are to Private Joint Stock Company “VF Ukraine”(formerly PJSC MTS Ukraine) which is our former subsidiary in Ukraine disposed of in December 2019; (iii) “Uzdunrobita” are 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, which was compelled to suspend communication services in Turkmenistan in 2017; (v) “Comstar” or “Comstar-UTS” are to COMSTAR—United TeleSystems, our former fixed line subsidiary, which was merged into MTS PJSC in 2011; (vi) “MGTS” are to Public Joint Stock Company Moscow City Telephone Network, our Moscow public switched telephone network (“PSTN”) fixed line subsidiary; and (vii) “MTS-Armenia,” “K-Telecom” or “VivaCell-MTS” are to our Armenian subsidiary; (viii) “MTS Bank” are to MTS Bank PJSC, our subsidiary that provides banking services; (ix) “UMS” are to Universal Mobile Systems LLC, our former subsidiary in Uzbekistan which was deconsolidated in 2016; (x) “NVision” or “NVision Group” are to our former subsidiary which provided integration services and was sold in 2019 to Sistema, becoming a related party,(xi) “Sistema” are to Sistema Public Joint Stock Financial Corporation, our significant shareholder. We refer to Mobile TeleSystems LLC, our 49% owned equity investee in Belarus, as “MTS Belarus.” As MTS Belarus is an equity investee, our revenues and subscriber data do not include MTS Belarus.
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” are to our ordinary shares, “ADSs” are to our American depositary shares, each of which represents two ordinary shares, and “ADRs” are 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.
None of the websites referred to in this document, including where a link is provided, nor any of the information contained on such websites is incorporated by reference in this document.
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 | ||||||
Years ended December 31, |
| High |
| Low |
| Average(1) |
| Period End |
2019 |
| 69.47 |
| 61.72 |
| 64.74 |
| 61.91 |
2020 |
| 80.88 |
| 60.95 |
| 72.15 |
| 73.88 |
2021 | | 77.77 | | 69.55 | | 73.65 | | 74.29 |
(1) | The average of the exchange rates on the last business day of each full month during the relevant period. |
| | | | |
| | Rubles per | ||
| | U.S. dollar | ||
|
| High |
| Low |
July 2021 | | 74.63 | | 72.72 |
August 2021 | | 74.36 |
| 72.79 |
September 2021 | | 73.44 |
| 72.51 |
October 2021 | | 72.92 |
| 69.55 |
November 2021 | | 75.58 |
| 70.52 |
December 2021 | | 74.89 |
| 73.19 |
January 2022 | | 78.95 |
| 74.29 |
February 2022 | | 86.93 |
| 74.72 |
March 2022(1) | | 120.38 |
| 84.09 |
Source: CBR.
(1) | For the period from March 1, 2022 to March 31, 2022. |
The exchange rate between the ruble and the U.S. dollar quoted by the CBR for March 31, 2022 was 84.09 rubles per U.S. dollar.
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SUMMARY RISK FACTORS
Our business is subject to a number of risks of which you should be aware of before making an investment decision. These risks are discussed more fully in the below “Risk Factors” section of this annual report. The following summarizes some, but not all, of the risks provided below:
Risks Relating to Business Operations in Emerging Markets
● | Emerging markets such as the Russian Federation and other CIS countries are subject to greater risks than more developed markets, including significant legal, economic, social, regulatory, tax and political risks which could have a material adverse effect on our business and could cause the value of our shares and ADSs to fluctuate widely. |
Risks Relating to Our Business including, among others, the following risks:
● | The telecommunications and digital 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. |
● | 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 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 have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA and the SEC Order. |
● | We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation. |
● | The outbreak of COVID-19 may have a material adverse effect on our business, financial condition, results of operations and prospects. |
● | If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices, which may diminish our market share and result in a loss of revenues and margins. |
● | We may not realize the benefits we expect to receive from our investments in 4G and 5G wireless services and Internet of Things (IoT) technologies, which could have a material adverse effect on our business and results of operations. |
● | If we are unable to successfully develop and/or deploy 4G and 5G wireless services in the countries in which we operate, or if any operators in those markets obtain a significant technological and/or commercial advantage over us in 4G and 5G wireless services, it may have a material adverse effect on our business and results of operations in the long term. |
● | 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. |
● | Failure to monitor, manage and prevent MTS Bank’s operational and technological risks, could have a material adverse effect on our business, 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. |
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Risks Relating to Our Financial Condition including, among others, the following risks:
● | 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. |
● | 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. |
● | Ruble volatility 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. |
● | 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. |
Risks Relating to Our Countries of Operation including, among others, the following risks:
· | Economic instability in the countries where we operate could adversely affect our business. |
● | Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries. |
● | Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs. |
● | Failure to comply with existing laws and regulations as well as requirements of international and regional standards 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. |
● | Russian and foreign legislation on personal data and information security in information systems and communication networks may turn out to be hard to implement and require significant resources. Inability to comply with the requirements may lead to sanctions. |
● | 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. |
Risks Relating to Our Shares and ADSs and the Trading Market including, among others, the following risks:
● | Government regulations may limit the ability of investors to deposit shares into our ADS facility. |
● | The market price of our ADSs has been and may continue to be volatile, making it difficult for investors to resell our ADSs at or above the price paid. |
● | 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 may be unable to repatriate distributions made on the shares and ADSs. |
● | Foreign judgments may not be enforceable against us. |
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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, risks and their assessment, 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-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,” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk” and include statements regarding:
● | our strategies, future plans, economic outlook, industry trends and potential for future growth; |
● | our liquidity, capital resources and capital expenditures; |
● | our payment of dividends; |
● | our capital structure, including our indebtedness amounts; |
● | our ability to generate sufficient cash flow to meet our debt service obligations; |
● | our ability to achieve the anticipated levels of profitability; |
● | our ability to timely develop and introduce new products and services; |
● | our ability to obtain and maintain interconnect agreements; |
● | our ability to secure the necessary spectrum and network infrastructure equipment; |
● | our ability to meet license requirements and to obtain and maintain licenses and regulatory approvals; |
● | our ability to maintain adequate customer care and to manage our churn rate; and |
● | our ability to manage our rapid growth and train additional personnel. |
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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:
● | growth in demand for our services; |
● | changes in consumer preferences or demand for our products; |
● | availability of external financing on commercially acceptable terms; |
● | the developments of our markets; |
● | the highly competitive nature of our industry and changes to our business resulting from increased competition; |
● | the impact of regulatory initiatives; |
● | the rapid technological changes in our industry; |
● | cost and synergy of our recent acquisitions; |
● | the acceptance of new products and services by customers; |
● | the condition of the economies of Russia, and certain other countries of the CIS; |
● | risks relating to legislation, regulation and taxation in Russia and certain other CIS countries, including laws, regulations, decrees and decisions governing each of the telecommunications industries in the countries where we operate, currency and exchange controls relating to entities in Russia and other countries where we operate and taxation legislation relating to entities in Russia and other countries where we operate, and their official interpretation by governmental and other regulatory bodies and by the courts of Russia and the CIS; |
● | political stability in Russia and certain other CIS countries; |
● | further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs; and |
● | the impact of general business and global economic conditions and other important factors described herein and from time to time in the reports filed by us with the U.S. Securities and Exchange Commission (the “SEC”). |
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.
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PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3.Key Information
A. | [Reserved] |
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. 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 occurs, our business, prospectus, financial condition or results of operations could 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-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 and other CIS countries are subject to greater risks than more developed markets, including significant legal, economic, social, regulatory, tax and political risks.
Investors in emerging markets such as the Russian Federation, Armenia, Belarus 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, social, regulatory, tax and political risks. Investors should also note that emerging economies such as the economies of the Russian Federation and other CIS countries are subject to rapid change and that the information set out herein may become outdated relatively quickly.
When conducting business in different CIS countries, we may face risks similar to those (and sometime even more substantial) we have in Russia.
There are a number of risks associated with investing in emerging markets, including the following:
● | instability of emerging markets (for more information, see “—Risks Relating to Economic Risks in Our Countries of Operation” and “—Legal Risks and Uncertainties”); |
● | high volatility of national currencies (for more information, see “—Risks Relating to our Financial Condition”); |
● | possible geopolitical disputes (for more information, see “—Political and Social Risks”); and |
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● | possible liquidity constraints (for more information, see “—Risks Relating to Economic Risks in Our Countries of Operation” and “—Risks Relating to our Financial Condition”). |
For example, in September 2020, martial law was declared in Armenia due to escalation of the conflict in Nagorno-Karabakh. Continued tensions or further escalation of the conflict could have a negative effect on the Armenian economy as well as our business, financial position and results of operations. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
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 and digital 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 as well as the digital services sector are subject to rapid and significant changes in technology and are characterized by the continuous introduction of new products and services. The mobile telecommunications and digital services industries in Russia are also experiencing significant technological change, as evidenced by the constant technological evolution of standards for radio telecommunications, such as Wi-Fi, Enhanced Data Rates for Global Evolution (“EDGE”), Universal Mobile Telecommunications System (“UMTS”), and Long Term Evolution (“LTE”), 5G, 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 expenditure 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 telecommunication services markets (including the largest for MTS mobile communications market) and digital services markets where we operate, are highly competitive, particularly in Russia.
Competition is generally based on price, product functionality, range of service offerings and customer service.
Generally, increased levels of competition, including potential entry of new companies particularly new mobile operators, government-backed operators, mobile virtual network operators, operators of satellite TV and alternative fixed line operators in the markets where we operate, as well as the strengthening of existing companies, increased use of IP-telephony and other services, provided via the internet, may adversely affect our ability to keep the level of revenue which we receive from our operations on the telecom and other digital markets. This in turn could result in reduced operating margins and a loss of market share and may have a material adverse effect on our business, financial condition and results of our operations.
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Competition in the Russian market
Our principal wireless competitors in Russia are Public Joint Stock Company “Vimpel-Communications” (“VEON”), Public Joint Stock Company MegaFon (“MegaFon”), as well as the federal cellular operator established in 2014 by the combination of Tele2 Russia and the mobile assets of Public Joint Stock Company “Rostelecom” (“Rostelecom”). We also face competition from several regional operators.
In addition, we face competition in the fixed line telecommunications business, in particular from Rostelecom. For instance, in 2018, the Russian government made Rosetelecom the only provider of Internet services for state and municipal medical institutions in 2018 and 2019.
In November 2019, the Board of Directors of Rostelecom approved a transaction to consolidate 100% of LLC “T2 RTK Holding”, which was completed in 2020 and resulted in increasing competition.
In the area of digital services we compete with technological companies, such as Yandex Group, Sber Group, Mail.ru Group and others, which are focused on developing digital services, as part of either new or existing core elements of their business. Despite the fact that in Russia, local technological companies are currently successfully competing with global leaders such as Google, Apple, Amazon and Alibaba Group, etc., further penetration of global players into local markets of digital services, including Russia, may intensify competition in these markets. Digital markets are growing strongly, driven both by a natural trend and the additional impact of the COVID-19 pandemic, which has dramatically increased online consumption and the importance of digital sales channels. Due to these market dynamics, current positions of market participants are subject to significant change in the near term.
See also “—If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices, which may diminish our market share and result in a loss of revenues and margins” below.
Competition in the foreign markets of our operation
In Belarus, our associate, MTS Belarus, while maintaining its leadership in the market in 2021, faces increasing competition and aggressive pricing from the main competitors – Best CJSC, a subsidiary of System Capital Management and Turkcell Iletisim Hizmetleri A.S. (“Turkcell”), which operates in Belarus under the “life:)” brand and A1 (a subsidiary of A1 Telekom Austria Group) which actively promotes convergent services. Additionally, in 2011, the government of the Republic of Belarus announced its intention to hold a public tender to privatize a 51% stake in MTS Belarus with an opening price of approximately USD 1 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% stake in MTS Belarus took place in February 2014. However, it was unsuccessful for the same reason. 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 prospective 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.
The change in ownership structure of Belarusian Cloud Technologies LLC (beCloud brand), which is the unified 4G infrastructure operator in Belarus, was effected at the end of 2021. The state acquired full control over the beCloud operation: Republican unitary enterprise “National traffic exchange center” increased its ownership up to 60%, the Republican Unitary Enterprise Beltelecom (owns 51% stake in Mobile TeleSystems JLLC) acquired a 40% stake. In January 2022, Beltelecom gained a license to provide mobile communications services, which will allow the company to compete in the mobile communications market.
We also face competition in Armenia. In October 2020, VEON telecommunications holding (Beeline trademark) reached an agreement to sell its business in Armenia to the local telecommunications company Team LLC. A possible sale of a Rostelecom subsidiary in Armenia, which provides fixed line service, was announced in January 2022. If one of the competitors buys this asset, it could have negative effect on our business, financial condition and results of operations in Armenia.
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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 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.
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 or any third party acting on our behalf or in our interests 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 34 to our audited consolidated financial statements. In February 2019, the Group reached a resolution with the SEC and the United States Department of Justice (“DOJ”) relating to the previously disclosed investigation of our former subsidiary in Uzbekistan.
We consented to the entry of an administrative cease-and-desist order (the “Order”) by the SEC.
The United States District Court for the Southern District of New York approved a deferred prosecution agreement (“DPA”) entered by the Group and a plea agreement entered into by our subsidiary in Uzbekistan. Under the agreements with the DOJ, we agreed to pay a total criminal penalty of USD 850 million (RUB 59.1 billion as of December 31, 2018) to the United States. We provided a provision of USD 850 million (RUB 55.8 billion as of the date of accrual), which was recognized as a part of discontinued operations in the consolidated statement of profit or loss for the year ended December 31, 2018.
See also “—We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA and the SEC Order,” “—We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Uzbekistan.”
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We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA and the SEC Order.
We are subject to the DPA with the DOJ and the SEC Order. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Uzbekistan” and Note 34 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. In conjunction with the DPA and pursuant to the SEC Order, we are required to retain, at our own expense, an independent compliance monitor. Pursuant to the DPA and the SEC Order, the monitorship was initially due to continue for a period of three years from the date of appointment and the term of the monitorship could be terminated early or extended depending on certain circumstances, as ultimately determined and approved by the DOJ and the SEC. We have not received notice from the SEC, the DOJ or the monitor of any breach of the terms of the DPA or SEC the Order. However, given a variety of factors, including the COVID-19 pandemic we have agreed to a one-year extension of the DPA and the monitorship with the DOJ and the SEC to (i) provide us with adequate time to implement necessary enhancements to certain critical components of our anti-corruption compliance and ethics program and (ii) allow the monitor sufficient time to be able to complete its review of our remedial efforts, including our implementation of the monitor’s recommendations and an assessment of the sustainability of our remedial actions. The term of the monitorship will continue until September 2023. The monitor assesses and monitors our compliance with the terms of the DPA and the SEC Order as well as reviews and evaluates the effectiveness of our policies, procedures, practices, internal accounting controls, record keeping and financial reporting as they relate to our current and ongoing compliance with the anti-bribery, books and records and internal accounting controls provisions of the FCPA and other applicable anti-corruption laws, and makes recommendations reasonably designed to improve the effectiveness of our internal accounting controls and FCPA corporate compliance. See also “—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. 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 have incurred significant costs in connection with the disposition of the matters covered in the DPA and SEC order, including retention of legal counsel and other advisors and other costs related to the investigations undertaken in connection with these matters. We currently cannot estimate additional costs that we are likely to incur in connection with compliance with the DPA and the SEC Order, including the ongoing obligations relating to the monitorship, our obligations to cooperate with the agencies regarding their investigations of other parties, and the costs of implementing the changes, if any, to our internal controls, policies and procedures required by the monitor. However, such costs could be significant. See also “—We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation.”
We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation.
Failure to comply with the terms of the DPA, whether such failure relates to alleged improper payments, internal controls failures, or other non-compliance, could result in criminal prosecution by the DOJ, including for the matters addressed in the DPA. Under such circumstance, the DOJ would be permitted to rely upon the admissions and the waiver of certain defenses we made in the DPA. Similarly, breach of the SEC Order could result in additional penalties against the Company.
Criminal prosecution by the DOJ as a result of a breach of the DPA or penalties imposed as a result of noncompliance with the SEC Order could subject us to penalties and other costs and could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects.
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We may also face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC, and other authorities. None of the DPA and the SEC Order prevents these or any other authorities from carrying out certain additional investigations with respect to the facts not covered in the agreements or in other jurisdictions, or prevents authorities in other jurisdictions from carrying out investigations related or unrelated to the matters which being investigated. Additionally, on March 19, 2019, a proposed class action complaint, captioned Salim v. Mobile TeleSystems PJSC et al., case number 1:19-cv-01589, was filed in the United States District Court for the Eastern District of New York against us and certain of our managers. The complaint was filed by an individual securities holder on behalf of himself and all similarly situated securities holders alleging violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act with respect to certain public disclosures made by us regarding our former business in Uzbekistan and investigations carried out by the SEC and DOJ related thereto. The complaint further alleged that such disclosure omissions led to a decline in the market value of our securities resulting in losses and damages to the plaintiff and other securities holders. The plaintiff was seeking damages in an unspecified amount, prejudgment and post-judgment interest and attorneys’ fees, expert fees and other costs and other and further relief. On March 1, 2021 the United States District Court of Eastern District of New York granted MTS’s motion to dismiss with prejudice and dismissed the complaint in full.
Any collateral investigations, litigation or other government or third party actions resulting from these, or other, matters could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects. In addition, any ongoing media and governmental interest in the investigations, the agreements and claims could impact the perception of us and result in reputational harm.
The outbreak of COVID -19 may have a material adverse effect on our business, financial condition, results of operations and prospects
A novel strain of the coronavirus, COVID-19, was discovered in Wuhan, China in December 2019 and on 11 March 2020, was declared by the World Health Organization to be a global pandemic. It has adversely affected and continues to affect the economies and financial markets of many countries, including Russia and CIS and has resulted in a series of measures implemented by governments around the world aimed at mitigating the further spread of the virus. These measures include restrictions on travel, closure of national borders, imposition of quarantines, introduction of import restrictions, prolonged closures of workplaces and curfews or other social distancing measures. The second and subsequent waves of the COVID-19 pandemic resulted in further growth of number of cases and death toll in Russia and other countries. There is still significant uncertainty regarding the impacts and duration of the COVID-19 pandemic. If the spread of COVID-19 persists for a significant period or the infection rates stagnate or increase, this could lead to renewed nationwide lockdowns, which could have a material negative impact on the global and Russian economies. For example, in Armenia the COVID-19 quarantine was extended until June 20, 2022. The continuation of quarantine measures imposed by the Armenian government due to the COVID-19 pandemic could negatively affect our financial results in that country.
The impact of COVID-19 on the Group is limited so far. However, due to the uncertainty of the duration and degree of impact of the COVID-19 pandemic, we continue to evaluate various scenarios and their potential impacts on Group financials. We have also carried out risk assessments for each of our business units, considering potential strategic, operational and regulatory related impacts. We have incorporated COVID-19 commentary below, which gives an overview of the related uncertainties and potential impacts on the Group.
Clients and counterparties
Global economic downturn caused by the novel coronavirus pandemic could affect customer spending habits, decrease of demand on our products and services, as well as affect financial condition of our counterparties and their ability to fulfill their obligations. In addition, travel restrictions imposed by a number of countries and voluntarily travel limitation may lead to a decrease in roaming services provided and our roaming revenue from our subscribers. See also “—We may be adversely affected by the current economic environment.”
Development of Our Network Infrastructure
The lack or limited access to residential buildings, for example, due to COVID-19 impact, may affect projects for construction and modernization of fixed-line network. For more information, see “—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.”
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Financial Stability of Our Subsidiaries, including MTS Bank
Uncertainty on the international financial market amid COVID-19 pandemic may have material adverse effect on the financial condition of MTS Bank and its customers, in particular, it may result in an increase of non-performing loans and loan provision charges, loan losses and write-offs, an increase in exchange rate risk and losses, etc. For more information, see “—MTS Bank’s business entails regulatory and operational risks.”
Personnel
If the COVID-19 pandemic adversely affects our businesses and liquidity in the future, we may fail to retain employees and attract suitable talents to the company. The productivity of our employees may be reduced due to remote work. See also “—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.”
Moreover, due to stricter safety standards, our cost of compliance with COVID-19 related safety requirements may increase.
IT Technology and Cyber Security
Despite the fast development of the pandemic and the extremely rapid transfer of our personnel to distant work, we managed to fully maintain operation of our information security units and ensure continuous monitoring of compliance with local regulations on information security. However, no assurance can be given that these measure will be sufficient in the future and no new challenges will emerge. If we are required to develop any additional measures to protect the company and its business processes, it may result in the significant increase in operating costs. See also “—Breach of information confidentiality, integrity and availability may lead to interruption of business critical processes, a loss of market share, and claims from subscribers, regulators, and partners, which could materially adversely affect our reputation, business, financial condition, results of operations and prospects.”
We have a significant shareholder, which may limit your ability to influence corporate matters and may give rise to conflicts of interest.
Sistema, which is a public company, owns approximately 42% of the Company’s ordinary shares. As a result, Sistema exerts, and may continue to exert, influence over us and any action requiring the approval of the holders of our ordinary shares. Sistema can take actions that may conflict with the interests of other security holders. Furthermore, our international, credit, investment and other ratings, which determine, inter alia, peculiarities of our operations, terms of raising debt financing and our other activity could be affected by Sistema’s activity and (or) its ratings. See also “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources— Credit Rating Discussion.”
Sistema, as well as other our shareholders, have a right regulated by applicable law to receive dividends at the amount proportionate to the number of our shares belonging to a respective shareholder. For information about dividends see “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Requirements.” 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 expenditure, investments and acquisitions could be materially adversely affected.
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Difficulties with operational management of 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 acquisitions may occur in countries and regions that represent new operating environments for us. We therefore may have less control over their activities. We may also face uncertainties with respect to the operational and financial needs of those 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, it is possible that our activities in the countries of our current presence and counties into which we may expand may be associated with greater political, economic, social and legal risks.
For example, see “—Legal Risks and Uncertainties—An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable” 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 a number of acquisitions. We will continue to evaluate opportunities to acquire, invest in or merge with other existing operators or license holders, as well as other complementary businesses. In 2017-2021, our acquisitions focused on various segments, including communication and software development companies, providers of cloud services, as well as management investment and other non-telecom companies.
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:
● | assumption of the acquired target’s liabilities and contingencies; |
● | failure to realize any of the anticipated benefits or synergies from any acquisitions or investments we complete; |
● | problems connected with integrating the acquired businesses, technologies or products into our operations; |
● | incurrence of debt to finance acquisitions and higher debt service costs related thereto; |
● | difficulties in retaining business relationships with suppliers and customers of the acquired companies; |
● | risks associated with businesses and markets in which we lack experience, including political, economic, social, legal and regulatory risks and uncertainties; |
● | competition risks; |
● | potentially incorrect assessment of the value of any acquired target resulting from the facts we could not have known at the time of evaluation (subsequently discovered facts); |
● | more onerous government regulation; |
● | potential loss of key assets of the acquired company; |
● | potential loss of key employees of the acquired company; |
● | potential write-offs of acquired assets; and |
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● | lawsuits arising out of disputes over ownership of acquired assets and/or the enforcement of indemnities relating to the title to such assets. |
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. This would entitle our creditors to file a claim seeking to accelerate their claims or terminate the respective obligations and seek damages. 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 also be required to prove that the security provided by our shareholders, any third parties or us is not sufficient to secure our obligations. Creditors whose claims are secured by pledges do not have the right to claim additional security.
As of December 31, 2017, we held a 26.61% stake in MTS Bank. In 2018, we acquired a 28.63% stake in MTS Bank from Sistema for RUB 8.27 billion, thus increasing our effective ownership in MTS Bank to 55.4%. In February 2019, we acquired a 39.48% stake in MTS Bank for RUB 11.4 billion, as a result of which our effective ownership in MTS Bank reached 94.97%. In December 2019, we increased our stake in MTS Bank up to 99.9% by acquiring it from Sistema. The increase of our share in MTS Bank is in line with our strategy to diversify the business, achieve synergies and develop innovative financial services.
In 2019-2021, we also acquired certain companies such as United Russian Studios JSC, JUST AI Limited, Zelenaya Tochka Group and others. See “Item 4—Information on Our Company—A. History and Development” for further information.
These acquisitions have allowed us to diversify our business. However, additional risks relating to acquired companies’ liabilities and non-achievement of initial financial and operational targets may arise in connection with these acquisitions. See also Note 5 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 loss.
In addition, a merger or any corporate reorganization or 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 we cannot successfully develop our network or integrate the acquired companies, 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 (including fixed-line networks).
We have expended considerable amounts of resources to enable both organic expansion and expansion through acquisitions, and we plan to continue to do so. Limited information regarding the markets into which we have or are considering expanding, through either 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.
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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 difficulties in obtaining base station sites on commercially attractive terms. Further, telecommunications equipment used in Russia and other CIS countries is subject to governmental certification and periodic renewals of the same. We are also required to obtain permits and governmental certification for the operation of telecommunications equipment and/or permission for the import and export of certain network equipment, which can result in procurement delays and slower network development. The failure of any equipment we use to receive timely certification or re-certification, as applicable, could hinder our expansion plans. See also “—Risks Relating to our 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.” In particular, in 2019 considerable changes to the Federal law No. 412 “On Accreditation in the National Accreditation System” dated December 28, 2013, which increased powers (authority) of Rosaccreditation relating to control over unfairly accredited persons, came into force. These changes introduced stricter requirements to accredited persons’ activities and accreditation experts and provide for additional basis for suspension and termination of accreditation. As a result, these changes may lead to an increased cost of certification services and increase time needed for acquiring certifications, which may affect delivery time of certified equipment in Russia.
For example, the import and export of products containing cryptographic hardware is subject to special documentation requirements and approvals. As telecommunications 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 such “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.
Our inability to develop additional sources of revenue and competitive services could have a material adverse effect on our business, financial condition, results of operations and prospects.
Until recently, customer growth has been our principal source of revenue growth. Currently, however, increasing competition, market saturation and technological development lead to the increased importance of digital services based on mobile Internet, smart home, artificial intelligence, cloud services, big data solutions , Internet of things and media services. As a result, we will need to focus on the development of new services based on the abovementioned technologies. We invest in new businesses, such as artificial intelligence, financial technologies, big data, IoT (in particular, we participate in realization of national program “Digital Economy of the Russian Federation”), cloud services and others. Decrease or absence of demand for new services, as well as competition increase on current markets, or new companies’ entries may lead to revenue decrease and necessity to revise our strategy regarding new businesses, which may require additional investments. Our inability to develop additional sources of revenue could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, in September 2021 our shareholders approved the separation of our passive infrastructure as well as a significant share of our active network and digital infrastructure into the wholly-owned subsidiaries. For more information, please see “Item 4. Information on Our Company—B. Business Overview—Business Strategy”. An inability to realize the anticipated benefits of this separation could have an adverse effect on our business, financial condition, results of operations and prospects.
If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices, which may diminish our market share and result in a loss of 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 and other countries in which we operate. Interconnect fees are established by agreements with network operators and vary depending on the network used, the nature of the call and the call destination.
Although Russian legislation requires that operators of public switched telephone networks that are deemed to be “substantial position operators” cannot refuse to provide interconnect services 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.
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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 our 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 network 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, a fourth national mobile operator in Russia was established by the combination of “Tele2 Russia” and the mobile assets of Rostelecom in 2014, which 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 could put us at a competitive disadvantage. 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.”
We may not realize the benefits we expect to receive from our investments in 4G and 5G wireless services and Internet of Things (IoT) technologies, which could have a material adverse effect on our business and results of operations.
In July 2012, the Federal Service for Supervision in the Area of Communications and Mass Media awarded MegaFon, VEON, Rostelecom (under Tele2 brand) and us a license to provide 4G services in the Russian Federation.
In December 2017, the State Commission for Radio Frequencies issued a decision allowing the use of frequency bands previously allocated for LTE mobile communications for NB-IoT technology. In the second half of 2018 and March 2020, State Commission for Radio frequencies awarded additional frequencies and determined the procedure for the use of radio electronic means, operating in the range of 800 MHz under LPWAN group of standards (Low-power Wide-area Network) relating to IoT technology. In March 2020, the Commission allowed indefinite range of persons and entities to use the 24.25-24.65 GHz frequency band under the 5G standard for radio electronic means. This decision allows the construction of local communication networks under the 5G/IMT-2020 standard, which could lead to increased competition in our certain business areas. In July 2020, we received the first license to provide 5G-based services in this frequency band. In November 2020, the State Commission for Radio frequencies clarified the terms regarding mandatory use of equipment of Russian origin in the 24.25-24.65 GHz frequency band, which may affect the possibility of using these frequencies.
In August 2021, the State Commission for Radio frequencies prolonged permits to use the frequencies of 700 MHz, 800 MHz, and 2600 MHz for LTE networks for another 10-year term. The main conditions for the prolongation includes:
● | for 800 MHz, and 2600 MHz range: operators must provide network coverage of settlements with a population of more than 1,000 persons and federal highways until September 2031 in accordance with the schedule; |
● | for 700 MHz range in case of its reallocation for mobile telecommunication services: operators must provide network coverage of settlements with a population of more than 500 persons and regional highways until the end of 2031 in accordance with the schedule; |
● | starting from 2023, operators will have to use local equipment. |
The aforementioned changes, on the one hand, allow operators to use the necessary radio frequency resources, and on the other hand, could require additional costs for network construction.The 4G wireless services provide faster, higher quality data transfer and/or streaming capabilities, as compared to 2G and 3G, and 5G wireless services pose a similar advantage over 4G. Historically, mobile operators that are developing 4G networks experienced various difficulties and challenges, including a limited supply of compatible handsets, limited international roaming capabilities, as well as various software and network related problems. We may experience similar problems or encounter new difficulties when developing our 4G and 5G networks (including NB-IoT) and may be unable to fully resolve them. For example, we cannot be certain that:
● | we will be able to build-out our 4G (including NB-IoT) and 5G networks in a timely manner or within the time frame stipulated by the license terms; |
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● | our 4G (including NB-IoT) and 5G networks will deliver the quality and level of service that our customers demand or expect; |
● | we will be able to provide all contemplated 4G services (including NB-IoT) and 5G at reasonable prices and within a reasonable timeframe; |
● | manufacturers and content providers will develop and offer new marketable products and services for our4G and 5G networks (including NB-IoT) on a timely basis; |
● | demand for our 4G services (including NB-IoT) will not be lower than expected; |
● | our 4G and 5G networks will be commercially viable in all of the locations we are required to operate pursuant to our licenses; |
● | our competitors will not offer similar services at lower prices; and |
● | changes in governmental policies, rules, regulations or practices will not affect our network rollout or our business operations. |
See also “—If we cannot successfully develop our network or integrate the acquired companies, we will be unable to expand our subscriber base and maintain our profitability.”
In addition, Russian military and other authorities also use frequencies in the 4G and 5G spectrum, which may limit the availability of 4G and 5G frequencies for commercial use in certain areas. During the construction of our networks, there is also a risk that the frequencies assigned to us for commercial use may overlap with those used by the Russian military and other authorities. For example, conflicts over the availability of frequency reserved for military use in Moscow caused delay in the commercial launch of 3G services by all 3G license-holders in Moscow, despite the fact that some of these frequencies were cleared for commercial use in 2009. If a similar conflict were to occur, it could cause problems or delays in the development and operation of our 3G and 4G networks in Russia.
Potential competition from other 4Gand LPWAN providers, together with any problems relating to the rollout of our 4G and 5G networks and provision of 4G and 5G services in the future, could materially adversely affect our business, financial condition and results of operations.
In December 2013, July 2014 and in July 2017, the State Commission for Radio Frequencies introduced several modifications to the conditions of using the frequency band for mobile radio communication networks. These changes resulted in the implementation of the principle of technological neutrality for frequency bands 900 MHz (UMTS and LTE), 1800 MHz (LTE) and 2100 MHz (LTE), and included the imposition of certain additional obligations on network operators. Pursuant to these modifications, in case of using frequencies on the terms of technological neutrality principle, we are, inter alia, 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 networks and may therefore adversely affect our business, financial condition and results of operations. Moreover, the rules on the Russian-produced telecommunication equipment usage, which require to operate only equipment included in the Unified register of the Russian radio-electronic products, could affect implementation of the Internet of things (IoT) technology and 5G networks deployment.
If we are unable to successfully develop and/or deploy 4G and 5G wireless services in the countries in which we operate, or if any operators in those markets obtain a significant technological and/or commercial advantage over us in 4G and 5G wireless services, it may have a material adverse effect on our business and results of operations in the long term.
Currently, the ability to develop 4G/LTE and 5G networks is one of the key factors of the operator’s competitiveness in the market of mobile services in Russia and other countries where we operate. The cost of 4G/LTE and 5G network deployment and quality of services (including data speed and quality of radio coverage) depends on the band and the width of frequency range given to an operator.
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In 2012 outside of the auction process, the State Commission for Radio Frequencies 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 in the entire territory of Russia. The remaining frequencies, 40 MHz of the 2.5 2.7 GHz band, were allocated evenly during the auction among four major market participants (VEON, MegaFon, Rostelecom and us). 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.
On October 1, 2013, MegaFon acquired Maxiten Co Limited, which had acquired 100% of shares in Scartel and Yota Ltd. from Garsdale. The transaction was approved by a general shareholders’ meeting of MegaFon and by the Federal Antimonopoly Service (the “FAS”). 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. In addition, as a result of this deal, MegaFon consolidated the financial and operational indicators of Scartel/Yota, which increased its formal market share in the mobile communications market.
Significant material resources for the introduction of such technologies may be required, which could have a material adverse effect on our business and results of 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.
In 2019, Rosletelcom PJSC received a LTE frequency in the 2.3-2.4 GHz band outside of the auction process. In July 2020, the State Commission for Radio frequencies allowed Rostelecom PJSC to share this frequency band with T2 Mobile LLC (Tele2), which gave an advantage to these operators. However, in December 2020, the State Commission for Radio frequencies changed its decision relating to permission for the commercial use of this range. These developments reflect ongoing discussions on allocation frequencies in order to construct 5G network in Russia, deployment of which has been actively negotiated by operators and regulators since 2017. The greater part of frequency spectrum suitable for 5G network in Russia, is partially or fully occupied by other users (for example, satellite communication companies use the most suitable frequencies for 5G in 3.5 GHz band), including state-owned companies. Significant expenses and time may be required to clear frequencies, however the frequency conversion mechanism has not been fully defined yet and if it will be realized, there is no assurance that sufficient frequencies optimal for 5G deployment will be cleared in low- band spectrum (“sub-6”).
As a solution, the regulator is considering creation of a Single Infrastructure Operator, which will be assigned with the 5G frequencies, and, as one of the discussed variants, will construct a single 5G network in Russia mainly using equipment produced in Russia and will maintain this network. It is planned that the Single Infrastructure Operator will operate as a technological platform based on which independent market players will develop and provide a wide range of services to clients. According to market players and certain industry experts, this solution has variety of advantages as well as some disadvantages and risks as compared to traditional network deployment by operators on a free and non-discriminatory basis.
Final regulator decision on frequency allocation for 5G will significantly affect process of mobile communication market development and may lead to occurrence of certain difficulties, including extension of time needed for putting 5G network into operation, increase in capital and operating expenditures, failure to realize all 5G technological advantages caused by separation of 5G and earlier generation network infrastructure, realization of market advantages by certain players due to non-equal frequency allocation or obtaining of other technological advantages connected with frequency allocation. All of these factors may affect our ability to develop 5G network, which in turn may have a material adverse effect on our business.
Moreover, if we cannot develop a commercially viable 4G and 5G networks, 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.
Disruptions on our networks and information systems could lead to a loss of subscribers, damage to our reputation, violations of the terms of our licenses and subscriber contracts, penalties and have a material adverse effect on our business and financial condition.
We are able to maintain our operations only to the extent that our network infrastructure, information systems and data processed therein is protected from unlawful actions, including hacker and targeted attacks, technical malfunctions, power failures and natural disasters. Any failure, accident or network or information systems security breach, that causes interruptions in our operations could impair our ability to provide services to our customers or may influence other business processes, any of which could materially adversely affect our reputation, business and results of operations.
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In addition, to the extent that any disruption or network or elements of information systems security breach results in a loss of or damage to customers’ personal data, or inappropriate disclosure of confidential information, we may incur liability as a result, including costs to remedy the damage caused by these business-interruptions or elements of information systems security breaches.
While we maintain backup systems for our telecommunications and infrastructure equipment, network and data management, operations and maintenance systems, these systems may not ensure recovery in the event of a network or information systems failures. 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 in full. 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, physical or software break-ins, viruses and similar events. Although our computer and communications hardware is insured against fire, storm and flood, we do not have 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 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. If we fail to comply with the requirements of Russian or other applicable legislation or 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 constitute an event of default under certain of our debt obligations and cause certain of our debt to be accelerated.
The Russian government enacted its Decree No. 2385 dated December 30, 2020, as amended, which came into force starting from January 1, 2021. (The validity of the document is limited to January 1, 2027.) It replaced the previously existing regulation on licensing activities in the communication services sector and introduced certain new mandatory licensing requirements and grounds for license termination.
A suspension or termination of our licenses or other necessary governmental authorizations, as well as regulatory changes of licensing requirements could therefore have a material adverse effect on our business and results of operations.
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. For a list of the telecommunications licenses held by us, see “Item 4. Information on Our Company—B. Business Overview—Licenses.”
These licenses may be renewed upon application to the relevant governmental authorities. Government officials in Russia and the other countries in which we operate consider the compliance with license requirements and the conditions of using the allocated frequency range when deciding whether to renew a license.
Additionally, new mandatory conditions, which relate to the need for further development of the communication network in order to provide licensed communication services for potential users of the communication service in sparsely populated residential areas, may be introduced when deciding whether to renew a license. These new conditions will require additional investment. Moreover, we may be subject to penalties or our licenses may be suspended or terminated for non-compliance with any such new license requirements. The suspension or loss of certain licenses could significantly limit our operations and cause certain of our debt to be accelerated.
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If frequencies currently assigned to us are revoked, 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 revenues.
There is a limited radio frequency spectrum 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, 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 and radio technology). 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 if 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 revenues.
An increase in the fees for frequency spectrum usage could have a negative effect on our financial results.
The Russian and the CIS legislation requires us to make payments for frequency spectrum usage. A number of projects implemented by MTS in 2016 - 2018, as well as a number of normative acts previously adopted by the Ministry of Communications, resulted in expansion of the range of frequencies that have to be paid for.
The fees for frequency spectrum usage are 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.
Fees are directly calculated according to 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. The rates and coefficients of the aforementioned Methodology used for calculating fees for frequency spectrum, are subject to revision at least once every two years. The Ministry of Communications developed and circulated for discussion a draft order “On Amendments to the Methodology for establishing of single fee and annual fee for the use of radio frequency spectrum in the Russian Federation”. The order provides for, inter alia, imposition of payment for radio frequency spectrum usage for 5G technology. Currently, key coefficients, which define the payment amount for using 5G technology, have not been approved. In case of the exchange of radio frequency spectrum between operators in the ranges with high fragmentation (GSM 900/1800) operators are obliged to pay a one-time fee for the new assigned ranges of the radio frequency spectrum as well as change coefficients used for calculating the fee for the spectrum that may lead to significant additional expenses..
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.
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 a 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.
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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 our brand image, which could lead to a loss of market share and revenues. 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.
MTS Bank’s business entails regulatory and operational risks.
MTS Bank’s operations are subject to regulation by various government and banking authorities in connection with obtaining and renewing various licenses and permits, as well as with ongoing compliance with existing laws and regulations and with the terms and conditions of MTS Bank’s licenses and permits. MTS Bank has the required license in connection with its banking activities issued by the CBR.
Requirements imposed by regulators, including capital adequacy requirements, which are designed to ensure the integrity of the financial markets and to protect customers and other third parties with whom MTS Bank deals, may limit MTS Bank’s activities, including its lending, and may increase MTS Bank’s costs of doing business, or require MTS Bank to seek additional capital in order to maintain CBR capital adequacy requirements or different varieties of funding to satisfy the CBR’s liquidity requirements. The CBR may also amend the capital adequacy requirements and increase the capital adequacy ratios applicable to Russian banks at any time and, in such circumstances, MTS Bank may be forced to seek additional capital or alternative sources of financing to comply with these requirements. Such additional capital or alternative sources of financing may not be available or may only be available on commercially unacceptable terms.
If MTS Bank’s capital position were to decline below the minimum statutorily required levels of capital adequacy, its banking licenses could be suspended or revoked and it could encounter difficulties in continuing to operate its business and obtaining funding, which could materially adversely affect its business, financial condition, results of operations and prospects. MTS Bank’s capital adequacy level may decrease organically with the growth of business or the payment of dividends. In addition, any breach of regulatory requirements in the Russian Federation could expose MTS Bank to potential liability and other sanctions, including the loss of general banking license. If the CBR were to suspend or revoke MTS Bank’s general banking license, then this would render MTS Bank unable to perform any banking operations and/or would lead to winding-up of its business. Our shareholding in MTS Bank may require us to make subsequent investments in the share capital of the bank in order to sustain growth of MTS Bank’s business as well as to comply with the capital adequacy requirements and relevant banking regulations. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
Uncertainty in the international financial markets, possible further tightening in credit conditions and contraction of the global economy and markets in which MTS Bank operates (including the impact of COVID-19), could adversely impact, should the market conditions continue to worsen, MTS Bank’s business and operating results due to:
● | decreases in MTS Bank’s net interest income; |
● | decreases in the demand for MTS Bank’s credit products as a result of higher interest rates; |
● | significantly increased non-performing loans and loan provision charges, loan losses and write-offs; |
● | decreases in the business activity of Russian companies and the credit-worthiness of Russian companies and individuals; |
● | increases in borrowing costs and reduced, or zero, access to the capital markets due to unfavourable market conditions; |
● | currency volatility; |
● | liquidity constraints; |
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● | outflows of deposits from accounts; |
● | significant declines in the market values of securities held in MTS Bank’s trading and available for sale portfolios; and |
● | deterioration of capital adequacy. |
Any of the factors discussed in the preceding paragraphs could adversely affect the financial condition of MTS Bank and its customers and may result, among other things, in a reduction in MTS Bank’s capital adequacy ratios and profits, pressure on credit risk concentration levels, an increase in exchange rate risk and losses, higher funding costs, a change in the strategy of MTS Bank or curtailment of some business operations due to increased risks. Moreover, any of these factors may cause a decrease in customer funds, a reduction in the demand for loans, foreign currency, investment and other banking transaction services that customers carry out with MTS Bank, as well as a general deterioration in the quality of MTS Bank’s loan book and/or a reduction in the market values of securities or other assets held on MTS Bank’s balance sheet, leading to possible defaults of such loans and/or the need for increased loan provisions. Should any of this take place, this could materially adversely affect our business, financial condition and results of operations.
Failure to monitor, manage and prevent MTS Bank’s operational and technological risks, could have a material adverse effect on our business, financial condition and results of operations.
MTS Bank is exposed to technological risks as banking business requires the development of sufficient communication channels and software, the creation of large automated systems and considerable computer capacity located throughout the Russian Federation. MTS Bank invests considerable time and money in order to upgrade its technologies in a timely manner, centralize its information systems, create appropriate reserves and duplicate capacities, develop internal audit functions and control the operation of its hardware and software, however MTS Bank’s IT systems are significantly less developed in certain respects than those of banks in more developed countries. The lack of immediately available consolidated financial and operating data may hinder the ability of MTS Bank’s management to make decisions, to react promptly to changes in market conditions and to detect fraud and non-compliance with internal procedures. In addition, insufficient integration of the IT system increases MTS Bank’s operational risks and the costs of further business development.
MTS Bank’s ability to operate its business depends on its ability to protect the computer systems and databases which MTS Bank operates and uses from the intrusion of third parties who may attempt to gain access to MTS Bank’s computer systems, networks or databases through the Internet or otherwise. In addition, MTS Bank is exposed to risk of fraud by employees or outsiders, mismanagement, unauthorized transactions by employees and operational errors, including clerical or record keeping errors or errors resulting from faulty computer or telecommunications systems. Given MTS Bank’s high volume of transactions, errors may be repeated or compounded before they are discovered or rectified. In addition, a number of transactions at MTS Bank are processed manually, which may further increase the risk that human error or employee tampering or manipulation will result in losses that are difficult to detect. There can be no assurance that MTS Bank will be able at all times to successfully monitor, prevent and manage its operational and technological risks in the future. Any failure to do so could materially adversely affect our business, financial condition and results of operations.
MTS may potentially enter into agreements with members of the Sistema group (i.e. related parties transactions) on terms which are different from those that would be obtainable on an arm’s length basis.
We have purchased interests in certain companies from Sistema, for example, United Russian Film Studios JSC and MTS Bank PJSC. We are entering into agreements with other companies within the Sistema group for supply of switching and subscriber network equipment, power supply devices, medical services, license agreements, agreements on providing access to the infrastructure for installation of communication equipment, leasing of non residential real estate, rent of cloud services and other services. According to the applicable Russian legislation, and notwithstanding MTS’s effective control procedures in respect of related parties transactions, such as verification whether such transactions comply with the terms on a market, including mandatory procedures with respect to consideration of related parties transactions with the companies within the Sistema group by the Audit Committee, a number of transactions with the companies within the Sistema group may potentially be concluded on terms, which are different from those that would be obtainable on an arm’s length basis.
See “Item 7—Major Shareholders and Related Party Transactions—B. Related Party Transactions” and Note 31 to our audited consolidated financial statements.
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In the event that our past or future interested party transactions are 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 entered into, and continue to enter into, transactions that may be considered to be “interested party transactions” for the purposes of Russian law, requiring in some cases consent or approval by disinterested directors, disinterested independent directors, disinterested shareholders or owners of voting shares, depending on the nature of the transaction and parties involved. The provisions of Russian law No. 208 “On Joint-Stock Companies” dated December 26, 1995, as amended (the “Joint Stock Companies Law”) relating to “interested party transactions” was amended in 2016 and may be subject to different interpretations taking into account, inter alia, the insufficiency of court practice in respect of 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 challenge, 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.
Moreover, due to the adoption of Federal Law No. 55-FZ dated March 14, 2022, until December 31, 2022 only shareholders holding alone or with other holders 5% or more of the voting shares have the right to appeal to the court with claims to challenge major and interested party transactions, as well as claims against a member of the Board of Directors or a member of any executive body of the Company. Before the adoption this Federal Law, shareholders holding alone or with other holders 1% or more of the voting shares had the right to file such lawsuits.
In 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 to or approve certain transactions and other matters, including, for example, charter amendments, major transactions involving assets in excess of 50% of the total assets of the company, purchase of offered shares by the company and certain share issuances. In addition, a 95% or a 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 the event that our minority shareholders or minority shareholders of our subsidiaries do not consent to or approve such 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.
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. The loss of any our senior management team members 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. We 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, dismissal, or unavailability of our key personnel, resulting from a number of reasons, including but not limited to COVID-19 (for more information see “—The outbreak of COVID-19 may have a material adverse effect on our business, financial condition, results of operations and prospects”). 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 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”). In 2017, new requirements relating to services of mobile radio communication and
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telephone communications while using business models of mobile radio communication and telephone communications virtual networks were adopted. MVNOs are companies that provide mobile communications services but do not own the radio frequencies and, in some cases, 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 is to be done pursuant to agreements entered into between MVNOs and existing frequency holders. However, existing frequency holders are under no obligation to enter into such agreements with the MVNOs.
By introducing this regime, the Ministry aims to increase competition in the Russian mobile services market, which is currently dominated by MTS, VEON and MegaFon. The existing frequency holders, including us, may receive revenues from MVNOs for the use of our frequencies and network infrastructure. However, in the event we lose either subscribers to MVNOs that lease their frequencies and infrastructure from other operators or MVNOs that lease their frequencies and infrastructure from 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.
For example, Skartel (under the “Yota” brand), Rostelecom, Tinkoff Bank operate as MVNOs in the Russian mobile communications market.
It is currently unclear how the emergence of new MVNOs in the market or any of the foregoing trends might affect market competition and subscriber churn, but this could have a material adverse effect on our business, financial condition, results of operations and prospects.
A finding by the FAS that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operations.
Our businesses have grown substantially through the acquisition and formation of companies, many of which required the prior approval of, or subsequent notification to, the 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 the 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 the FAS were to conclude that our acquisition or formation of a new company was done in contravention of applicable antimonopoly legislation, which has led or may lead to restriction of competition, including emergence or strengthening of the company’s dominant position, or find prescriptions of the FAS, issued as part of the transaction approval, not fulfilled, it could file a claim to liquidate or reorganize in the form of separation or division of an acquired or established company. Moreover, the FAS may impose administrative sanctions for non-compliance with antimonopoly law when acquiring or creating a company. These could have a material adverse effect on our business, financial condition and results of operations.
In recent years, the FAS has been investigating mobile operators, including MTS, for suspected violations of antimonopoly laws. For example, see “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Antimonopoly Proceedings” and “—Changes to the rules and regulations involving roaming charges in Russia may adversely affect our financial condition and results of operations.”
If the FAS finds that we have violated or otherwise acted in contravention of antimonopoly legislation, this could have a material adverse effect on our business, financial condition, results of operations and prospects.
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 be entitled to regulate our subscriber tariffs and impose certain restrictions on our operations.
Under Russian legislation, a company controlling over 35% of a market may be found by the FAS to hold a dominant position in such market. In case of collective dominance of legal entities and in certain instances provided by law, a company could be also categorized by the FAS as dominant under certain conditions even if its share of the corresponding market is less than 35%, but equals to or is higher than 8%. 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 certain amendments to 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 in the markets in which they operate, which previously listed MTS as occupying a dominant position in certain markets, was repealed. At the
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same time, the FAS continues to conduct market analysis in order to identify entities holding a dominant position in the markets in which they operate.
Companies recognized as natural monopolies are also considered to have a dominant position in their respective markets. One of our subsidiaries, MGTS, is categorized as a natural monopoly in the Moscow telecommunications market. As a result, MGTS’ tariffs are now subject to regulation by the FAS. In addition, as a natural monopoly, MGTS is obliged to comply with the rules of non-discriminatory third party access to its infrastructure. See also “—Change of regulated tariffs may lag behind MGTS’ real expenses growth, which may negatively impact profitability of our business.”
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 in the market and/or concluded anti-competitive agreements, the FAS will have a 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—Regulation in the Russian Federation—Competition, Interconnect and Pricing” for additional information.
If we are found to have violated antimonopoly legislation, an order requiring us to transfer any illegally obtained revenue to the federal budget may be issued in relation to such violations.
According to the Code of Administrative Offences of the Russian Federation, a company may be subject to either fixed penalty fine up to RUB 1 million or fine based on total turnover in the market where the violation is conducted, depending on the nature of violation of antimonopoly legislation. The level of fine ranges from 3% to 15% of revenue in the market where the violation is conducted for cartel agreements, from 1% to 15% of revenue for abuse of dominant position, from 1% to 5% of revenue for other anticompetitive agreements and from 1% to 3% of revenue for coordinated actions. Moreover, if the FAS finds actions of a company insufficient to rectify past violations of antimonopoly laws, it could file a claim for liquidation of this company or its reorganization in the form of division or separation.
If we or any of our subsidiaries were found by the competition authority to be business entities occupying a dominant market position, the competition authority would have a power to impose certain restrictions on our or our subsidiaries’ businesses. In particular, the authorities may impose on us tariffs at levels that could be competitively disadvantageous. If we or any of our subsidiaries were found by the FAS to be business entities occupying a dominant market position with a market share exceeding 70% and determined to abuse such dominant position, the Russian government would have a right to determine the rules of non-discriminatory 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 network 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 the 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 cases where such agreement would contradict the terms of their license or other regulatory acts in respect of the unified communications 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—Regulation in the Russian Federation.”
At present, the foregoing regulations apply only to fixed-line operators in Russia, including 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 proposed and adopted in the future remains. If any legislation that extends the
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foregoing regulations to mobile operators is adopted, and we and any of our mobile network 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 its interconnect tariffs are therefore subject to state regulation. In February 2013, Comstar-UTS was removed from the list of “substantial operators” in Moscow and MTS was not included therein. There is however a possibility 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 interconnect rates, we, as “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 “—Change of regulated tariffs may lag behind MGTS’ real expenses growth, which may negatively impact profitability of our business.”
Change of regulated tariffs may lag behind MGTS’ real expenses growth, which may negatively impact profitability of our business.
In addition to holding a “substantial position” in the Moscow telecommunications market, MGTS is included in the register of natural monopolies in the telecommunications market. Consequently, tariffs for basic services rendered to public switched telephone networks subscribers (fees for providing access to a local telecommunications network, monthly fees for granting subscriber line in a constant use and monthly fees for providing a local telephone connection) are subject to regulation.
Although MGTS is permitted to petition the FAS 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 FAS may not adequately take such factors into account in setting tariffs. If the permissible tariffs applicable to MGTS do not adequately compensate MGTS for the costs of providing services, our business and results of operations could be materially adversely affected. See also “—If we or any of our mobile network 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.
In September 2018, the Board of sectoral ministries of communications of the Russian Federation and the Republic of Belarus approved a Roadmap aimed at reducing roaming charges between two countries. In December 2018, the Russian party drafted a new project of the Roadmap aimed at cancellation of international roaming in the territory of the Union State in 2019. Later, as a result of negotiations between Russia and Belarus a new project of Roadmap, which assumes cancellation of roaming charges in the territory of the Union State in 2020, was developed. In December 2019, a new version of Roadmap was approved, according to which, cancellation of roaming charges in the territory of the Union State will take place in September 2020. In order to implement the Roadmap, we significantly reduced roaming charges in November 2020. This affected our revenues from roaming charges in Belarus.
In July 2017, the FAS sent a warning to mobile operators, in which it demanded to cancel intra-network roaming. In March 2018, the FAS opened an antimonopoly case against VEON, MTS and MegaFon (in connection with the non-fulfilment of the warning). In August 2018, the FAS found MTS, VEON and MegaFon to have violated the antimonopoly legislation. In December 2018, the FAS imposed a fine in the amount of RUB 737,500 on each of MTS, VEON and MegaFon. As of September 30, 2018 MTS changed charging principles for communication services outside “home” region for all subscribers.
In August 2017, the FAS opened an antimonopoly case against VEON, MTS, MegaFon and T2 Mobile LLC on the grounds of establishing and maintenance of monopolistically high prices for communication services in national roaming and inter-operator roaming agreements. On February 22, 2018 the FAS rendered a decision and found MTS responsible for establishing monopolistically high prices for subscribers for communication services in national roaming. VEON, MegaFon and T2 Mobile were also found guilty for establishing monopolistically high prices for subscribers for communication services in national roaming. In September 2018, following the examination of the case, the FAS imposed administrative fines in respect of each of the operators. The case related to inter-operator roaming agreements against MTS was canceled due to the fact that there had been no violation. See also “—A finding by the FAS that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operations.”
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On December 27, 2018, the Federal Law No. 527 was adopted, under which the intra-network roaming is cancelled, and MTS is obliged to provide subscribers with communication services on its network under the same conditions, regardless of whether a subscriber is in or outside the bounds of his “home network” when moving across the country. In addition, this law excludes the possibility of charging subscribers for incoming calls in intra-network and national roaming. The law came into force on June 1, 2019 and affected our revenue from intra-network and national roaming charges. Any similar regulatory changes which could limit our ability to charge fees for the services provided could have material adverse effect on our business and financial condition.
An action plan to establish conditions necessary for setting fair tariffs for international roaming services on the territories of the Eurasian Economic Union states in the first quarter of 2025 was adopted by the Decree No.19 of the Eurasian Economic Commission Board dated October 29, 2021. Although it is currently unclear how the Decree and its implementation might affect our operations, it could have a material adverse effect on our business, financial condition, results of operations and prospects. Any material fines imposed on us or changes to the roaming charges may adversely affect our financial condition and result of operations.
Compliance with the new regulations on IMEI numbers may present us with technical difficulties and may lead to the expenditure of significant resources.
A draft law that provides obligatory registration of a user terminal on an International Mobile Equipment Identity (“IMEI”) numbers database was rejected in 2015.
If similar initiatives are proposed in the future, we may be required to develop a system to monitor IMEI numbers and may need to establish and maintain a database of IMEI numbers, which would necessitate the expenditure of significant technical and financial resources.
However, the Federal Law No. 533 dated December 30, 2020, which came into force starting from June 1, 2021, introduced amendments to the Law “On Communications”, including the IMEI concept. According to the law, the subscriber has a right to add information on his number and/or the IMEI in the Integrated Identification and Authentication System (IIAS). If the subscriber lost his device, he may report this to the operator through the IIAS. Subject to the confirmation of an IMEI number, the operator should stop providing services for such device.
Currently, there are no practical ways to confirm the uniqueness of the equipment identifier because an IMEI number may be used by several mobile manufacturers. It is currently unclear how these amendments might affect our activities, but this could have a material adverse effect on our business, financial condition and results of operations.
The accession of Russia to the World Trade Organization (the “WTO”) may lead to legislative and business changes.
On August 22, 2012, the Russian Federation became a member of the 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 increased competition in the markets where we operate. During the period of 2012 to 2021, Russia adopted certain changes to its legislation related to the accession to the WTO, for example, regarding intellectual property laws, tax legislation; however, it is still unclear if, and when, all necessary legislative changes related to the WTO accession will take place. If further new legislation is implemented in Russia as a result of its accession to the WTO, 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.
One of our subsidiaries, MGTS, has devised a number of projects aimed at developing communications networks and expanding availability of telecommunications services for customers. The likely shortage of free cash flow during the current economic downturn could halt such investment programs for the development of new products and services, and possibly lead to a decrease in the number of projects and cutbacks in development programs in the New Moscow and Moscow regions.
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The company completed its project on connection of its subscribers to broadband optical networks employing the Gigabit-capable Passive Optical Network (“GPON”) technology in Moscow, however, the network development still continues in Moscow and Moscow region. In addition, transition to a single converged network and BRAS (Broadband Remote Access Server) expansion are being performed. See “Item 4—Information on Our Company—A. History and Development—Capital Expenditure” for further information. The lack or limited access to residential buildings, for example, due to COVID-19 impact, may affect these projects on construction and modernization of fixed-line network. For more information see “—The outbreak of COVID-19 may have a material adverse effect on our business, financial condition, results of operations and prospects.”
We engage contractors for the construction and upgrade of our network. Due to the currently unfavorable market conditions, some of our contractors may face a lack of own current assets and/or external finance sources, as well as other reasons, which may lead to the contractor’s inability to fulfill contract obligations or, in some cases, lead to bankruptcy. This may negatively affect the terms of our projects’ implementation and lead to higher costs. If we are not able to expand and upgrade our network infrastructure in a timely manner and 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, patents and similar intellectual property rights, including our rights to certain domain names, as essential to our continued success. We rely upon legislation on intellectual property, trade secret protection laws, as well as confidentiality and/or license agreements or contracts with our employees, customers, partners and others, to protect our proprietary rights. Nonetheless, intellectual property rights are particularly difficult to protect in the markets where we operate. In these markets, the regulatory agencies responsible for the protection of intellectual property rights are inadequately funded, legislation is underdeveloped, piracy and infringement are commonplace, and enforcement of court decisions is problematic.
Litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of 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. We also may incur substantial acquisition or settlement costs to the extent that it would strengthen or expand our intellectual property rights or limit our exposure to intellectual property claims of third parties.
Breach of information confidentiality, integrity and availability may lead to interruption of business critical processes, a loss of market share and claims from subscribers, regulators, and partners which could materially adversely affect our reputation, business, financial condition, results of operations and prospects.
We ensure the security of restricted information processing in corporate information systems, including when working remotely (for example, distant work period). However, unauthorized actions of our employees and partners that violate information security policy, as well as illegal actions of third parties may lead to breach of information confidentiality, integrity and availability, including subscriber data leakage, and, as a result, to interruption of business-critical processes, a loss of market share, claims from subscribers, regulators, and partners what could materially adversely affect our reputation, business, financial condition, results of operations and prospects.
Despite the measures taken, we cannot completely exclude the possibility of such incidents occurring in the future. See also “—Legal Risks and Uncertainties—Russian and foreign legislation on personal data and information security in information systems and communication networks may turn out to be hard to implement and require significant resources. Inability to comply with the requirements may lead to sanctions.”
Alleged medical risks of cellular technology may subject us to negative publicity or risk of 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 such 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 of obtaining or maintaining sites for base stations and/or reducing the financing available to the wireless communications industry. Each of these potential risks may adversely affect our business, financial condition, results of operations and prospects.
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Effects of climate change may impose risk of damage to our infrastructure, our ability to provide services, additional costs and have a material adverse effect on our business and financial condition.
Extreme weather events precipitated by long-term climate change have the potential to directly damage network facilities or disrupt our ability to build and maintain portions of our network and could potentially disrupt suppliers’ ability to provide products and services required to provide reliable network coverage. Any such disruption could delay network deployment plans, interrupt service for our customers, increase our costs and have a negative effect on our operating results, financial condition and our business. The potential physical effects of climate change, such as increased frequency and severity of storms, floods, fires, freezing conditions, sea-level rise, and other climate-related events, could adversely affect our operations, infrastructure, and financial results. Operational impacts resulting from the potential physical effects of climate change, such as damage to our network infrastructure, could result in increased costs and loss of revenue. We could incur significant costs to improve the climate resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate such physical effects of climate change. We are not able to accurately predict the materiality of any potential losses or costs associated with the physical effects of climate change.
Effects of climate change may lead to regulatory changes and additional requirements from customers, investors and other stakeholders that may have a negative effect on our business, financial condition, results of operations and reputation.
Due to the nature of our operations, we may be impacted by regulatory developments related to climate change, including, for example, the introduction of national carbon regulation, and the revision of plans for the contract on the provision of renewable energy capacity, which may lead to an increase in the price of purchased electricity. In addition, the introduction of carbon pricing in various jurisdictions may lead to an increase in the prices of purchased equipment, and the lack of a public position regarding the setting of decarbonization goals and the development of appropriate action plans may lead to a deterioration of market positions and a decrease in the confidence of interested parties. In addition, in case of the lack of response to customer requirements regarding the company’s decarbonization goals and the availability of low carbon telecommunications solutions it may lead to a decrease in revenue.
Further, customers, consumers, investors and other stakeholders are increasingly focusing on environmental issues, including climate change, water use, deforestation, plastic waste, and other sustainability concerns. Concern over climate change or other environmental, social and governance (ESG) matters may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the environment and reduce the impact of our business on climate change. Further, climate change regulations may require us to alter our proposed business plans or increase our operating costs due to increased regulation or environmental considerations, and could adversely affect our business and reputation.
Risks Relating to our Financial Condition
We may be adversely affected by the current economic environment.
Macroeconomic challenges, resulting from a number of reasons, including but not limited to, the COVID-19 pandemic, credit market crisis (including uncertainties with respect to financial institutions and the global capital markets), instability of prices for major export commodities (including oil and metals) and other factors, currently affecting many of the markets in which we operate, may negatively impact our clients’ disposable incomes and our vendors’ cash flows. See also “—Ruble volatility 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”.
Consequently, customers may modify or decrease their usage of our services and products or fail to pay the outstanding balances on their accounts, and vendors may significantly increase their prices, eliminate vendor financing, reduce their output or fail to supply equipment, subscriber devices and services on a timely basis.
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 affect our business and financial condition.
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.
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In addition, a further 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. Likewise, the current geo-political situation in Russia and Ukraine might also have an impact on the value of our business goodwill. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
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, European Union, United Kingdom and other countries with respect to the Russian Federation coupled with an economic downturn caused a significant capital outflow, ruble depreciation, a rise of credit rates in the domestic market and a lack of available financing.
In June 2019 the Central Bank of Russia decided to decrease the key rate by 0.25 p.p. (down to 7.5%), and taking into account decrease of inflation rate key rate decrease continued and in July 2020 reached 4.25%. During 2021 the key rate grew up several times and in December 2021 it reached 8.5%. In February 2022, the Bank of Russia raised the key rate up to 9.5%, and later – up to 20%. Further growth of the key rate may negatively affect the cost of funding. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
A continuation or repetition of the downturn in the global financial markets as well as a toughening or extension of international sanctions against Russia and the resulting volatility of the trading price of our shares and ADSs may negatively impact our ability to obtain financing on commercially reasonable terms, either domestically or overseas, 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 an amount of outstanding indebtedness, primarily consisting of the obligations we entered into in connection with our notes and bank loans. For information about our debt and finance cost, see “Item 5—Operating and Financial Review and Prospects—A. Operating Results.”
Our ability to service, repay and refinance our indebtedness and to fund planned capital expenditure 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 servicing is becoming more difficult due to our dependence on floating interest rates in the financial markets.
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We may not be able to generate sufficient cash flow or access domestic or international 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. This, in turn, may force us to sell assets, reduce or delay capital expenditure 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 volatility 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.
The ruble volatility can be explained by external geopolitical factors, limited financial markets, change in oil prices, change in internal consumption and other factors.
As of December 31, 2019, ruble amounted to 61.91 per one U.S. dollar. As of December 31, 2020 and December 31, 2021, the ruble exchange rate was RUB 73.88 per 1 US dollar and RUB 74.29 per 1 US dollar, respectively. As of April 2, 2022, the ruble has dropped down to RUB 83.43 per 1 US dollar. See also “—Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries.” and “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
See also “—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, 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 financial results.”
The stability of the ruble will depend on many political and economic factors. These include the ability of the government to finance the deficit of the state budget without recourse to monetary emissions and 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 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. Any further 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 our ADSs. See also “Item 11—Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
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Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, 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 financial results.
Our expenditure, including capital expenditure, is denominated in, or closely linked to, the Ruble, the U.S.dollar, euro and/or yuan, while substantially all of our revenues are denominated in local currencies of the countries where we operate. 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 countries where we operate 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 those countries. Further, a portion of our cash balances is held in jurisdictions outside Russia, and as a result of currency exchange controls in those jurisdictions, these cash balances may not always be readily available for our use.
In addition, a portion of our liabilities and borrowings (including our U.S. dollar denominated notes) are also either denominated in or tightly linked to the U.S. dollar or euro. A significant part of these is hedged through financial instruments with various banks, though the risk that such hedging is not fully effective remains.
On July 1, 2016, Belarus redenominated its currency on a scale of 10,000:1. As of December 31, 2019 and December 31, 2020, the official exchange rate published by the National Bank of the Republic of Belarus amounted to 2.10 and 2.58 Belarusian rubles per one U.S. dollar, respectively. As of December 31, 2021, the official exchange rate was 2.55 Belarusian rubles per 1 U.S. dollar. As of April 5, 2022, the exchange rate reached 2.95 Belarusian rubles per 1 US dollar. The possible devaluation of the Belarusian ruble in the future may adversely affect our revenues from this market.
See also “—Inflation could increase our costs and adversely affect our results of operations” and “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 expenditure, particularly in connection with the development, construction and maintenance of, and the purchasing of necessary software for, our mobile and fixed-line networks. For information about our capital expenditures, see “Item 4—Information on Our Company—A. History and Development—Capital Expenditure.” Further, 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 expenditure.
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:
● | a lack of external financing sources; |
● | changes in the terms of existing financing arrangements; |
● | construction of the wireless networks at a faster rate or higher capital cost than anticipated; |
● | pursuit of new business opportunities or investing in existing businesses that require significant investment; |
● | acquisitions or development of any additional wireless licenses; |
● | slower than anticipated subscriber growth; |
● | slower than anticipated revenue growth; |
● | regulatory developments; |
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● | changes in existing interconnect arrangements; or |
● | a deterioration in the economies of the countries where we operate. |
During the period from 2014 to 2022, the United States and the European Union announced sanctions applying to a number of Russian and Ukrainian individuals and associated institutions. The sanctions may be extended and our ability to gain external funding may be affected. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, 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. 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 economy has been characterized by high rates of 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.
In 2014, the Bank of Russia implemented an inflation targeting program. As a result of this, inflation in Russia reached 3.0% in 2019 and 4.9% in 2020. In 2021, there was a significant increase in inflation in the US and the Eurozone, covering a wide range of goods, increased inflationary pressure due to rising costs in the global economy. In Russia, this factor also fueled inflationary expectations and hampered the transition to a steady slowdown in inflation. As a result, inflation in Russia reached 8.39% in 2021.
According to the March macroeconomic survey of the Bank of Russia the inflation in Russia may reach 20% in 2022.
At the end of 2019 and 2020, inflation in Belarus amounted to 4.7% and 7.4%, respectively. For the year ended 31 December 2021, the annual rise of consumer prices published by the National Bank of the Republic of Belarus amounted to 9.8%.
High rates of inflation in Russia and other 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.” and “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
See also “—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, 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 financial results” and “Item 11—Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
Indentures relating to some of our notes contain, and some of our 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 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.
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.
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A material adverse effect on our financial condition and results of operations could occur if redemption rights of our noteholders are invoked.
Under the terms of our outstanding notes, upon occurrence of the circumstances described below, 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. Such redemption scenario could be triggered in any of the following circumstances:
● | with respect to the notes due 2023, any person acquires beneficial or legal ownership of, or control over, more than 50% of our issued shares, ownership of or control over more than 50% of the voting interests in our share capital or obtains the power to elect not less than half of our directors, provided that the following transactions would not be deemed to trigger a right of noteholders to require redemption of our notes: |
● | any acquisition by Sistema or its subsidiaries that results in the 50% threshold being exceeded; |
● | any acquisition by us, our subsidiary or our employee benefit plan; and |
● | a contribution by Sistema of all or part of its ownership interest in us into a partnership, joint venture or other indirect holding vehicle as long as any other person who is an owner of or party interested in that partnership, joint venture or other indirect holding vehicle does not acquire beneficial ownership of or control over more than 50% of our issued shares, does not acquire ownership of or control over more than 50% of the voting interests in our share capital and does not obtain the power to elect not less than half of our directors. |
Some of our loan agreements contain similar redemption provisions triggered by occurrence of similar events. If such events occur, 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 Economic Risks in Our Countries of Operation
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 countries where we operate have experienced periods of considerable instability. For example, GDP level significantly impacted basic commodity prices as was detected during the crisis in 2008 and 2009.
The Federal State Statistics Service estimated that the Russian economy grew by 2.2% in 2019. However, the Russian GDP decreased by 2.7% in 2020 due to COVID-19 outbreak as well as a drop in global demand for energy resources. In 2021 Russian GDP grew by 4.7%. According to the March macroeconomic survey of the Bank of Russia, the GDP may decrease by 8% in 2022. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
Any future economic downturns in Russia or the other countries where we operate, could lead to a decrease in demand for our services and, consequently, in our revenues, and negatively affect our liquidity position and ability to obtain further debt financing, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
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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 financial services 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 are generally not insured.
In recent years, there has been a rapid increase in lending by Russian banks, which 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 the deficiency of capital and failure to meet the CBR requirements. In 2014-2018, for instance, 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. In addition, the Russian banking sector may experience instability and weaker financial results due to the ongoing volatility in the global financial and commodity markets, as well as any decline in the Russian economy as a result of COVID-19 and the decline in oil prices.
There is currently a limited number of sufficiently creditworthy Russian banks and few ruble 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.
In the event of a banking crisis, Russian companies may be subject to severe liquidity constraints due to the limited supply of domestic savings and the withdrawal of foreign funding sources that may occur during such crisis. 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. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
The physical infrastructure in Russia and the other countries where we operate is generally in poor condition, which could disrupt our normal business activities and adversely impact our results.
The physical infrastructure in Russia and the other countries where we operate does not always meet modern technical requirements, has not been always funded and maintained over the past years.
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 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 may be poor with many roads not meeting minimum quality and safety standards, causing disruptions and delays in the transportation of goods to and within these countries. The governments of the countries where we operate are actively considering plans to reorganize their national rail, electricity and
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communications systems. Any such reorganization may lead to additional costs and increased tariffs while failing to generate the anticipated capital investment needed to repair, maintain and improve these systems. The deterioration or insufficient renewal of the physical infrastructure in the countries where we operate harms the national economies, adds costs to doing business in these countries and impedes companies to operate effectively. 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 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 and the other countries where we operate, and businesses in these countries could consequently face severe liquidity constraints. Additionally, as Russia produces and exports large amounts of oil and gas, the Russian economy is especially vulnerable to the price of oil and gas on the world market and a decline in the price of oil and gas could negatively impact its economy. See also “—Ruble volatility 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”. In addition, recent military conflicts and international terrorist activity have significantly impacted the oil and gas prices globally, and pose additional risks to the Russian economy. Russia is also a major producer and exporter of metal products and its economy is vulnerable to world commodity prices and the imposition of tariffs and/or anti-dumping measures by the United States, the European Union or other principal export markets.
Although our results have not been materially affected by the pandemic to date, there can be no assurance that our business could be materially affected. For more information see “—The outbreak of COVID-19 may have a material adverse effect on our business, financial condition, results of operations and prospects.”
The disruptions recently experienced in the domestic and international 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. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
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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 political and economic situation in Russia has been negatively affected by the global financial crisis, the economic sanctions imposed by the United States, the European Union, Great Britain and other countries, the ongoing volatile economic conditions as well as the continuing impact of COVID-19 pandemic. Other countries where we operate may pose similar challenges. Current and possible future political changes in Russia and other countries where we operate, major policy shifts or a lack of consensus between the various branches of power and powerful economic groups could disrupt or reverse economic and regulatory reforms. This could, in turn, lead to further political instability or conflicts among powerful economic groups, which could have a material adverse effect on our business, financial condition, results of operations, prospects and the value of our shares and ADSs. For example, after the presidential elections, which took place on August 9, 2020, protests began in Belarus. Moreover, the United States, the European Union, Great Britain and other countries have imposed additional sanctions on certain Belarusian persons and entities. Further destabilization of the political and social situation can negatively affect our business, financial position and operations. A deterioration of the socio-political situation in Russia could also trigger an event of default under some of our loan agreements.
On July 4, 2020, the Law of the Russian Federation on Amendment to the Constitution of the Russian Federation came into force which implemented a number of constitutional reforms aimed at altering the balance of power between the legislative, executive and judicial branches and introducing certain other changes to the Constitution of the Russian Federation. This Law, among other things, prioritizes the Constitution of the Russian Federation over international treaties and the decisions of international bodies, strengthens the Russian State Council as an advisory board to the Russian President and grants the Russian Federal Council with authority to terminate the powers of the judges of the Constitutional Court of Russia upon the recommendation of the Russian President. These amendments to the Constitution may have a significant impact on the Russian political landscape and regulatory environment and lead to other changes that are currently difficult to predict. See also “—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
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 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. A 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, as well as governmental and administrative decisions implementing them and 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. 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 parts or the whole of Russia. Moreover, any terrorist attacks and the resulting heightened security measures are likely to cause disruptions to domestic commerce and exports from Russia. Any of these factors could materially adversely affect our business and the value of our shares and ADSs.
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Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.
In February and March 2022, as a result of the ongoing geopolitical conflict in Ukraine, the EU, the U.S., the UK and certain other countries have imposed new significant sanctions and export controls on Russia, particular sectors of Russian economy, and some Russian and Belarusian persons and entities. The continuation or expansion of such restrictions as well as uncertainty due to changes in the regulatory environment in Russia may raise additional compliance and operational challenges for the Company and adversely affect the business of the Company and its customers. In addition, a number of western companies and exchanges have taken further action suspending, stopping, or restricting their operations in Russia by their own initiative. On February 28, 2022, trading on the Moscow Exchange in all equity securities was suspended (including the Company’s ordinary shares), which was later suspended until the limited resumption of stock trading on MOEX on March 24, 2022, and the full resumption of stock trading on MOEX on March 28, 2022. Also, on February 28, 2022, the New York Stock Exchange halted trading in the Company’s ADRs and stocks of certain other Russian companies.
In addition, on February 24, 2022, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) issued a final rule imposing enhanced export controls on Russia, and a license generally is now required for the export, reexport or transfer (in country) of a number of items subject to the Export Administration Regulations (“EAR”) to Russia, including electronics, computers, telecommunications and information security, sensors and lasers, navigation and avionics, marine, and aerospace and propulsion. Most export license applications for Russia will now be subject to a policy of denial, and applications may be reviewed on a case-by-case basis if they relate to flight safety, maritime safety, humanitarian needs, civil telecommunications infrastructure, government space cooperation and government-to-government activities. On March 2, 2022, BIS issued additional export controls relating to Belarus and further expanding the scope of certain export controls relating to Russia.
On February 25, 2022, the European Union published a package of export control measures against Russia, and the package, inter alia, imposes further restrictions on the export of dual-use goods and technology to Russia and other goods and technology which might contribute to Russia’s technological enhancement of its defense and security sector. These measures cover equipment related to the manufacturing of electronic components and materials and other specially designed components and accessories, with certain limited exceptions.
On February 28, 2022, the UK removed Russia as a permitted destination from numerous open general export licenses, and suspended the approval of new export licenses for dual-use items to Russia. On March 1, 2022, a number of further amendments were made, expanding the scope of the existing ban on the export, supply and delivery, making available and transfer of military goods and technology to and for use in Russia, to include certain electronics, computers, telecommunications equipment and information security, sensors and lasers, marine-related items and aerospace and propulsion-related items, with certain exceptions.
In addition, the U.S., the EU, the UK, and other countries have imposed a number of sanctions relating to Russia and Russian parties, including: (i) sanctions that block the property of certain Russian entities and individuals, including a number of financial institutions; (ii) targeted sanctions that prohibit certain debt and/or equity or other transactions with identified companies (including those operating in the Russian financial, energy, and defense sectors); (iii) restrictions on transactions with the Russian Central Bank, National Wealth Fund, Ministry of Finance, and (iv) territorial sanctions restricting investment in and trade with Crimea, Donetsk, and Luhansk. In addition, a number of Russian financial institutions have been removed from the SWIFT messaging system.
Moreover, the restrictions introduced by the U.S., the EU, the UK and other countries may impact supply chain and cost of delivery of equipment and other products, and our business and financial condition.
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In particular, pursuant to Decrees of the President of the Russian Federation, Orders of the Russian Government and acts of the Central Bank of Russia a special procedure is established for the execution by residents of certain contracts with foreign legal entities and individuals, including foreign legal entities and individuals from the U.S., the EU, the UK and other countries, that committed unfriendly actions against Russia and Russian persons (hereinafter referred to as foreign persons). In particular, transactions for the provision of credits and loans to foreign persons, as well as transactions that concern the ownership title to securities and real estate are subject to restrictions. Such transactions may be carried out subject to permits issued by the special Government Commission.
Furthermore, a special procedure has been established for the fulfillment by residents (debtors) of their obligations in excess of 10 million rubles (or equivalent of this amount in foreign currency) per month on credits, loans and financial instruments (including payment of bond coupons and dividends) to foreign persons (creditors). These obligations are fulfilled by the debtor with the permission of the Central Bank of Russia (for credit organizations), the Finance Ministry of the Russian Federation (for other debtors) or in rubles through special accounts of type "S". In addition, the Central Bank of Russia is authorized to set limits on the amount of funds for transfers by non-residents from their accounts opened in the Russian Federation to the accounts of other non-residents, as well as for the purchase by non-residents of foreign currency in the foreign exchange market of Russia. Additionally, a ban on transfers by non-resident individuals and legal entities from states that have imposed restrictive measures against Russia (with certain exceptions) of funds held on their accounts opened in Russia to any accounts opened outside the Russian Federation was introduced on April 1, 2022 until September 30, 2022. As a result, any foreign individuals and entities that are the holders of ADRs as of the relevant record date for payment of dividends may be ineligible to receive such dividends in foreign currency. These developments could materially adversely affect the liquidity in, and the value of, our ADRs.
In addition, on March 29, 2022, it was reported that the Ministry of Economic Development of the Russian Federation has proposed a draft law requiring Russian companies to terminate foreign depositary programs, under which the depositary receipts of such companies (including the Company) are listed on foreign stock exchanges. The termination of our depositary program would result in the cancellation of our ADRs, with the underlying shares represented by those ADRs being distributed to shareholders, and the delisting of our ADSs from the NYSE. The underlying shares would continue to be listed on MOEX, which would remain the sole listing venue of our equity securities. The mechanics and timing relating to how the ADRs will be converted into the underlying shares and how such underlying shares are to be traded following their withdrawal from our depositary program remains uncertain. Recipients of such underlying shares may also be subject to restrictions on holding these (either as a matter of applicable law or their own policies). The adoption of this legislation could materially adversely affect the liquidity in, and the trading price of, our ADSs and ordinary shares.
Moreover, on April 3, 2022 certain deputies of the State Duma and members of the Federation Council of the Federal Assembly of the Russian Federation announced amendments to the Criminal Code of the Russian Federation that would establish criminal liability for complying with foreign sanctions on the territory of the Russian Federation. If such amendments were adopted, they could limit MTS’s access to foreign supplies of materials and equipment, as foreign counterparties may be unable to work with MTS, which could have a material adverse effect on our business, financial condition, results of operations, prospects and the value of our shares and ADSs.
In addition, the operations of MTS Bank, the MTS Group’s subsidiary, are susceptible to the risks, including those resulting from sanctions and other regulatory measures, that may affect the MTS Group’s borrowers’ ability to repay amounts due to the MTS Group, which may be impacted by the overall macroeconomic environment and business climate. Adverse changes in economic conditions may result in deterioration in the value of collateral held against loans and other obligations.
The aforementioned geopolitical events, and any continuation of tensions, has had and may continue to have a negative impact on the volatility and trading price of the Group’s shares and ADRs. Developments relating to these matters are highly unpredictable, occur swiftly and often with little notice, and are mostly outside the control of the MTS Group. The risk that any MTS Group member, or individuals holding positions within the MTS Group as well as its counterparties, may be affected by future sanctions designations cannot be excluded. Current and future risks to the MTS Group include, among others, the risk of reduced or blocked access to capital markets and ability to obtain financing on commercially reasonable terms (or at all), the risk of restrictions on the import of certain equipment and software, as well as the risk of further depreciation of the Russian ruble against other currencies (which has already occurred to a certain extent), which may adversely impact the Company’s investment process as a significant portion of its capital expenditures are denominated in or linked to foreign currencies. In addition, rate hikes by the Central Bank of Russia, which has increased its key rate to 20% on February 28, 2022, will and may continue to increase the Company’s financing costs due to the impact on floating-rate credit facilities.
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Moreover, operations of MTS Belarus, that is also a part of MTS Group, are also susceptible to risks described above, as well as to specific sanctions risks arising from the EU, the U.S., the UK and certain other countries’ sanctions and export controls regimes imposed at Belarus in February and March 2022.
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. 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 or demands of dishonest officials 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. Any actions which could result in a negative effect on investor confidence in Russia’s business and legal environment could have a further material adverse effect on the Russian securities market and prices of Russian securities or securities issued or backed by Russian entities, including the shares.
Actions of fraudsters aimed against subscribers cause additional risks for operators. Despite our efforts to detect and prevent fraud, some forms of rendering services (for example, offering payments via external Internet sources) might entail risks of fraudulent charge-offs from subscribers’ personal accounts. Such fraud actions could negatively affect our reputation and lead to an increase in subscriber churn, which could 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.
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.
Legal Risks and Uncertainties
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 the market economy. The following risk factors relating to these legal systems create uncertainties with respect to the legal and business decisions that we make, many of which do not exist in countries with more developed market economies:
● | inconsistencies between and among the constitution, federal and regional laws and subordinate legislation (presidential decrees and governmental, ministerial and local orders, decisions and resolutions) and other acts; |
● | legislation ambiguities which do not allow to predict how these provisions should be followed and how an authorized body or a court will interpret these provisions; |
● | the lack of judicial and administrative guidance on interpreting certain legislation as well as conflicting interpretations of supreme general jurisdiction and arbitrazh courts; |
● | the lack of necessary legislation in the reality of digital economy and rapid developing of new technologies; |
● | the relative inexperience of judges and courts in interpreting certain aspects of legislation; |
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● | the lack of an independent judiciary; |
● | a high degree of discretion on the part of governmental authorities, which could result in arbitrary actions such as suspension or termination of our licenses; and |
● | poorly developed bankruptcy and liquidation procedures and court practice that create possibilities of abuse. |
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 our 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. Total amount of damages was calculated and determined on the basis of all the aforementioned claims against Uzdunrobita and amounted to approximately RUB 18,375 million payable in equal installments over eight months.
Uzdunrobita paid two scheduled installments in November and December 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, 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 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”) and MTS agreed to reenter the Uzbekistan market through a joint enterprise with MTS holding a 50.01% in the charter capital of the joint 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 the resolution of any disputes arising out of the Settlement Agreement in the International Court of Arbitration under International Chamber of Commerce in Paris.
On September 24, 2014, in accordance with the Settlement Agreement, the authorities of the Republic of Uzbekistan granted the joint enterprise 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 enterprise so it could operate and offer full telecommunications services throughout Uzbekistan. The joint enterprise has also received guaranties for investment protection and return of investments in accordance with the laws of the Republic of Uzbekistan.
In November 2014, ICSID 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 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 telecommunications services on the entire territory of Uzbekistan. On August 5, 2016, we sold our 50.01% stake in UMS to the State Unitary Enterprise
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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 also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”.
An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable.
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, initially for a period of one month starting from December 21, 2010, and then permanently.
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 had a five-year term and could be extended for the following five years, provided certain terms and conditions are satisfied. Under this agreement, we were obliged to pay Turkmentelekom a monthly amount calculated as 30% of our net profit in Turkmenistan based on accounting rules of Turkmenistan.
On July 25, 2012, we, our subsidiary BCTI, the Republic of Turkmenistan, the Ministry of Communications of Turkmenistan, the state-owned company, Turkmentelecom, and a mobile operator, Altyn Asyr, signed a settlement agreement (which included 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 to 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.
MTS-Turkmenistan was compelled to suspend communication services in Turkmenistan from 00:00 September 29, 2017, due to the actions of the Government of Turkmenistan, the Ministry of Communications of Turkmenistan, the state-owned telecommunications company, Turkmentelekom, and its wholly-owned subsidiary, Altyn Asyr, the state owned mobile operator in Turkmenistan. These actions resulted in the disconnection of international and long-distance zonal communication services and Internet access.
In July 2018, we filed a Request for Arbitration against the Sovereign State of Turkmenistan with the ICSID in order to protect its legal rights and investments in Turkmenistan. The Tribunal for these proceedings was constituted on December 18, 2018 and the Company subsequently filed its Memorial (statement of claim) with ICSID on March 29, 2019. See also Note 34 to our audited consolidated financial statements and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Turkmenistan.”.
Unless resolved to our satisfaction, we intend to vigorously pursue our claims in arbitration and seek all available remedies.
Russian 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.
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However, pursuant to the Federal Law No. 46-FZ dated March 8, 2022 “On Amendments to Certain Legislative Acts of the Russian Federation,” a reduction in the value of the net assets of a Russian joint stock company below the size of its charter capital at the end of 2022 will not require the liquidation of the company.
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 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.
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 transformation from centrally planned economy to market economy, legislation has been enacted in the country 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.
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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.
In addition, the Russian tax authorities have 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 as well as requirements of international and regional standards 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 (planned and unscheduled) 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 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.
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. In October 2020, the Ministry of Digital Development, Communications and Mass Media adopted its Order dated July 31, 2020 No. 369 “On Determining the Requirements for the Quality of Sound and (or) Image of Mandatory Public TV and (or) Radio Channels”
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which updated the existing quality requirements. 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.
On June 1, 2018, Federal Law No. 245 “On Amendments to the Federal Law” On Communications” entered into force and is aimed at further aligning the process of entering into a contract for the provision of mobile radiotelephone communication services without appropriate identification of a subscriber (i.e., a user) of communication services. Operators may be subject to penalties and other sanctions, including the suspension of an operator’s activity for up to 90 days, for non-compliance with the Law.
Our failure to comply with existing laws and regulations of the countries where we operate as well as requirements of international and regional standards 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 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. We have also engaged in certain disputes, which could require us to pay damages or settlements. We may incur expenses in defending these lawsuits. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation”.
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.
We provide certain common contractual protections to the purchaser under the VF Ukraine Sale Agreement and are subject to certain post-closing obligations.
In December 2019, we sold our telecommunication business in Ukraine under an agreement entered into with Telco Solutions and Investments LLC, as purchaser, an entity affiliated with telecommunication company Bakcell LLC, which is a part of the NEQSOL Holding international group of companies (the “Sale Agreement”), see “Item 4—Information on our Company—A. History and Development” and Note 11 to our audited consolidated financial statements for details of the transaction. We provide certain common contractual protections to the purchaser and are subject to certain post-closing obligations under the Sale Agreement. Further, the Sale Agreement contains a post-completion price adjustment mechanism. As a result of applying this mechanism, the purchase price was adjusted in our favor so we were not required to pay any sum to the purchaser.
Although we do not anticipate any further material price adjustments or other liability under the Sale Agreement, there can be no assurance that a liability will not emerge in the future, in which case it could have an adverse effect on our financial position and results of operations.
There is insufficient 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, (c) the ability of a shareholder
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to sell his shares at a fair price when the control is changed, the company is acquired at a price determined in accordance with the requirements of the current legislation, (d) shareholders’ right to challenge decisions of the company’s management bodies in certain circumstances, and (e) shareholders’ right to challenge transactions which caused company’s loss. Companies are also required under Russian law to obtain the approval of disinterested shareholders for certain transactions with interested parties. In practice, enforcement of these protections has not always been effective. Shareholders of some companies have 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 provides that shareholders owning not less than 1% of the company’s outstanding common stock may bring an action for damages caused to a company by its CEO, member of the Board of Directors or its 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 by the court. In 2009, legislation was adopted which contemplates class action litigation, in 2015 mechanism of class action regarding corporate disputes was introduced and in 2019 this mechanism was updated and specified. Although there have been several disputes in the past few years, Russian courts do not have a clear and consistent approach in regards to class action litigation. In addition, the issue of claims by shareholders against the company to compensate the shareholders for their losses is not clearly regulated by the current legislation.
Moreover, due to the adoption of Federal Law No. 55-FZ dated March 14, 2022, until December 31, 2022 shareholders holding alone or with other holders 5% or more of the voting shares have the right to appeal to the court with claims to challenge major and interested party transactions, as well as claims against a member of the Board of Directors or member of any executive body of the Company. Before the adoption of this Federal Law, shareholders holding alone or with other holders 1% or more of the voting shares had the right to file such lawsuits.
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:
● | to demand the liquidation of a company in case of failure to achieve a corporate purpose for which it was created, including a case when an operation of a company becomes impossible or is substantially hampered; and |
● | to demand exclusion of a shareholder or a participant (except for the public joint stock companies, including MTS) whose actions/inactivity either cause significant harm or hampers the company’s operations. |
In this regard, we cannot rule out the possibility of such claims being filed 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 both obligations of our 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
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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 liability for transactions concluded by the effective subsidiary in carrying out its decisions or decisions made with its consent. 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 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 failure 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.
Accordingly, we could be liable in some cases for debts of our subsidiaries and losses of the legal entities to the extent that we had any power of determining such subsidiaries’ actions that 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:
● | decisions with respect to a reorganization; |
● | the approval by shareholders of a “major transaction,” which involves property in excess of 50% of the balance sheet value of the company’s assets calculated according to Russian accounting standards, regardless of whether the transaction is actually consummated (including those which are simultaneously interested-party transactions), except for transactions undertaken in the ordinary course of business; |
● | the amendment of our charter in a manner that limits shareholder rights; |
● | the amendment of our charter in a manner that excludes reference to the entity’s public status, approved simultaneously with a decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities; and |
● | a decision on applying for delisting of shares and convertible securities from a stock exchange. |
For example, during 2015-2021 we repurchased MTS ordinary shares, for more details see “Item 16E—Purchases of Equity Securities by the Issuer and Affiliated Purchasers.” 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 of the date of repurchase, we will 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 the FAS. In addition, a company may be considered to be strategically important due to our offering of services involving the use of cryptographic technologies.
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Starting from the effective date of the Strategic Foreign Investment Law, a foreign investor (including Russian citizens having foreign citizenship according to the amendments which came in force on July 1, 2017) seeking to obtain direct or indirect control over a strategically important company is required to have the respective transaction pre-approved by a special governmental commission on control of 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 the pre-approved transactions. With effect from July 1, 2017, according to the amendments, offshore companies (and companies under their control) are prohibited from obtaining control over a strategically important company and are obliged to have any acquisition of 25% or more of right of ownership of voting shares pre-approved. According to the amendments that came into force on July 1, 2017, certain sanctions may be imposed in respect of such transactions conducted without notification, for example, a deprivation of the foreign investor of any voting rights at a shareholders’ meeting of strategically important companies through judicial proceedings brought by an authorized governmental body.
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 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. Over the past few years the government authorities developed a number of new initiatives, which have not yet been implemented or were implemented recently and a lack of law enforcement practice may cause difficulties in interpreting these developments and lead to additional burden for telecommunications operators. In December 2018, the Ministry of Communications developed new initiatives relating to the reframing of interaction between operators. It is unclear yet how this proposal may be implemented, however it may potentially lead to a reduction in traffic transmission revenues and margin. The final decision on the implementation of this proposal has not been made yet. The agreement 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 Russian legislation. To date, the provisions have not been implemented yet.
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.
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With the entry into force of the Treaty on the Eurasian Economic Union (the “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 requirements are applied, was expanded according to those amendments. In addition to telecommunications operators entitled to independently render mobile radio telecommunications services, the telecommunications 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 telecommunications 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 of cash assets / 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 telecommunications operators.
On July 8, 2017, the Federal Law No. 110 “On Amendments to Article 66 of the Federal Law “On Communications” and Article 35 of the Federal Law “On Mass Media” dated June 7, 2017 came into force, which requires operators to transmit warning signals to telecommunications services users or inform them about dangers arisen by threat of occurrence of emergencies or occurrence of emergencies. Expenditure related to the transmission of warning signals is not compensated to operators.
On 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 order came into force on July 26, 2017.
According to the requirements, a telecommunications operator is obliged (on a quarterly basis) to provide authorities with 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 telecommunications 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.
The Federal Law No. 374 “On the Introduction of Amendments to Certain Legislative Acts of the Russian Federation with Respect to Setting up of Additional Counter-terrorism Measures and Public Security Enforcement” was adopted on July 6, 2016. Pursuant to that law, operators are obliged 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 telecommunications services users (for a three-year period) and the contents of such communications, including voice data, text messages, pictures, sounds, video or other communications (for up to six months). The requirement relating to the storage of messages contents entered into force on July 1, 2018. The Government regulation “On Rules, Terms and Volume of Voice Information, Text Messages, Images, Sounds, Video- and Other Messages of Telecommunications Services Users to be Stored” was adopted on April 12, 2018 (the “Rules on Storage”). According to this regulation, commencing July 1, 2018, communication operators that render intercity and international communication services (as well as personal radio call services, mobile radio services in a public communication network, mobile radiotelephone and satellite communication services, data transmission services for the purposes of transferring voice information, zonal and local telephone communication services) are required to store voice information and text messages, for a period of six months from the moment of the end of their receipt, transfer, delivery and/or processing. Starting from October 1, 2018, operators that render telematics services, as well as data transmission services (except for data transmission services for the purposes of transferring voice information) are obliged to store telecommunication messages by using data storage technical equipment in the volume of electronic communication messages sent and received by the operator’s subscribers (the actual traffic) during 30 days before the commissioning date of the technical equipment. Moreover, the capacity of the data traffic storage system is required to be increased by 15% annually during 5 years from the date the data storage technical equipment was put into operation. Significant additional costs will be required in order to comply with these requirements.
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With effect from October 1, 2019 the Federal Law No. 191 “On Introduction of Changes to Certain Legislative Acts of the Russian Federation” dated July 18, 2019 came into force and assumes important changes to the procedural legislation regarding class actions in Russia. According to the law, consumers have a right to file class action lawsuits with the courts of general jurisdiction. Moreover, the law provides changes relating to class actions in arbitration proceeding, specifically, a “group” is defined as those having common or homogeneous rights. The law is aimed at harmonization of civil and arbitration proceedings as well as boosting the effectiveness of the Arbitration Procedure Code (“APC”) clauses, therefore the changes are generally consistent with the Civil Procedure Code (“CPC”) developments. These changes allow mass consumer claims in case the amount of each individual claim is small, but the total amount of all claims is significant, that could additionally motivate to initiate lawsuits, inter alia, by using litigation funding (investment) tools. The law expanded the list of persons who can advocate the interests of a group of persons. Claims might be filed by, inter alia, Rospotrebnadzor, FAS, Bank of Russia, stakeholders and other persons as well as by a group of consumers, whose interests are suffered as a result of violation of competition legislation. Any class actions filed against us could have a material adverse effect on our business, financial condition and results of operations.
In November 2019, the Federal Law No. 90 “On certain amendments to the Federal Law “On communications” and the Federal Law “On information, information technologies and information protection” dated May 1, 2019 (the “Sovereign Internet Law”) aimed at ensuring stable, secure and integral functioning of the Internet in the territory of the Russian Federation, came into force. Under the Sovereign Internet Law, operators, installed equipment on their networks, which could adversely affect the networks’ stability and the quality of provided communication services. The Sovereign Internet Law is broadly drafted, and although the Russian authorities have already adopted necessary implementing acts, practical issues may require further subordinate legislation to be adopted further clarifying the provisions of the law. Furthermore, additional costs for maintenance and operation of this equipment may be required from the operators.
On January 14, 2019, the Government of the Russian Federation published a list of instructions aimed at encouraging the procurement of telecommunication equipment of Russian origin. According to the document, ministries should prepare proposals by May 1, 2019, relating to an increase in the import customs duty rate to a level of up to 20% with respect to telecommunication equipment. Currently, there can be no certainty as to the form of the implementation of these initiatives; therefore, it is difficult to assess how such changes will affect the company’s operations. Should the import customs duty rate increase in respect of the equipment we purchase, this may have a material adverse effect on our financial condition and results of operations.
The Federal Law No. 533 dated December 30, 2020, which came into effect from June 1, 2021, introduced amendments to the Law “On Communications” clarifying the contracting process with subscribers, including the following changes:
● | the possibility to conclude contract with subscribers using a simple electronic signature obtained in operator’s offices is excluded; |
● | a contract for devices with eSIM can be concluded via the Internet only using a unified biometric system and an advanced qualified electronic signature; |
● | rendering services for corporate clients is possible only if data on individuals using a subscriber’s numbers is entered into the Integrated Identification and Authentication System (IIAS). Operators have the obligation to check if such information is present in the IIAS starting from December 1, 2021 and stop providing services to clients in case the information is inaccurate; |
● | rendering telecommunication services to corporate clients for M2M devices is possible only if data on a subscriber’s number, address of a corporate client or device location as well as other information is entered into the IIAS. This may affect the M2M services development, including IoT projects; |
● | Roskomnadzor is responsible for developing an information system for monitoring the contracting process between operators and their subscribers. An operator will have the obligation to report certain information via this system unilaterally. Modification of business processes and IT systems for connection to the monitoring system may be required from operators. Federal Law No. 319 determines information, which operators are obliged to transfer to Roskomnadzor , including information about subscribers (users), volume and period of providing telecommunication services etc. |
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In July 2021 the Russian President signed the Federal Law No. 319, according to which free access must be organized starting from December 1, 2021, to the websites of domestic socially significant Internet resources, including the websites of state bodies, non- budgetary funds, state and municipal service portals and other websites that will be determined by the Government Commission. In furtherance of the abovementioned Federal Law, the Government adopted Decrees No. 2531 dated December 29, 2021 and No. 2469 dated December 25, 2021, containing the Rules for maintaining a list of domestic socially significant information resources and establishing the Government Commission, including its tasks, rights and decision-making procedures. The conditions under which the operator provides free access are regulated by the rules for the rendering of telecommunication services. In January 2022 the Government Commission determined the list of domestic socially significant information resources and included the “Vkontakte” social networking system and the “Gosuslugi” Integrated Identification and Authentication System in the list. We provide free access to these resources on our mobile network. This could potentially have a material adverse effect on our business, financial condition and results of operations.
The Federal Law No. 319 dated July 02, 2021 introduced amendments to the Law “On Communications” expanding the list of requirements for operators, including:
● | a register of communication lines, crossing the Russian state border, and communication facilities, to which these communication lines are connected, will be formed. Operators will have to comply with requirements established by Roskomnadzor for such lines and communication facilities, and send a notification of their fulfillment to Roskomnadzor in order to include the relevant information in the register. Operators do not have a right to connect communication lines to communication facilities and communication facilities to communication lines, if there is no information about them in the register. |
● | operators are obliged to connect and send/receive information through a system developed by the radio frequency service. This information will be used to monitor compliance by operators with the requirements of the Federal Law “On Communications”. |
The Federal Law No. 465 dated December 30, 2021 introduced amendments to the Law “On Communications”, according to which:
● | operators are obliged to transmit free SMS messages with a confirmation code to citizens and legal entities in case of their authentication through the Integrated Identification and Authentication System (IIAS) as well as in case of their significant actions using the IIAS; |
● | the special features of providing communication services, connection services and traffic transmission services (for example, pricing) for the needs of state authorities, the needs of the country’s defense, state security and law enforcement have also been extended to other state bodies, local governments and organizations (customers), if they: conclude contracts for such services in accordance with the legislation of the Russian Federation on the contract system; pay for them using the funds of the budget system of the Russian Federation. |
● | operators are prohibited to suspend and (or) terminate the provision of telecommunication services to the above-mentioned customers after the expiration of the contract. |
The Federal Law No. 480 dated December 30, 2021 establishes administrative sanctions for non-compliance with obligations related to the transfer of a subscriber number and (or) a unique identification code, termination of rendering communication services and (or) services for traffic transmission (it entered into force on December 30, 2021) as well as connection by operators to the system for ensuring their compliance with requirements for the provision of communication services and services for traffic transmission in the public communication network (it will come into force on January 1, 2023).
Currently, the Russian Civil Code is undergoing the process of substantial revisions with new provisions being introduced relating to a number of sectors. Particularly, Federal Law No. 430 dated December 21, 2021 (excluding certain provisions) will come in force on March 1, 2023 and, among other things, supplement the Civil Code of the Russian Federation with chapters on real estate and rights to buildings, structures, objects under construction, premises. The regulation also defines the types and concepts of immovable things, land, buildings, structures, and premises, as well as the general principles for the formation of immovable things.
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At present, the potential interpretation of these amendments by state authorities (including the courts), along with their impact on our activities are unknown.
A roadmap for 2018-2020, for the development of competition in economic sectors of the Russian Federation and the transition of particular sectors from the state of natural monopolies to the competitive market was approved by the Order of the Government of the Russian Federation No. 1697-r dated August 16, 2018. The roadmap provides for the adoption of a number of regulatory legal acts, inter alia, in the telecommunication sphere. Currently, it is difficult to assess how such changes and their interpretation by state bodies, particularly by courts, may affect our operation.
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 increase of our costs 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 application of certain liability measures with respect to our subsidiaries.
One of our subsidiaries, MGTS, is categorized as a natural monopoly in the Moscow telecommunications market. According to the Federal Law No. 223 “On Procurement 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 certain liability measures, according to Russian legislation. 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 be entitled to regulate our subscriber tariffs and impose certain restrictions on our operations.”
Russian and foreign legislation on personal data and information security in information systems and communication networks may turn out to be hard to implement and require significant resources. Inability to comply with the requirements may lead to sanctions.
Communication operator activity in the sphere of information security in the Russian Federation is represented by the following legal acts: Federal laws “On Communication,” “On Information, Information Technologies and Information Protection,” “On Personal Data,” “On Trade Secret,” “On Electronic Signature,” by-laws of the Government, FSTEC, FSS, Ministry of Communication and The Federal Service for Supervision of Communications, Information Technology and Mass Media of the Russian Federation, among others. Main risks, posed by organization of processing and providing security of personal data include the following factors:
● | ambiguity of applicability of legislation on communication, personal data, trade secret, etc. to a single object of legal regulation. Data may be simultaneously attributed to different categories of limited access information, which fall under different information security requirements under different sections of the Russian legislation; |
● | responsibility of personal data operators for the actions of the third parties, processing personal data at the request of personal data operators; |
● | ambiguity of the criteria for determining personal data protection level during its processing in the information systems (for example, in case undocumented possibilities in system and/or applied software exist), set by Government Decree No. 1119, dated November 1, 2012; |
● | high level of requirements to the personal data protection; |
● | significant costs on creation of information protection system and support of protection level; |
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● | necessity to use the means of information protection, which have undergone a special conformity assessment procedure; replacement of the existing means of information protection with the ones, certified by FSTEC and FSS of Russia may require additional costs on certification of the existing means of information protection and later on certificates renewal (because of the limited period of certificates validity); |
● | in case of failure to comply with requirements for confirmation of licenses for the technical and cryptographic protection activity of confidential information by FSTEC of Russia or FSS of Russia, the company would not be able to provide the corresponding commercial services to the third parties; and |
● | ambiguity of the requirement of Federal law No. 152 to localize processing of the Russian citizens personal data on the territory of Russia, keeping the possibility of cross-border transfer of this data. |
In case of non-compliance with the Russian legislation on information security and personal data protection, the company cannot rule out the possibility of imposing sanctions by the regulatory bodies in the form of fines, confiscation of uncertified means of information protection, suspension of business processes for 90 days as well as suspension or withdrawal of the license, allowing to provide communication services, technical and cryptographic protection of confidential information.
In addition, it is possible that subscribers will file legal claims, seeking to reimburse tangible and moral damage in connection with the violation of the legislation requirements.
With effect from May 25, 2018, the General Data Protection Regulation came into force in the European Union. Our basic business processes and our subsidiaries were audited in order to determine applicability and compliance with the GDPR requirements. In addition, a control mechanism for determination of compliance with the specified requirements was proposed to be established for new business processes (if they are initiated). In case of launching services and products, to which the GDPR will apply, we must ensure these services and products comply with the GDPR requirements.
Federal Law No. 519-FZ dated December 30, 2020, which came into force from March 1, 2021, established specific regulation for processing of personal data, permitted by the personal data subject for distribution. The Law established certain consent requirements for such personal data processing. For example, the consent should be obtained separately from other consents. An operator must provide the opportunity for the subject to determine the list of personal data for each personal data category specified in such consent. Lack of response or inaction of the personal data subject cannot be considered as consent to the processing of personal data, authorized by him for disclosing. The personal data subject has a right to request any personal data operator to remove his personal data from public access without additional proving the fact of illegal processing of his personal data.
If the resources required to maintain, develop and implement data protection and information security systems meeting the legislation requirement 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.
The Ministry of Digital Development, Communications and Mass Media of the Russian Federation prepared draft amendments to the Federal Law No. 149-FZ “On Information, Information Technology and Data Protection” dated July 27, 2006 aimed at unifying the approach to big data processing. Currently there is no clarity as to the requirements to the big data processing and when the announced draft law and subordinate legislation may be adopted, hence we are not able to estimate their potential impact on the Group.
The Federal Law No. 441 was adopted on December 30, 2021. According to the Law, if we continue to collect and process biometric personal data to authenticate personal data subjects, we will have to be accredited by September 1, 2022 in accordance with the requirements of legislation on information, information technology and information protection. In addition, we must check the compliance of organizational and technical measures for the processing (including collection) and protection of personal biometric data and, in case of non-compliance with such requirements, take appropriate measures. At present, such changes in the legislation could lead to significant additional costs as well as significant risks including administrative sanctions in case of non-compliance with these requirements.
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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 the Russian tax regime 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.
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.
Lately the Russian government has taken measures aimed at revising the existing structure and practice of applying agreements on avoidance of double taxation in order to limit the taxpayer’s ability to apply reduced rate (exemptions) when paying dividends and interest in certain jurisdictions. The terms of the agreements have already been revised with a number of jurisdictions in order to increase tax rate on dividends and interest, and are being revised with other ones. Limitation of the taxpayer’s ability to apply reduced rate (exemptions) might lead to higher tax rates, and thus increase our costs.
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. Moreover, the Russian Tax Code was amended with direct provisions which prohibit tax benefits, if achieved without real business activities, or the main aim of the transaction was tax benefits. 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.
See also “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Tax Audits and Claims.”
Lack of law enforcement practice of the Russian anti-offshore policy may have an 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.
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The 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 in certain cases. 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 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 also impact our results of operations.
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 specific documentation.
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. The 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 40% 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.
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The regulatory environment for telecommunications in Russia 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 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. In addition, some of our competitors may receive preferential treatment from the government, potentially giving them an advantage over us.
We are subject to currency control regulations.
The Currency Control Law provides a framework and establishes general rules within which the government of Russia and the Bank of Russia are authorized to introduce certain measures of currency regulation, in connection with which there may be some uncertainty in the process of our implementation of foreign exchange operations when importing equipment.
The change in the currency regulation may negatively affect our performance of obligations under contracts previously concluded with Russian and foreign counterparties, requiring us to make payments on them in foreign currency and necessitating the conclusion of additional agreements in relation to the relevant contracts. As a result, we are exposed to the risks of changes in the currency regulation and foreign exchange control in Russia. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
The regulation of critical information infrastructure in the Russian Federation may lead to additional costs which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Federal Law No. 187 “On the Security of the Critical Information Infrastructure of the Russian Federation” which came into force on January 1, 2018 (the “Law on CII”) provides for the creation of a register of significant critical information infrastructure (CII) objects, to which the communication networks elements may be assigned (after the classification of CII objects). Both state-owned and non-state-owned organizations are classified as subjects of the CII.
The law envisages criminal penalties if the security requirements in respect of such significant CII objects are not met and damage is incurred. CII subjects, including communication operators, are required to, among other things:
● | categorize CII objects; |
● | sent the results of CII objects categorization with the authorized bodies; |
● | create a security system for significant CII objects and implement measures targeted at significant CII protection and protection of information, belonging to the corresponding category; |
● | set up and provide the operations of means for attacks search on the communication network with the transfer of management to the authorized body; and |
● | organize transfer of information about computer incidents on the CII to the authorized body. |
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The by-laws envisage measures aimed at CII objects protection, which are difficult to implement, especially as regards the implementation of information protection measures that are not provided by such communication standards as 3GPP, ETSI, etc., which may lead to incompliance with the regulatory requirements. The implementation of these requirements will require additional costs to be incurred. Requirements of Federal Service for Technology and Export Control of the Russian Federation and the Ministry of Communications (orders No. 239 and No. 582) restrict remote access to CII objects, which may affect possibility to provide warranty and technical support of communication infrastructure by foreign vendor agents.
Pursuant to paragraph 1 d)-2 of the Order No. Pr-1180 of the Russian President dated July 2, 2019 the Ministry of Communications developed draft orders «On economic measures to ensure technological independence and security of critical information infrastructure objects» and «On approval of requirements applicable for software, telecommunications equipment and radio-electronic products used at critical information infrastructure objects, and the procedure for the transition to the preferential use of Russian software, telecommunications equipment and radio-electronic products», providing for obligation of operators to use only Russian equipment and software at CII objects.
Compliance with the requirements of the laws and regulations or introduction of similar regulations may require additional costs to be incurred by us or otherwise negatively affect us and could have a material adverse effect on our business, financial condition, results of operations and prospects.
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, before November 28, 2021, under Russian securities regulations, no more than 25% of a Russian company’s shares could have been 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 lower threshold, which was subsequently abolished, did 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 traded on the Moscow 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.
Failure to comply with requirements on the disclosure of certain information on ADSs and ADS holders may restrict your ability to vote.
Pursuant to 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. In addition, uncertainties with respect to exercise of certain rights attaching to shares underlying ADS holders could complicate the exercise of right to, and the ability to derive benefits from, the shares represented by ADSs.
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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. Volatility remains relevant, as trading in our ADSs on NYSE was suspended on 28 February 2022, following the suspension of all trading on the Moscow Exchange on the same day. MOEX stock trading was resumed on March 24, 2022. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
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:
● | periods of regional or global instability, including macroeconomic; |
● | announcements of technological or competitive developments; |
● | regulatory developments in our target markets affecting us, our customers or our competitors; |
● | actual or anticipated fluctuations in our quarterly operating results; |
● | changes in financial estimates or other material comments by securities analysts relating to us, our competitors or our industry in general; |
● | the value of local currencies in the markets where we operate compared to the US dollar; |
● | change of the key rate by world banks; |
● | announcements by other companies in our industry relating to their operations, strategic initiatives, financial condition or financial performance or to our industry in general; |
● | announcements of acquisitions or consolidations involving industry competitors or industry suppliers; |
● | sales or perceived sales of additional ordinary shares or ADSs by us or our significant shareholders; and |
● | impact and development of any investigation or lawsuit, currently pending or threatened, or that may be instituted in the future. |
For example, market price of our ADSs experienced volatility in 2017 due to legal proceedings relating to Sistema, initiated by Rosneft, Bashneft and the Ministry of Land and Property Relations of Republic of Bashkortostan, and arrest of 31.76% of shares in our authorized capital held by Sistema, which was lifted as a result of execution of the settlement agreement.
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.
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They are 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 50 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 ADS 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 “—Failure to comply with requirements on the disclosure of certain information on ADSs and ADS 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 Russian Tax
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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—Certain Russian Tax Consequences—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.
If we were classified as a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes, U.S. holders of the ADSs could be subject to adverse U.S. federal income tax consequences.
In general, we will be a PFIC for any taxable year in which either: (i) at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest, capital gains, rents, and royalties, other than rents or royalties derived in the active conduct of a trade or rental business); or (ii) at least 50% of the value of our assets (generally determined on the basis of a quarterly average) is attributable to assets that produce, or are held for the production of, passive income. Our PFIC status is an annual determination that can be made only after the end of each taxable year, and will depend on the composition of our income and assets and the value of our assets from time to time, including goodwill (which may be determined by reference to the market value of our shares or ADSs, which may fluctuate), and the manner in which we operate our business. Recent volatility in the global capital markets could increase the risk that we might be classified as a PFIC in the current taxable year or in future taxable years. Accordingly, there can be no assurance that we will not be a PFIC for any taxable year.
If we were classified as a PFIC for any year in which a “U.S. Holder” (as defined under “Certain United States Federal Income Tax Consequences”) owns our ADSs, the U.S. Holder could be subject to adverse U.S. federal income tax consequences. For any year during which a U.S. Holder held the ADSs, we will continue to be treated as a PFIC with respect to that U.S. Holder for all succeeding years during which the U.S. Holder held the ADSs, unless we cease to be a PFIC and the U.S. Holder has made certain “purging” elections with respect to the ADSs. Each U.S. Holder of the ADSs should consult its tax advisor regarding the PFIC rules and should read the discussion below under “Certain United States Federal Income Tax Consequences—Passive Foreign Investment Company Considerations.”
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
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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 central and rigorously regulated share registration system in Russia may result in improper record ownership of our shares and ADSs.
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, there is no single central registration system in Russia. Share registers can be maintained only by licensed registrars located throughout Russia. Regulations have been adopted regarding the licensing conditions for such registrars, as well as the procedures to be followed by licensed registrars when performing the functions of registrar. In practice, however, these regulations have not been strictly enforced, and registrars generally have relatively low levels of capitalization and inadequate insurance coverage. Moreover, registrars are not necessarily subject to effective governmental supervision. Due to the lack of a central and rigorously regulated share registration system in Russia, transactions in respect of a company’s shares could be improperly or inaccurately recorded, and share registration could be lost through fraud, negligence 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. Furthermore, the depositary, under the terms of the deposit agreements governing record keeping and custody of our ADSs, is not liable for the unavailability of shares or for the failure to make any distribution of cash or property with respect thereto due to the unavailability of the shares. See “Item 10. Additional Information—Charter and Certain Requirements of Russian Legislation—Registration and Transfer of Shares.”
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.
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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.
Other Risks
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.
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.
Factors over which we have little or no control may affect our revenues.
Our business activities depend on a number of factors which are outside of our control, including natural disasters, imposition of a state of emergency in the countries of our operations, strikes and global and regional economic conditions. Any of these factors could result in deterioration of our revenues, which could have a material adverse effect on our results of operations, financial condition, prospects and the price of our ADSs.
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 42.085% of our share capital (effective ownership - 49.94%). See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”
Our legal name is Mobile TeleSystems Public Joint Stock Company (MTS) 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.ir.mts.ru. The information on our website is not a part of this report. We have appointed Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711 as our authorized agent for service of process for the service or processing of any suit or proceeding arising out of, or relating to, our shares, ADSs, or the depositary agreement(s). We maintain a website at www.ir.mts.ru. The information on our website is not a part of this report. The SEC
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maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.Mobile TeleSystems Public Joint Stock Company (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 (now VF Ukraine) for RUB 11,872 million. Starting from 2007 until 2015, we operated under the MTS brand in Ukraine. In 2015, as part of our strategic partnership with Vodafone, we introduced Vodafone brand in Ukraine. In December 2019, our wholly owned subsidiary Allegretto Holding S.a.r.L (Lux) sold its 100% stake in its Dutch subsidiary Preludium B.V., the sole shareholder of VF Ukraine, for total consideration of USD 689 million (RUB 44,386 million) (including fair value of earn-out of USD 44 million). See Note 11 to the consolidated financial statements. This deal is in line with our revamped strategy focused on Russia and aimed to build innovative digital services on top of a strong telecoms foundation.
We started operations in Uzbekistan, following the two step acquisition of 100% ownership interest in Uzdunrobita in 2004 and 2007. 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 April 22, 2013, the Tashkent Economic Court declared Uzdunrobita bankrupt and initiated liquidation 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. On September 29, 2017, we stopped providing communication services in Turkmenistan due to the actions of the state-owned telecommunication company Turkmentelekom, which resulted in the disconnection of international and long-distance zonal communication services and internet access. See “Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable.”
In September 2007, we acquired an 80% stake in International Cell Holding Ltd., a 100% indirect owner of K-Telecom (now MTS-Armenia), the leading wireless operator in Armenia, for €260.0 million (RUB 9,142 million), and entered into a call and put
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option agreement initially valid until 2012 (and later extended until 2018) for the remaining 20%. Subsequently International Cell Holding Ltd. was substituted by Aramayo Investments Limited and further liquidated due to corporate restructuring. In August 2019 Allegretto Holdings S.a.r.L (Lux), our 100% subsidiary, that held 80% shares of Aramayo Investments Limited entered into a full and final settlement agreement, under which the value of 20% shares in MTS-Armenia was offset against the amount of loan issued to the minority shareholders and accrued interest ($99.1 million or RUB 6,618 million). Thus, as a result of the transaction, Allegretto accumulated 100% of indirect ownership over the asset. MTS-Armenia 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, 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. As of now we still continue to provide these services. One of Comstar subsidiaries was 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 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.
Between 2009 until now we acquired controlling stakes in various regional fixed line operators as we are determined to develop broadband Internet through regional expansion. We also acquired controlling stakes in regional operators, holding rights to use radio frequencies in their regions of operations. The acquisitions enhanced our spectrum resources in these regions.
In April 2013, we acquired a 25.095% stake in MTS Bank for 5.09 billion rubles through an additional share issuance by the bank. In July 2018, we acquired additional stake in MTS Bank for RUB 8.27 billion from Sistema and our ownership share increased to 55.4%, providing control over the bank. The acquisition allowed us to consolidate MTS business in the Russian FinTech market, simplify corporate and operational management, and accelerate the launch of new products. In February 2019 we acquired a 39.48% stake for RUB 11.4 billion and later in December 2019 we acquired an additional 4.46% stake for RUB 1.4 billion. As a result of these transactions, MTS’ effective share in MTS Bank increased to 99.9% (including a 0.2% share in the bank held by our subsidiary MGTS and MTS Bank’s ownership of its own treasury shares).
In April 2014, we acquired a 10.82% stake in OZON, a leading Russian e-commerce company, through the purchase of OZON Holdings Limited’s additional share issuance for RUB 2,702 million. Cooperation with OZON created new distribution channels available to us through its extensive online retail platforms. As of December 31, 2017 our interest comprised 11.19% and was further increased to 18.69% as of December 31, 2018. In March 2019, we sold our stake in OZON to Sistema for RUB 7.9 billion. Following this date, we had no interest in OZON.
In December 2015, we have completed the acquisition of NVision Group (“NVision”) 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 is a system integrator and complex IT solutions provider in Russia. In November 2020 we sold our 100% stake in NVision Group JSC to Sistema PJSFC for RUB 369 million (including adjustment based on NVision’s financial results as of the date of deal closure). Under the terms of the deal, we agreed to sell NVision’s systems integration assets, excluding those utilized in the development of our product portfolio. We also retained the FORIS BSS/OSS billing system that had earlier been part of NVision.
In October 2017, we acquired 50.82% of ownership interest in the Russian retail software developer Oblachny Retail LLC, operating under trademark LiteBox, with a call and put option arrangement existing over another 49.18% of shares. The deal allowed
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us to enter the cloud-based cash register market as a fully licensed fiscal data operator (“FDO”) and a provider of integrated digital cash management solutions for B2B clients. In 2021, we increased our stake in Oblachny Retail LLC to 100%.
In December 2017, we purchased a 100% stake in Praliss Enterprises, thus acquiring one of the world’s leading eSport clubs—Gambit Esports. The acquisition was a part of our 3D strategy.
In January 2018, we acquired a 78.2% stake of Cubichall Holdings Ltd (the owner of Kulturnaya Sluzhba LLC), operating under the trademark Ponominalu.ru, for RUB 321 million with a call and put option arrangement existing over another 21.8% of shares. Following exercise of options in May 2019 and July 2020 we increased our stake to 100%. In February 2018, we acquired a 100% ownership interest in Moskovskaia Direktciia Teatralno-Kontcertnyh i Sportivno-Zrelishchnyh Kass LLC, operating under the trademark Ticketland.ru, for RUB 3.19 billion. These acquisitions allowed us to enter the event ticket market, while broadening our suite of digital services, and integrate a key new product into existing loyalty program and mobile applications ecosystem.
In 2018, we acquired Dekart and Serebryaniy Bor property complexes in full from Sistema. The property complexes are partly occupied by us and partly used as investment property.
In December 2018, we acquired a 100% interest in IT-Grad 1 Cloud LLC, one of the largest cloud providers on the Russian IaaS (Infrastructure as a Service) market. This acquisition allowed the Group to strengthen its presence in the Russian cloud services market.
In April 2019, we acquired from Sistema a 100% interest in Joint Stock Company “United Russian Studios,” a management company of a “Kinopolis” movie studio with its own movies production complex. The acquisition was a part of our 3D strategy.
In June 2019, we acquired a 97.42% stake in JSC “RIKT,” a regional provider of telecommunications services in Mezhdurechensk and Kemerovo Oblast. The acquisition was commenced through the voluntary tender offer procedure under Russian law. Later, in October 2019 we acquired the remaining 2.58% stake in JSC “RIKT” through obligatory squeeze-out procedure set out in Russian law. As a result of both procedures, MTS’ share in JSC “RIKT” increased to 100%. This acquisition allowed the Group to strengthen its presence in the Russian broadband Internet regional market.
In August 2019, we acquired Narodnoje property complex in full from Sistema. The property complex comprises office facilities and hostel premises, and is partly occupied by us and partly used as investment property.
In November 2019, we acquired a 7.5% stake in JUST AI Limited, IT-company specialized in artificial intelligence technologies, machine learning and natural language processing. The acquisition was a part of our CLV 2.0 strategy (as described below).
In December 2019, we acquired a 15.01% stake in SWIPGLOBAL Ltd, IT-company specialized in face recognition payments without using a smartphone or QR code. The acquisition was a part of our CLV 2.0 strategy.
In February 2020, we acquired a 51% stake in Zelenaya Tochka Group, a provider of broadband and digital TV services in a number of Russian regions, and accounted for investment in joint venture, based on the provisions of the shareholders’ agreement. The Zelenaya Tochka group of companies comprises 13 connectivity operators operating under multiple brands across 12 Russian cities: Stavropol, Mikhaylovsk, Nevinnomyssk, Elista, Tambov, Belgorod, Lipetsk, Ufa, Neftekamsk, Beloretsk, Tomsk, and Vladivostok. Under the terms of the agreement, we retain three-year call and put options to purchase the remaining 49% of Zelenaya Tochka’s share capital. Later in April 2021, we exercised a call option and bought out the remaining 49% of Zelenaya Tochka’s share capital in six local fixed-line network operators.
In June 2020, we acquired a 100% interest in Stopol Group (later renamed as “MTS Auto”), producer and supplier of car multifunctional multimedia devices / on-board computers. The acquisition is a part of our digital ecosystem strategy. The purchase price constituted a cash payment of RUB 312 million paid in July 2020 and a contingent consideration with the fair value of RUB 9 million at acquisition date.
In September 2020 we announced an agreement to invest RUB 125 million in the developer of CoinKeeper, Russia’s most popular personal finance app. The investment—which marks the first outlay by the MTS Venture Fund—is to be structured in multiple tranches, with the fund receiving a minority stake in the startup. As a first tranche we`ve invested RUB 85 m and have got
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22.08% stake in Disrapp LLC. In August-September 2021, we've additionally invested 40m Rubles and increased our indirect stake to 29.41%. In January 2021, we announced a RUB 60 million investment by the MTS Venture Fund for an approximately 10% stake in the Russian startup Airo, a platform aggregator for on-demand household and dry cleaning services in Moscow and St. Petersburg with over 50,000 users.
In January 2021, we announced an agreement to invest by MTS AI around USD 10 million in the startup Kneron, an AI chip developer. The investment will enable MTS AI to receive exclusive distribution rights in Russia for Kneron chips as well as move toward creating its own line of AI-ready products leveraging Kneron’s technology.
In April 2021, we acquired a 100% ownership interest in LLC “Credit Consulting”, a credit broker. The purchase price comprised a cash payment of RUB 10 thousand paid in May 2021 and contingent consideration at fair value of RUB 60 million, payable in 5-year period based on operating performance targets.
In May-June 2021, we acquired an 8.39% stake in TalkBank, a Russian new generation messenger-bank without physical branches, mobile applications and call centers, by investing RUB 85 million in TalkFinance LLC and purchasing a share from existing members. The acquisition is a part of our digital ecosystem strategy.
In June 2021, we acquired a 100% stake in MTT OJSC (“МТТ”), a country-wide provider of smart-telecom and IT solutions for business. In addition to B2B and inter-operator telecom services, MTT is a leading Russian company providing smart-services for business-customers based on CPaaS communication platforms and API. The purchase price constituted a cash payment of RUB 3,680 million paid in June 2021, transfer of receivables from former owners offset against the purchase price for RUB 1,958 million and deferred payment of RUB 160 million.
In June 2021, we acquired a 51% of the equity capital of Factorin LLC (“Factorin”) for RUB 867 m, including a RUB 350 m cash-in investment to support the startup’s continued development. Factorin is the developer and owner of an innovative blockchain-based platform for trade finance transactions with a focus on supply chain finance and invoice factoring. The investment is aimed at expanding our portfolio of digital financial services for B2B clients.
In June 2021, we acquired a 100% ownership interest in LLC “GDTs Energy Group” (“GreenBush”), the operator of the GreenBush data center in Tehnopolis special economic area, to use the facility’s additional capacity to offer colocation and cloud solutions to customers as well as to facilitate our own compute and storage needs. The purchase price constituted a cash payment of RUB 5,200 million paid in July 2021.
In September 2021, we acquired a 70% stake in Sistema Capital LLC (“Sistema Capital”) for RUB 3.5 bn, that allowed us to increase our share in Sistema Capital to 100%. The aim of consolidation is to accelerate the launch of new MTS Investments features; developing new offerings for retail and high-net-worth individuals; as well as expanding ecosystem of MTS’s financial services and strengthening our overall market position in the fast-growing Russian retail investment services space.
In February 2022, we acquired a 100% stake in VisionLabs B.V., a renowed developer of products based on machine learning, for RUB 6.5 bn. The company has implemented more than 500 projects in 37 countries for more than 270 clients from the financial, telecommunications, retail, transport and energy sectors. The acquisition is aimed at reinforcement of our artificial intelligence product portfolio in the computer vision space, and enhancing the potential of our digital ecosystem.
Capital Expenditures
We spent in total RUB 111,682 million in 2021 for network development in Russia and the other countries where we operate, which included RUB 73,080 million in cash expenditures on property, plant and equipment, and RUB 38,602 million for the purchase of intangible assets. In 2022 we plan on spending further network expansion, special projects relating to the development of big data, media, artificial intelligence and ecosystem products, fixed network modernization, further construction of radio subsystem and additional storage, processing and indexing centers to comply with requirements of “Yarovaya Ozerov bundle of laws,” maintenance capital expenditures, construction of new sites and purchase of software for network managing in Armenia and other initiatives. As the business scale grew, MTS increased investment until 2021 and plans to stabilize its capital expenditures and change investments structure starting from 2022 by focusing on the building of its ecosystem and digital products. 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 2022 may vary depending on subscriber growth, demand and network development, as well as
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currency volatility, vendor terms and the availability of external financing. Please see also “Item 3. Key Information—D. Risk Factors—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the risks connected with sanctions.
A breakdown of our capital expenditures in 2021 by country is set forth below.
We spent RUB 10, 186 million, 262 million and 2,052 million in 2021, 2020 and 2019, respectively, for acquisitions of subsidiaries, net of cash acquired from third parties.
Russia
We spent RUB 109,703 million in 2021 for network development in Russia, including RUB 72,046 million in cash expenditures on property, plant and equipment, and RUB 37,657 million for the purchase of intangible assets.
Armenia
We spent RUB 1,695 million in 2021 for network development in Armenia, including RUB 1,003 million in cash expenditures on property, plant and equipment, and RUB 692 million for the purchase of intangible assets.
Czech Republic
We spent RUB 284 million in 2021 for network development in the Czech Republic, including RUB 31 million in cash expenditures on property, plant and equipment, and RUB 253 million for the purchase of intangible assets.
Belarus
MTS Belarus spent RUB 2,420 million in 2021 for network development, including RUB 1,457 million in cash expenditures on property, plant and equipment, and RUB 963 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, including Big Data, IoT, cloud services, banking services, e-commerce, as well as selling equipment, accessories and software. According to AC&M Consulting, we are the largest provider of mobile cellular communications services in Russia. According to our own estimates, updated at least annually and based on our subscriber data and reports of other national operators, we are also the largest provider of mobile cellular communication services in Armenia in terms of mobile subscribers.
As of December 31, 2021, we had a mobile subscriber base of approximately 82.7 million (80.44 million in Russia and 2.23 million in Armenia) which is an increase of 2.5% compared to December 31, 2020. As of December 31, 2020, we had a mobile subscriber base of approximately 80.6 million (78.5 million in Russia and 2.1 million in Armenia) which is a decrease of 0.8% compared to December 31, 2019. As of December 31, 2019, we had a mobile subscriber base of approximately 81.3 million (79.1 million in Russia and 2.2 million in Armenia) which is an increase of 1.4% compared to December 31, 2018.
We are also the largest operator in the Moscow residential broadband market in terms of subscribers, with a 38% market share as of December 31, 2021, based on TMT Consulting data.
Our revenues for the year ended December 31, 2021, were RUB 534,403 million, which is an increase of 8.0% from RUB 494,926 million for the year ended December 31, 2020. Our revenues for the year ended December 31, 2020, were RUB 494,926 million, representing 5.2% increase from the year ended December 31, 2019. Our profit for the year ended December 31, 2021, was RUB 64,269 million, which is an increase of 3.5% from RUB 62,073 million for the year ended December 31, 2020. Our
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profit for the year ended December 31, 2020, was RUB 62,073 million, which is an increase of 12.7% from the year ended December 31, 2019.
Russia is our principal market, both in terms of subscribers and revenues. For the year ended December 31, 2021 approximately 97.5% of our revenues came from operations in Russia and approximately 2.5% of our revenues came from operations in other countries, respectively.
In July 2018 we acquired control over MTS Bank and started rendering banking services. MTS Bank is one of the 50 largest banks in the Russian Federation. MTS Bank was established in the Russian Federation as an open joint stock company in 1993. MTS Bank’s primary business consists of commercial activities, trading with securities, foreign currencies and derivative instruments, originating loans and guarantees. MTS Bank is regulated by the CBR and conducts its business under general license number 2268 issued on December 17, 2014. In 2018, RAEX (Expert RA rating agency) assigned MTS Bank a credit rating of ruBBB+, and Fitch Ratings upgraded the bank’s rating to BB−. In 2019, rating agencies affirmed the credit ratings of the financial institution. As of December 31, 2020, among Russian banks, MTS Bank ranked 29th in terms of the amount of household deposits and capital and 37th in terms of total assets, according to Banki.ru. As of December 31, 2021, among Russian banks, MTS Bank ranked 25th in terms of the amount of household deposits, 29th in terms of capital and 34th in terms of total assets, according to Banki.ru. In March 2022, Fitch Ratings decreased the bank's rating to B and further withdrew the bank’s rating, following the withdrawal of the sovereign rating of Russia.
Our strategy of MTS Bank development is building of a digital bank in cooperation with telecommunication business, resulting in positive synergies and fulfilling financial services area to create a single ecosystem of digital services for customers.
Banking services revenue in 2021 was RUB 48,340 million, representing 9.0% of our total revenues for the year ended December 31, 2021. MTS Bank’s net operating profit was positive and amounted to RUB 6,038 million. MTS Bank activities (financial assets and liabilities, management of liquidity risks connected with the activities) are described in Note 30 to the consolidated financial statements. Outstanding deposits and loans to customers as at December 31, 2021 came to RUB 205,936 million. Loans to legal entities made up 13.1% of that total, 85.2% were loans to individuals.
Operations of MTS Bank are included in "Fintech" reportable segment.Detailed segment information is presented in Note 6 to the consolidated financial statements.
As of December 31, 2021, approximately 97.2% of our mobile subscriber base was in Russia and approximately 2.8% was in other countries. According to AC&M-Consulting, as of December 31, 2021, we had a 31% market share of total mobile subscribers in Russia.
The table below sets forth our total mobile subscribers as of the end of the last five years:
| | | |
Period |
| Subscribers(1) |
|
| | (in million) |
|
2017 | | 80.4 | (2) |
2018 | | 80.1 | (2) |
2019 | | 81.3 | (2) |
2020 | | 80.6 | (2) |
2021 | | 82.7 | (2) |
(1) | Excludes MTS Belarus subscribers as its results of operations are not consolidated in our financial statements. We define a subscriber as an organization or individual, whose SIM-card shows traffic-generating activity or accrues a balance for services rendered or is replenished of topped off over the course of any three- month period, inclusive within the reporting period, and was not blocked at the end of the period. |
(2) | Excludes Turkmenistan and Ukraine subscribers. |
In August 2016, we ceased our operations in Uzbekistan. In September 2017, we suspended the provision of telecommunication services to our subscribers in Turkmenistan, due to the termination by Turkmen state-owned companies and state authorities of line rental, frequency allocation, interconnect, and other agreements necessary to servicing MTS clients. For more information, see “Item 3. Key Information—D. Risk Factors—An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable.”
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In November, 2019, the Group entered into a sale agreement to dispose of VF Ukraine. The disposal was effected in order to concentrate on development of the Group’s core Russian market. The disposal was completed in December, 2019, and is reported in the current period and retrospectively restated in prior periods as a discontinued operation.
In October, 2020, the Group entered into a sale agreement to dispose of JSC “Nvision Group”, which provided integration services, as well as the sales of software, and constituted “System Integrator” operating segment. The disposal was completed in October 2020, and is reported in the current period and retrospectively restated in prior periods as a discontinued operation.
For details on the sales, please see “Item 4—Information on our Company—A. History and Development” and Note 11 to the consolidated financial statements.
According to AC&M Consulting, overall mobile cellular penetration in Russia was approximately 178% as at December 31, 2021, 172% as at December 31, 2020 and 178% as of December 31, 2019. According to our estimates based on our subscriber data
and reports of other national operators, mobile cellular penetration in Armenia was approximately 125.8% as at December 31, 2021 and 123% as of December 31, 2020, as compared to approximately 127.6% as of December 31, 2019.
Our consolidated mobile subscriber base changed insignificantly in the first three months of 2022. Specifically, according to our estimates as of March 29, 2022, we had approximately 82.3 million subscribers, including approximately 80.1 million in Russia and 2.2 million in Armenia.
As of December 31, 2021, according to our estimates based on our subscriber data and reports of other national operators, MTS Belarus had approximately 5.7 million subscribers and a leading market share of 45.9%. As of December 31, 2020, according to our estimates, based on our subscriber data and reports of other national operators, MTS Belarus had approximately 5.7 million subscribers and a leading market share of 48.7%. As of December 31, 2019, according to our estimates, based on our subscriber data and reports of other national operators, MTS Belarus had approximately 5.6 million subscribers and a leading market share of 46.9%. Belarus, a country with a population of approximately 9.5 million, had a mobile cellular penetration rate of approximately 123.2% as of December 31, 2019, according to our estimates based on our subscriber data and reports of other national operators. Please see “Item 3. Key Information—D. Risk Factors—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the risk of sanctions on operations of MTS Belarus.
As of December 31, 2021, we had mobile licenses to operate and commercial mobile operations throughout the entire territory of Russia with a population of approximately 146.2 million people and throughout the entire territory of Armenia with a population of approximately 3.0 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,” 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 2021, we offered fixed line communications services in 56 regions across Russia, covering a population of about 25 million households.
Our Moscow fixed line operations contemplate communications services provided through incumbent operator MGTS. Our Moscow fixed line operations included 2.5 million unique residential subscribers as of December 31, 2021. We are the largest operator in the Moscow residential broadband market, with a 38% market share, based on TMT Consulting data. 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 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, 2021, we had 3.0 million unique residential subscribers according to our estimates. Fixed line services are also provided in Armenia with digital telephony communications services, data transmission, Internet access and the renting of channels.
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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
Starting from 2019 MTS follows the strategy called “Customer Lifetime Value 2.0” (“CLV 2.0”) which is aimed to build substantial digital business on the top of our telecommunication business. The name of the strategy reiterate that we put customers at the center of our value proposition. We plan to supply our customers with a wide range of digital services. Our strategy is focused on prolonging customers’ lifetime by use of our services by increasing emotional attachment to the brand together with level of satisfaction and loyalty. We focus on providing more value for our clients and maximize their value to us in the long run. Reference to “2.0” stresses that we are shifting from single business line telecom centric ideology (which could be considered “1.0”) to a multi product digital services provider approach which should enable us to maximize value across the whole product portfolio.
We believe that extension from telecommunication into adjacent markets such as financial services and entertainment supported by digital capabilities like Big Data and AI is the first step to our convergence into multi service digital company. We intend not to rely on development of our own products portfolio solely, but rather build partnerships with independent services providers. Collaboration with such projects should enable us to offer more innovative, various and convenient services to our clients and bring more value to their life.The key priorities of our partnership program are: increase the number of partnerships, boost our partnership capabilities and value proposition them in order to become ultimate preferred choice for our potential partners.
Russian market of digital services is quite unique due to the fact that in most of the segments local projects retain leadership positions and compete successfully against the global players. This situation is due to multiple fundamental reasons ranging from customer’s behavior and language specifics to regulatory requirements and structure of capital market. This allows major Russian business groups from banking, retail, high tech, and telecom sectors to aggressively develop multiple lines in digital businesses and adopt ecosystem approach in their business strategies. At the moment a number of big local companies from TMT, fintech and digital industries are moving this direction, expanding their businesses outside of their core sectors and entering the market with ecosystem propositions. In this respect we believe we are entering a period of new competition for customer spend and attention in Russia.
We believe that we are well positioned for this type of competition. Our strong brand and deep knowledge of our clients supported by powerful analytical capabilities (Big Data and AI based) will allow us to provide our clients with seamless, deeply customized and personalized digital experience for wide portfolio of different services. We have already experienced substantial synergies between telecommunication, banking and media services which allow us effectively utilize our online and offline marketing capabilities and deep customer knowledge. We clearly see that customers who use a few different services from us bring higher value and have high level of brand loyalty and services satisfaction.Our key priorities in terms of the ecosystem development for the next few years are: growing the ecosystem client base, developing high-quality digital products, expanding the pool of partner companies.
In 2021 on top of the transition to the full-scale operational model within CLV 2.0 concept we have also focused the efforts of senior management and corporate governance bodies on the issues of the optimal “format” of key business areas to intensify their development and reach fair evaluation.
As a result of a comprehensive analysis, we came to the conclusion that some of our business areas have reached such a scale and a level of maturity that they can become a driver of an increased fundamental value of MTS Group. Therefore, we intend to gradually separate such areas into independent structures and independent companies that will operate freely on the market, attract external financing on their own and become full-fledged entities with separate and attractive investment story for the investment community.
We believe that this approach will provide high motivation for the teams of business areas, will allow them to set up their business processes in an optimal way, considering the specifics of each area, and will simplify the process of attracting additional financial resources. As a result, this will ensure the high dynamics of products development and keeping their quality at the level of the market leaders. In addition, we hope that new promising businesses will be freed from traditional telecom multiples and will be able to fully unlock the potential for the growth of shareholder value. In this sense, we are striving to move from the investors’ perception of the Group as a single and indivisible entity to the perception of the “sum of the parts”, where each of the parts is evaluated fairly in accordance with its own performance and multiples accepted on the market for each specific type of business. The
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first step towards the implementation of these strategic initiatives is the separation and mid-term sell-off of the tower infrastructure, which we currently perceive as a passive element of the business, making minimal impact on our ecosystem agenda. The resulting funds can be invested into the development of dynamically growing business areas with high financial returns.
The proposed spin-off of tower assets into Tower Infrastructure Company LLC (“TIC”), a 100% subsidiary of MTS, would allow TIC to possess a large portfolio of antenna mast structures (23 thousand estimated as of the end of 2021), making it potentially attractive business for sector-specific investors. Given the tower footprint, it is hoped that TIC could become a partner of choice for other mobile network operators for network equipment installation. It is hoped that increasing tower tenancy could enable TIC to grow incremental revenue and further drive business performance.
Also in 2021 we launched a process of spin-off of infrastructure and cloud assets, followed by their transfer into Mobile Web Services JSC (“MWS”), a 100% subsidiary of MTS. This was a response to emerging global trends including the surging cloud market, edge computing and convergence of mobile networks and edge cloud infrastructure on the wave of mobile networks virtualization and 5G development. All these trends give mobile operators a chance to develop a strong cloud business especially in Russia where we believe there will be a limited competition from global cloud leaders (“hyperscalers”).
In the next several years depending on the situation in financial markets, we aim to bring to the investment market MTS Bank, which has been demonstrating high dynamics over the past 2 years, approaching the sector leaders not only by size, but, which is even more important, in terms of a product portfolio and degree of business digitalization. Other businesses of MTS Group (e.g. Retail, Media, Cloud & Infrastructure or Entertainment) in long term can also potentially follow this track of attracting co-investors on the market or through strategic partnerships.
We want to underline that shifting to the logic of “sum of the parts” does not mean our transformation into a holding of loosely connected businesses. We remain a Group and maintain strong ecosystem connections between areas. The main connecting forces in our opinion are: ecosystem marketing and brand management (not necessarily a unified brand); sharing knowledge about the client and following the unified CLV logic; centrally developed and managed capabilities. All of them are supported by clear and detailed agreements on interaction between the companies and parts of the Group.
It also must be emphasized that to enjoy synergies and effective interactions within the Group, besides ecosystem connections, we need also mutual reinforcement (from business to business and from Corporate Center to businesses) through strong / unique competencies and capabilities. Strong capabilities in digital, IT and adjacent areas in modern world are obviously sources of strategic competitive advantages. So we are going to pay special attention towards cultivation of competencies and capabilities necessary for developing digital products and overall ecosystem.
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, in particular “Item 3. Key Information—D. Risk Factors —Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”.
Current Operations
We are a provider of a wide range of mobile and fixed line voice and data telecommunications services, including data transfer, broadband, pay-TV and various value-added services, including Big Data, IoT, cloud services, banking services, e-commerce, as well as selling equipment, accessories and software.
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.”
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Mobile Operations
Network Infrastructure—Mobile Core
As of December 31, 2021 MTS Mobile core network in Russia includes the following nodes:
● | Mobile switching centre-server (MSC-S): 114 nodes, servicing 62.8 million subscribers; |
● | Media gateway (MGW): 111 nodes, maximum capacity 3.2 million Erl.; |
● | Subscriber Data Management (SDM) includes 21 nodes (Home Location Register (HLR) / Home Subscriber Server (HSS)); |
● | 104 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 during the course of 2021:
● | MSC-S/MGW and S/P-GW nodes were expanded as a result of voice and data traffic growth; |
● | SWAP PS Core Far-East macro-region: SGSN/MME Huawei nodes were replaced by new SGSN/MME ULTRA-M Cisco; |
● | Upgrade IMS Core Nokia launched VoLTE in 77 regions. |
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 voice and data usage for a fixed monthly charge. 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 the agreements between us and other operators.
As of December 31, 2021, we had bilateral roaming contracts with 873 wireless operators/networks in 232 countries, including 15 regional operators/networks in Russia. We continually seek to expand our roaming capability and are currently in negotiations with additional operators. One roaming contract with regional operator/network is determined to be terminated as of March 25, 2022.
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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:
Basic telephony |
| Customer care |
| Other services |
· Call Divert/Forwarding | | · Itemization of Monthly Bills | | · Ring Back Tone |
· Caller ID Display and anti-Caller ID Display | | · Information and Directory Service | | · Second Memory (Cloud storage) |
· Conference Calling | | · Automatic Customer Care System and Customer Care System via the Internet | | · Parental control for internet, calls, SMS |
| | · My MTS service app | | |
· Voicemail | | | | · GEO services |
· Call Barring | | | | · Connected Car (IoT B2C) · MTS marketolog |
· Call Waiting | | | | · MTS Music |
| | | | ● MTS Live |
| | | | · MTS TV (KION) |
| | | | · MTS Library |
· Missed Call Alert | | | | · MTS Junior |
· Intelligent call assistant | | | | · VoD (Video on Demand) |
| | | | · Location Based Service (“LBS”) · Mobile banking |
· Collect call | | | | · Security and Privacy services for B2C · Information Security (partnership with Kaspersky) |
· Black List | | | | · Branded App for calls and messaging · Blocking spam calls · MTS video surveillance |
· VoLTE/Wi-Fi Calling | | | | |
| | | | |
Messaging | | Mobile internet | | |
· SMS P2P, A2P | | · 3G, 4G (LTE), 5G test zone | | |
· MMS | | · Data share plan | | |
· Application MTS Connect | | · Real IP | | |
| | · E shop | | |
| | · APN remote access point | | |
| | · Fixed Mobile Convergence | | |
| | · MTS Modem | | |
| | · MTS Tablet | | |
| | · Mobile Office | | |
| | · Wi-Fi | | |
We also provide many voice and SMS-based value-added services in cooperation with various content providers.
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-1800 technology. From 2001, we implemented wireless data communication services based on GPRS technology with download data rate of 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 LTE networks in order to provide our subscribers with high-speed broadband wireless services.
As of December 31, 2021, we provided GSM, GPRS and EDGE services with 60,500 2G BTS over the geographic area with more than 97% of population of Russia.
3G Technology
In April 2007, we obtained a nationwide 3G/UMTS (Universal Mobile Telecommunications System) license in Russia. The license was valid till May 21, 2017 and covered the entire territory of Russia with frequencies 1950 1965 MHz and 2140 2155 MHz. In 2017 we prolonged the 3G/UMTS license until August 25, 2022. We are planning to prolong the 3G/UMTS license till 2027.
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Currently we have commercial 3G networks launched in all regions of Russia. In addition, we use UMTS900 in Moscow region and Habarovskiy kray where we have 2100 MHz restrictions. As of December 31, 2021, we installed 52,342 3G base stations over the geographic area with more than 88% of population of Russia.
In 2010, we started implementation of a high-speed technology known as HSPA+ on our 3G network. This technology supports up to 21 Mbit/s per carrier data transmission speed. In addition, we launched second and third 3G carriers to improve capacity and activated Dual Carrier technology, which supports up to 42 Mbit/s data transmission speed.
Since 2011, we use 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 3G/HSPA+ mobile devices. We use femtocells to deliver a 3G/HSPA+ services inside building for business clients. In 2016, we launched offer of femtocells for consumers at B2C market segment.
MTS Armenia UMTS network was commercially launched in 2009. Staring from 2011 MTS Armenia gradually implemented services based on HSPA+ technology, 64QAM and Dual Carrier features making it available to almost 99% of the Armenian population. UMTS network expansion and upgrades are being done yearly to improve network quality and capacity. In 2018 during a major network upgrade project, frequency refarming (repurposing of frequency bands) was done in 900 MHz band to allocate bandwidth for UMTS900 operation which led to UMTS network capacity and coverage significant improvement. Also 2 pairs of RNCs-in-pool from were put in operation in 2019 increasing UMTS network reliability.
LTE Technology
In December 2011 we got LTE TDD license in 2595-2620 MHz frequency band for Moscow only. In July 2012, we won Russian Ministry of Communications and Mass Media tender for nationwide LTE-FDD license in the following frequencies: 720-727.5 / 761-768.5 MHz, 798.5-806 / 839.5-847 MHz and 2540-2550 / 2660-2670 MHz. Since September 2012, we offer LTE-based commercial service in Moscow region, where we initially deployed more than 800 LTE TDD base stations. As of December 2021, we had 2,985 LTE TDD and 18,186 LTE FDD base stations in Moscow region.
In December 2013, Russian regulator allowed re-farming of existing 900 and 1800 MHz spectrum to UMTS-900 and LTE-1800. In 2014, we started DCS 1800 spectrum re-farming to LTE and deployment of 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 the following bands: 2595-2620 MHz for the whole territory of Russia, except Moscow region (obtained earlier). We are using LTE-TDD as a capacity layer to cope with increasing network utilization due to growing data traffic. In August, 2021 we prolonged the license for frequencies 798.5-806 / 839.5-847 MHz and 2540-2550 / 2660-2670 MHz till 2031.
As of December 2021, we implemented Carrier Aggregation functionality at 48% of our LTE sites.
In 2018, we started re-farming of existing 900 and 2100 MHz spectrum to LTE-900 and LTE-2100. In 2021 we finished re-farming the 2100 MHz band in St. Petersburg and in the first clusters of Moscow. In 2022 we plan to continue rolling out LTE2100 in Moscow and other regions of Russia.
In 2018, we launched IoT services based on NB-IoT technology (Narrow Band IoT) in 20 largest Russian cities, including Moscow, Saint Petersburg, Novosibirsk, Kazan, Nizhny Novgorod, Vladivostok and others. MTS is IoT leader in the Russian market, with large-scale narrow-band coverage provided by 45,055 base stations over the geographic area with more than 85% of population of Russia, at the end of 2021. We plan to continue NB-IoT rollout in the remaining regions of Russia in 2022.
In 2019 we started to modernize our network in 7 North West regions to support LTE Evolution and 5G ready technologies. At the end of 2021 we’ve completed modernization of more than 95% of the radio network in these regions.
In 2020 the modernization of our radio network in Moscow and the Central Regions began, the estimated project implementation period is 3 years. At the end of 2021 the modernization of the network in Moscow was completed with more than 50%.
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In September 2019 we launched two 5G pilot zones in Moscow and Saint Petersburg in 27GHz and 4.9GHz frequency bands. The pilot zone in Saint Petersburg is located in Kronshtadt. In October 2019, MTS StartUp Hub has unveiled the 5G Lab an open incubation platform where startups and other companies can develop new 5G use cases using expertise, grants and other support from MTS. In 2020 5G test zones have been launched in the cities of Kazan, Ufa, Tomsk and Vladivostok.
In 2021 MTS launched the Russia’s first multi-location pilot 5G network for end consumers in Moscow and in Saint Petersburg. 5G network covers hot spot public areas and provides 5G connectivity at speeds of up to 1.8 Gbps for subscribers with compatible 5G smartphones. In 2022 we plan to further expand 5G pilot zones for public and corporate users.
Research work has begun with OpenRAN (LTE and 5G). At the end of 2020, we launched at VDNKh the OpenRAN laboratory for testing OpenRAN equipment and software, and collaborating with software developers and hardware vendors. In 2021 the first samples of hardware and software were tested on the basis of the OpenRAN laboratory. Since 2021 we started to include in the new tenders for RAN vendor selection additional requirements and separate lots on Open-RAN technology support.
In 2021 we’ve established a subsidiary company MTS Electronics with the target at development and manufacture of 4G and 5G hardware and software solutions’ components.
We launched our first LTE base stations in MTS Armenia network in 2011 in 2600 MHz band and expanded the number of sites and coverage with new base stations installation every year. In 2018, after the refocusing on 1800 MHz band, LTE sites were activated in 1800 band with Carrier Aggregation technology. In 2019 MTS Armenia obtained the license to operate LTE network in 800 MHz band, as well as licenses for 1800 MHz band additional spectrum to increase L1800 network capacity. More than 370 new LTE base stations were launched in 2021. By the end of 2021 the number of L800/L1800/L2600 base stations in operation is more than 2180, providing LTE services all over Armenia. VoLTE and WiFi Calling services are commercially available from 2018. As total at the end 2021 MTS Armenia network has 1,304 2G BTS, 2,561 3G base stations and 2,171 4G BTS.
For 2022 the company plans for additional network capacity increase following continued data traffic growth. IMS platform will be expanded as we observe higher customer demand for VoLTE services. As soon as more circuit switched voice traffic migrates to VoLTE MTS Armenia will continue to demount 2G base stations freeing the frequencies for use by LTE technology.
5G Technology
Over the past few years, we launched agreements with leading global vendors to lay the foundation for cooperation on fifth-generation equipment and solutions.
In August 2019, we together with Huawei launched Russia’s first large-scale urban 5G coverage on Saint Petersburg’s island of Kronshtadt, and made a 5G cell in Moscow near the Smart City pavilion in one of the city’s most historic parks, VDNKh. In the early stages, the networks will be used for testing and to connect certain public facilities to the Internet, with plans for broader rollout to subscribers in the future. Coverage includes both 4.9GHz mid-band and 28GHz millimeter-wave frequencies.
In addition, we tested a preproduction Samsung 5G smartphone. Tests were carried out in Moscow at the Nokia laboratory within the pilot MTS millimeter-wave network based on Nokia’s commercial equipment, using MTS SIM cards and the Samsung S10 5G pre-commercial smartphone based on the Snapdragon 855 platform with Snapdragon X50 modem.
In October 2019, we opened a 5G Lab at the Moscow pilot zone that will provide a platform for startups to develop new products and solutions based on fifth-generation connectivity. Potential 5G applications include smart city solutions in transportation, as well as new use cases in IoT, cloud computing, telemedicine, autonomous vehicles, and virtual and augmented reality (VR/AR).
In January 2020, we demoed private 5G network at the country’s largest heavy truck manufacturing facility, the KAMAZ plant in Naberezhnye Chelny.
In July 2020, MTS together with Motorola and Qualcomm Technologies, Inc. have successfully completed testing of the flagship motorola edge+ smartphone, which supports the specific mmWave frequencies that have been allocated for 5G in Russia.
During 2021, we have increased the coverage of the 5G network and launched new test sites in popular places in Moscow and St. Petersburg.
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In September 2021, we deployed two 5G pilot networks in Moscow for Sberbank, the largest bank in Russia, Central and Eastern Europe, in order to test the wireless services of the Sber ecosystem.
In September 2021, we have completed the construction and put into pilot operation private LTE/5G-ready network at the Nezhdaninskoye gold deposit in the Republic of Sakha (Yakutia) for Polymetal International plc.
In November 2021, MTS together with Ericsson launched test 5G network at the Ural Federal University (Yekaterinburg). Also, MTS joined the international association of telecom operators 5G Future Forum (5GFF).
Currently, the MTS 5G Center has a strong lineup of startup participants as well as corporate partners, counting among its members Nokia, Sony, Samsung, Qualcomm, and Telit. We are looking forward to welcoming the next dozen residents as we move forward on charting the course for 5G in Russia.
In 2022, we are continuing to carry out 5G test projects, with all of the necessary in-house capabilities, technologies, and resources. With respect to further testing and development of 5G technology, we are closely monitoring the ongoing situation and are considering various options to continue our progress in fifth-generation connectivity.
Artificial Intelligence
In 2017, we created an artificial intelligence center, the main focus of which is the creation of innovative products and the addition of existing services to the company with new functions based on technologies for processing natural language, computer vision and speech recognition.
The key focus of the center is the development of virtual assistants, as well as the development of products in the areas of customer service, medicine, law and other areas.
In June 2019, we started selling customer service robots—automated dialogue systems that allow you to interact with a client without involving people. The solution, based on artificial intelligence technologies, processes any typical requests, for example, talks about products and services, answers popular questions, connects and disconnects services.
In November 2019, we, together with Sberbank, Yandex, Mail.ru Group, Gazprom Neft and the Russian Direct Investment Fund (RDIF), established an artificial intelligence alliance that will develop AI technologies in Russia. We believe that the sanctions placed upon RDIF imposed due to the geopolitical situation will not have an impact upon MTS's business. To develop solutions based on speech technologies, we also opened a research center in Skolkovo. Center experts intend to create the largest voice database in Russian, collecting and marking more than 15,000 hours of Russian speech.
In December 2019, we started selling a virtual lawyer-the automatic document management and life cycle management system Norma. The solution is based on artificial intelligence technologies such as natural language processing and computer vision.
In September 2020, we launched SaaS version of Norma for small and medium businesses and individuals who want to draft a customized legal document for personal needs. We believe that legal services can be affordable, user-friendly and quick.
In 2021, we focused on consolidation of AI properties such as competences, products and RnD. The product portfolio was reconsidered under the increasing technological demand from the ecosystem and highly competitive environment altered by other deep tech players. We concentrated on two major product directions such as conversational AI and video computer vision emerged with video surveillance.
By the end of 2021, we released MVPs of three major cloud-based B2B platforms:
1) Voice platform (so-called “Audiogramm” TM) – a service that recognizes and synthesizes speech;
2) NLP (natural language understanding and processing) platform which allows users to create multimodal bot’s (both voice-based and text-based) scenarios via low-code design tools and manage bots to automate customer service, employee’s onboarding and CX across digital channels;
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3) VsaaS (video surveillance as a service) platform – a service that allows to implement video- surveillance and AI analytics into other digital products.
SaaS version of product Norma was terminated due to low customer’s demand.
We continue cooperation with leading Russian Universities in the field of AI technologies, which resulted in USB card development based on Kneron chip. Such device can be used to learn AI basics by students and in cloud video surveillance.
We plan to dedicate 2022 to the development deep tech products based on conversational AI, computer vision and edge computing that will provide a competitive advantage to the ecosystem, especially in superior customer experience. VsaaS is launching as a part of Smart Home service on the external market, while conversational AI bunch of products are becoming enablers of the ecosystem. The planned launch date is April 5, 2022.
We are going to develop our Accelerator (a platform for creating start-up projects), the main goal of which is to gather start-ups and offer them resources for development – training, investments and technologies.
Banking Services
In July 2018, we started providing banking services made possible by the acquisition of control over MTS Bank. MTS Bank has accelerated the sale of its retail product with the help of MTS’ Big Data capabilities and MTS’ digital sales channels. The bank’s financial products are complementary to our core business and fully integrating the services under the Group umbrella allows us to offer our customers new integrated services, unlocking new revenue streams and consolidating our brand in the wider consumer space.
MTS Bank carries out its activities in the following areas:
● | Retail business. Serving individuals, including maintaining current accounts, receiving deposits, providing saving and investment products, custody services, servicing credit and debit cards, consumer and mortgage lending. |
● | Small and medium-sized businesses. Serving small and medium-sized businesses, including maintaining current accounts, accepting deposits, providing overdrafts and lending services. |
● | Corporate business.Serving corporate clients, including cash settlement, maintaining current accounts, accepting deposits, lending, including overdrafts, providing documentary products, including guarantees, letters of credit. |
● | Investment business.Providing investment banking services, including trading in shares and bonds, precious metals and derivative financial instruments, placement of fixed income securities, issuing debt securities and attracting subordinated loans, operations with foreign currency. |
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.
We also developed our ecosystem to offer our customers quality services in related sectors such as Telecom, Media, Fintech.
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.
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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 and Armenia.
In 2020, the agreement with Vodafone was extended until December 31, 2023.
Sales and Marketing
Target Customers
Our service model is based on the provision of services to customers to meet the needs of distinctive customer segments. We are not just a mobile operator. Our strategy is to build an umbrella brand which provides digital services and innovative products. We continued to work with youth audience keeping our focus on digital channels, such as social media, banners, pre-rolls and branded content.
In 2021, we focused our efforts on the following:
● | Building knowledge about MTS as an ecosystem; |
● | Launching products outside the telecom scope, convergent and comprehensive services; |
● | Continuing to build knowledge about MTS as an innovative and technological company with state-of-the-art solutions, including in the main business—telecom; |
● | Promoting strategic partnerships |
● | Promoting devices with special operator offers; |
● | Promoting our services aimed at the youth audience; |
● | Promoting the MTS CASHBACK virtual card from MTS Bank; |
● | Promoting B2B offers; and |
● | Promoting services for children. |
Advertising and Marketing
The key subjects for our advertising campaigns in 2021 included promotion of the MTS Premium innovative service and special offers on devices in our retail stores. In addition, in 2021, MTS continued to develop subscriptions along with billing plans to expand our ecosystem services.
In order to build brand awareness and stimulate demand, we used a combination of various advertising formats, including television, outdoor, retail and radio. We also stepped up our online advertising in desktop and mobile. We also coordinated 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.
In line with our strategy to find new ways to communicate effectively, especially through digital channel, we launched special cooperations with partner websites and several collaborations with popular Russian bloggers, trending Internet shows and other formats of online advertising (branded content, collaborations with bloggers; social media integrations, etc.) in 2021.
In 2021, MTS launched the following campaigns:
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Promoting the innovative “Non-billing plan” (“Netarif”) subscription
On New Year’s Eve we launched a special offer for new users – for 2.5 months we opened our most advantageous internal tariff for connections under the conditions that were previously available only to company employees and their relatives . For 250 ₽/month, the user gets: 500 minutes and unlimited on-net minutes, 20 GB of Internet, 200 SMS.
The MTS Premium loyalty program
In 2021, we launched two federal promotional campaigns in support of MTS Premium subscription.
The first campaign took place in February 2021 and was timed to coincide with the relaunch of MTS Premium, which ceased to be a loyalty program and became a subscription to MTS ecosystem products and services. The new subscription included an unlimited mobile Internet package, a KION online cinema subscription and MTS Music streaming service. The subscription price was 199 rubles/month.
The second campaign was launched in June 2021 in support of MTS Premium family subscription. As part of the family option, 3 persons can get access to the subscription and use the services included in the package independently of each other. The price of family subscriptions was 299 rubles/month.
Image and quality
In 2021, we launched a large-scale federal campaign to support 5G, AI and other technologies and products of MTS. Campaign ‘Future with MTS’ worked for the brand’s innovative and high-tech image. The campaign improved the image perception of MTS communication services —it emphasized the high-tech services of MTS and variety of products in different areas of consumers’ lives. Noticeable and technological campaign materials got many PR mentions in media and became the benchmark for other brands on the market: 1. AR portal - using a smartphone camera, a consumer could open the door to the world of the future, to walk along the streets of a technological city with MTS services and products all over the way; 2. 3D digital Cube - huge construction with UHD screens placed in one of the popular parks with image content creating the effect of live presence and immersion while telling about technological MTS products.
Ecosystem
In 2021, as part of a partnership with Daichi, MTS launched a pilot project with a subscription to smart air conditioners. The product was launched and promoted in two regions: Moscow and the Moscow Region, as well as Rostov-on-Don and the Rostov Region. By subscribing for 4999/5999 rubles per year (the price varied depending on the region), the customer received a comprehensive offer: a smart air conditioner with smartphone-based control, free delivery, assembly and installation of an air conditioner (the service is available only in Rostov-on-Don) and technical support (online monitoring of the air conditioner operation). The subscription varies depending on the region.
Entertainment
In 2021 we launched a big federal campaign where we combined several main entertainment services such as MTS Live, KION, MTS Music and MTS Library into an ecosystem of entertainment and promoted them with one common slogan “All types of entertainment - are at MTS”. This helped MTS to set up on a new territory and to increase knowledge about it.
MTS Live
MTS developed and launched a new sign, logo and style for the MTS Live umbrella brand combining a platform for selling tickets to events, its own concert venues and online concerts. The graphic mark is the letter L, the first letter of Live. The communication style is bright poster aesthetics.
Financial services
In 2021, three advertising campaigns were launched in support of MTS Bank's priority products. Two large-scale federal campaigns included promotion on TV, digital channels, social networks and special projects, bloggers. In second quarter, we launched
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the MTS bank innovative product promotion — MTS CASHBACK credit card, the terms of which are selected personally by artificial intelligence on the basis of the client’s profile — the maximum limit and the minimum rate. The fourth quarter saw the launch of MTS CASHBACK credit card with increased cashback of 5 % on any purchase in supermarkets with MTS Premium subscription. We also held a digital federal campaign with the use of OLV and social networks at the end of the fourth quarter in support of a deposit from MTS Bank with an increased rate (9.2%), which can be made both offline and online.
GPON
In spring 2021, MTS launched a regional campaign for Moscow and Moscow Region with a special advantageous offer for GPON high-speed home Internet: 500 Mbit/s for only 390 rubles/month (for a promotional period of 3 months).
The emphasis in communication was made on MTS’ leadership in home Internet speed among the broadband providers in Moscow for the campaign period (leadership was supported by an independent research).
Devices
In 2021, the majority of devices-related communication campaigns were targeted at supporting smartphone sales (of various price categories, vendors: Honor, Samsung, Xiaomi, ZTE) in MTS retail.
The main mechanics used in promotion (and communication) were: cashback, price offers, loans, as well as trading-in and package offers (device and phone accessory or billing plan).
Promoting our services specifically for teenage audience
In 2021 MTS continued its communication to the youth segment. We supported MTS flagship products relevant to youth audience with special campaigns: MTS Premium & MTS Family Premium, MTS Live, Tarifishe and special limited tarif “Smart for ours. New Year's”.
We released four short films “Musicians Nightmares” with famous Russian artists (Ivan Dorn, Morgenshtern, Husky and Ilya Naishuller) for a new MTS streaming service and production company “KION”.
For the gaming audience, we promoted our WASD streaming service with new “relaunch” campaign. We positioned WASD towards a wider audience with new IRL content.
Furthermore, we continued supporting modern art: sponsorship of Multimedia Art Museum and “ArtLife” exhibition in Moscow.
MTS products and services for children
In 2021, the line of products and services for children started to be actively developed and expanded, and a separate segment MTS Junior was introduced. We were the first brand on the market to launch an integrated comprehensive offer for children and parents - a NETARIF Junior subscription including all the most necessary digital services based on the needs and interests of both audiences. The subscription includes unlimited access to popular messengers, customizable minutes and gigabytes packages, KION online cinema, MTS Music and MTS Library with children-friendly modes through which a child will not encounter anything that is not suitable for his/her age, and school textbooks in digital format for a year free of charge as part of the “School” service.
To support the new product, several TV and digital campaigns were launched throughout 2021 targeting both audience segments: parents and childrenIn order to engage with the children’s audience, we strengthened the emotional component by using popular cartoon characters in advertising materials and as part of limited tattoo stickers that customers received when signing up a child to a NETARIFF Junior subscription. Especially for New Year’s, MTS continued advertising subscription communication and launched new non-standard activations with the characters of the children's target audience favorite cartoons: a music video was created with the characters of the “Fantasy Patrol" cartoon, as well as mini-series of "Mi-mi-bears" and "Masha and the Bear" cartoons with native product integration that the characters use for their tasks, development, education and entertainment. Moreover, a landing page was developed to produce personalized video greetings from the characters of “Fantasy Patrol” and “Mi-mi-bears” cartoons
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specifically for MTS subscribers and their children. Also, within the Junior segment, the promotion of smart children watches went on, for which two digital campaigns were launched in support.
Partnerships
In 2021, we proceeded with our partnership collaboration with Spotify (this time for mass segment), offering them “4 months of Spotify Premium for free for MTS users”, which ended in 2021.
In 2021, as part of a partnership with the Lukoil filling stations, MTS launched the first fuel subscription in Russia. The pilot project was implemented in four regions of Russia: Sverdlovsk and Saratov regions, the Republics of Tatarstan and Bashkortostan. The subscription integrated with MTS Cashback allowed the customers to fill the tank at partner gas stations with 10% discount.
B2B offers
MTS continued supporting the SME & BB segment with the smart advertising platform “MTS Marketolog”, which helps companies launch advertising and marketing campaigns without agencies, while retaining full control of the process and budgets. The product was promoted on TV and in digital media.
MTS launched a federal promotional campaign for the MTS Your Business, a line of products and services for entrepreneurs. The campaign promotes three flagship products of the line the workzen task tracker for keeping a client database and controlling orders; the InsideReport counterparty verification service and the MTS Kassa mobile online cash register.
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, transportation hubs and markets. In 2009, in response to changes in the independent retail market, we began to develop our own proprietary retail network to more effectively control sales of SIM-cards and provide a platform to sell handsets and 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.
In 2017, sales in the Russian market decreased for the first time and continued decreasing at a higher rate in 2018. Moreover, the churn rate also decreased, which confirmed the improvement of the mobile retail market.
In 2018, our competitors VEON Ltd. and MegaFon agreed on the termination of their joint ownership of Euroset outlets. MegaFon purchased the brand and the business with VEON Ltd. purchasing 50% of points-of-sale.
In 2018, VEON Ltd. rebranded points-of-sale and they began to work under the “Beeline” brand. MegaFon and SLV Group (Svyaznoy owner) have signed an agreement on merging Euroset and Svyaznoy into one retail network, which currently operates under Svyaznoy brand. These transactions marked the beginning of the transformation from the multibrand retail network to the monobrand retail network.
In 2019, we signed a partnership agreement with Svyaznoy. Now Svyaznoy retail network consumers across the country can sign contracts and get information about our tariffs and services. Moreover, in 2019 we and M.Video-Eldorado group, which is the largest household appliance and electronics retail network in Russia, also signed a partnership agreement. We placed stands in large M.Video stores. In addition, joint retail electronic stores, where consumers can obtain our services, have been opened. Furthermore, in 2019, we launched a pilot project to sell smart watches in the largest children goods retailer Detsky Mir. Special zones with wearable devices were installed in several dozen stores, where customers can get acquainted with the watches models and get advice from our specialists.
Such partnerships with market leaders allow us to optimize retail costs and reduce the planned number of own retail points-of-sale.
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In 2020, the outbreak of COVID-19 accelerated the trend of retail chain reduction, which concerned all telecommunication market players and pushed the transition to online channels. In April 2020, MTS launched the mobile application for a SIM-card self-registration by a subscriber. This technology allowed launching distribution in new sales channels, for example, online stores, online platforms and aggregators, supermarkets, delivery services. Our proprietary distribution network, which 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, has decreased by 73 points of sale year to year. As a result, as of December 31, 2021, MTS operated 5,167 points of sale, including 1,754 franchise points-of-sale and 3,413 points of sale owned by us, as compared to 5,240 points of sale, including 1,734 franchise points of sale and 3,506 points of sale owned by us in 2020.
In 2021, we continued to expand our online sale channels, developed a concept and allocated the necessary resources to the online channels, including additional investments in setting up of SIM-card delivery and self-pickup processes. We redesigned and launched a standard customer journey map, including mobile number portability, mobile number selection, eSIM (virtual SIM Card technology) and focused our IT resources on developing self-service registration processes.
The foundation of the prospective online basic telecom product customer acquisition is "Device + SIM" bundling consolidated with subscription, installment and trade-in options. In 2021, we have developed and tested the product component of the bundle and developed the prospective online Customer Journey for the bundle. Launching of the operator mechanics such as bundling with devices will provide an increase of basic telecom products sales in the online channel.
MTS maintains and strengthens its leadership positions in the offline sale channels. In 2021, MTS developed the franchising sale channel, being able to transfer expertise, process methods and market conditions to the partners while using the opportunity to reduce commission costs for SIM card sales. In the franchising sale channel MTS launches new format points of sales in cooperation with digital technology manufacturers.
We follow the digital solutions market leadership strategy. Development of own digital ecosystem is the base of digital leadership strategy. Connected sales are one of the points of our own ecosystem.In 2022, we plan to increase the share of convergent sales by launching new convergent products.
Competition
The Russian wireless telecommunications market
Until 1998, mobile communications developed slowly, penetration was less than 0.5%. However, this changed, as a result of explosive demand in 2006, the number of subscribers registered in networks exceeded the country’s population. Three market leading operators, MTS, Beeline and Megafon, served 85% of the subscriber base. Over the past decade, the Russian market has stabilized; further growth is associated with the development of the IoT services market and M2M devices. As of December 31, 2021, overall wireless penetration in Russia was approximately 178%, or approximately 258 million subscribers.
The following table sets forth key data on Russia’s wireless telecommunications market as of the dates indicated:
| | | | | | |
| | As of December 31, | ||||
|
| 2021 |
| 2020 |
| 2019 |
Subscribers(1) |
| 258.5 |
| 252.2 |
| 260.7 |
Subscriber penetration (%) |
| 178 |
| 172 |
| 178 |
According to AC&M-Consulting data and our estimates based on our subscriber data and reports of other national operators.
(1) | Based on registered subscribers (SIM cards only) including MVNO networks. There is no uniform definition of active subscribers in the Russian wireless market. |
The primary mobile providers in Russia include us, MegaFon and VEON (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
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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, 2021, 2020 and 2019:
| | | | | | |
| | As of December 31, | ||||
Operator |
| 2021 |
| 2020 |
| 2019 |
| | (amounts in millions) | ||||
MTS |
| 80.4 |
| 78.5 |
| 79.1 |
MegaFon |
| 74.4 |
| 70.4 |
| 75.2 |
VEON Ltd. (VimpelCom) |
| 49.4 |
| 49.9 |
| 54.6 |
T2 RTK Holding (Tele2+Rostelecom) |
| 47.5 |
| 46.6 |
| 46.0 |
Others & MVNO |
| 6.8 |
| 6.8 |
| 5.8 |
According to AC&M-Consulting and operators’ press releases.
MegaFon. MegaFon, which operates GSM 900/1800, 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. The operator changed the method of calculating the subscriber base in the fourth quarter of 2020 and applied stricter requirements for monitoring customer activity. MegaFon had a subscriber base of approximately 74.4 million subscribers in Russia, which represented a 29% market share as of December 31, 2021.
VEON. In addition to MegaFon, we also compete with VEON, which is the third largest GSM 900/1800/UMTS (3G)/LTE (4G) wireless operator in Russia in terms of subscribers.
VEON had a subscriber base of approximately 49.4 million in Russia at December 31, 2021. At December 31, 2021, VEON had a 19% market share of total wireless subscribers in Russia, based on the number of subscribers disclosed by VEON and our estimate of total number of subscribers.
T2 RTK Holding. In February 2014, Tele2 and Rostelecom announced a merger which created a new federal wireless provider. The license portfolio of the new company covers all Russia which effectively permits the roll out of federal-scale networks. 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 2018 - 2019, 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. In 2019, the operator launched a network in the Ivanovo and Yaroslavl regions in the 2G / 3G / 4G standard. By the end of 2020, Tele2 LTE networks were launched in all 68 regions.
Tele2 had a subscriber base of approximately 47.5 million in Russia and 18% market share as at December 31, 2021.
Other Operators. The number of subscribers of other operators, including MVNO operators, which were not indicated above is about 6.8 million customers as of December 31, 2021.
The Armenian wireless telecommunications market
As of December 31, 2020, overall wireless penetration in Armenia was around 126%—about 3.73 million active subscribers, according to the published figures of the operators and Socio-Demographic Data report published by Statistical Committee of RA (about 2.97 million population).
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The following table illustrates number of active subscriber bases and the coverage area of MTS Armenia and competitors—Beeline (VEON Armenia) and Ucom, as of indicated dates.
| | | | | | |
| | As of December 31, | ||||
Operator |
| 2021 |
| 2020 |
| Coverage Area |
| | (amounts in thousands) | ||||
MTS Armenia | | 2,231.84 |
| 2,146.89 |
| Nationwide |
Beeline | | 908.17 |
| 904.68 |
| Nationwide |
Ucom | | 593.89 |
| 594.60 |
| Nationwide |
Sources: https://beeline.am; https://www.ucom.am; http://mts.am.
As of December 31, 2021, MTS Armenia reported increase of 3-month active subscriber base by 3.96% y-o-y. According to our subscriber data and operators’ public releases, our market share is about 59.8%.
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 for the periods indicated:
| | | | | | | |
| | As of December 31, |
| ||||
|
| 2021 |
| 2020 |
| 2019 |
|
Russia |
|
|
|
|
|
| |
Prepaid |
| 24 | % | 28 | % | 31 | % |
Contract and corporate |
| 76 | % | 72 | % | 69 | % |
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 currently divided into several categories - “Prepaid,” “Smart,” “Premium,” “Data,” “IoT”, “Corporate” and “Convergent” - with each category designed to target specific segments as follows:
● | Prepaid: Prepaid tariff plans are geared towards consumers who use their mobile phones for personal communication. These plans do not have monthly subscription fees and the per-minute fee charges depend largely on the tariff plan chosen. We offer tariff plan “Super MTS” which varies depending on the region of the customer. Subscribers to our prepaid plans can reduce the price of their calls by using tariff options which 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 using the mobile app “My MTS” or sending an SMS message (USSD request) to a designated number. |
● | Smart: “Smart” is the family of integrated voice and data tariff plans for customers with active mobile data usage, which we believe will remain the main offer for a long period of time. “Smart” has a monthly fee for a bundle of all-net minutes and Internet. For the majority of tariff plans the on-net calls above the bundle are free. Versions of “Smart” (“Smart”, “X” for youth segment, “NE Tariff”, “Tarifische” with large Internet bundle and “ MY (We) MTS”) differ by amount of minutes and gigabytes included in the bundle and the corresponding monthly fee. “NE Tariff” is a personal tariff plan, |
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where each user can adjust the tariff for their needs by selecting the required package of minutes and Internet and including VAS services into the monthly fee. “Tarifische” is the tariff with large Internet bundle and option to adjust the tariff for personal needs and select the required package of minutes. We also have tariff plan “MY (We) MTS” for family segment with opportunity to share bundle of all-net minutes and Internet with 5 devices. |
● | Premium: “Premium” tariff plans are designed for heavy users who call primarily within their domestic region. Subscribers of unlimited tariff plans are provided an unlimited number of local minutes and access to personal customer care service. In the Moscow region, for those subscribers issued a local number, monthly fees start from RUB 2,833.6 and those using a federal number pay from 2,416.6 per month. The “Ultra” tariff plan includes unlimited calls to MTS numbers as long as the recipient and the caller are in the same region (defined as “home region”), free domestic calls from the MTS network to any number regardless of carrier up to a certain limit of minutes, no roaming charges within Russia, unlimited mobile Internet and 5000 SMS messages within the network. |
● | Data: For active users of mobile Internet devices (e.g., 4G capable USB-modems and routers) we offer an unlimited tariff plan with limited speed 20Mbit/second after certain threshold. |
● | IoT: For smart devices with special consumption needs we developed unique tariff plan “Smart device” with annual subscription fee. In addition, we provide special tariff free of charge. This free of charge tariff may apply on a permanent basis if our customer buys certain models of smart watches for kids in MTS retail stores and online. |
● | Convergent: “All MTS” and “MY (We) MTS+” are the family of integrated mobile and fixed line services with digital or satellite television. The purpose of “All MTS” is to strengthen the user base and reduce customer churn. “MY (We) MTS+” has a monthly fee for a bundle (mobile, fix Internet and TV, online video service “KION”) and also an opportunity to share bundle of all-net minute and Internet with 5 devices. The price for this tariff varies by region and depends on the competitive situation in the market. |
● | Corporate: We offer different tariff plans in each region targeted to meet the demands of our corporate clients, each plan allowing them to optimize their communication expenses in accordance with their individual consumption patterns. These plans feature specialized customer care, payment through our credit system and volume and tenure discounts. In addition, we provide customized pricing offers and technical solutions to our biggest clients. |
Our tariffs vary from plan to plan. The description of tariffs and charges are, in each case, exclusive of VAT. As of December 31, 2021, the per-minute tariff for local calls within the MTS network varied from zero per minute to RUB 2.17 per minute. Different rates apply to local calls to other networks and vary from RUB 0.82 per minute to RUB 3.67 per minute. Higher rates apply to domestic long distance calls and rates for international calls vary from RUB 1.25 per minute for calls to the China and South Korea to RUB 70,8 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.
Customer Payments and Billing
We enroll new prepaid subscribers in an advance payment program. As of December 31, 2021, 73% of our consolidated subscriber base was enrolled in the advance payment program and 27% used a 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, 2021, subscribers using the credit system of payment had credit limits of up to RUB 2.87 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.
We provide “in full confidence” 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. As of December 31, 2021, subscribers using the “limit on communication” service had a maximum credit limit of RUB 3 million. Customer service representatives can set individual credit
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limits for subscribers based on their payments and charge history (i.e., average balance usage) during the prior three months. 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 25th 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 implemented Foris billing system in Russia in 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.
Customer Service
Russia
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, chat). Customer service representatives respond to various issues such as phone lockage 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.
In 2021, we saw an active organization of the ecosystem-based seamless service in all channels of customer interaction with the company.
We implemented speech and text analytics tools based on AI technologies that helped to increase a number of analyzed requests to 100% for enhancing the service quality and improving customer experience.
In 2021, we witnessed an active retail service development: a chat with embedded chat bot was implemented for additional support of employees. New MTS ecosystem customer service scenarios were also developed for retail employees. In 2022, we will see a further development of intelligent systems to improve efficiency of sales and service in our stores.
IVR development continued in 2021. Integration with an internal intelligent platform was implemented, which allowed us to offer clients the most relevant scenarios. It helped to improve the IVR efficiency without customer experience deterioration. We have launched MTS Voice Bot in the Moscow region.
The product is focused on simplifying interaction of customers with the company’s services in the automatic telephone menu maintaining the IVR current efficiency. It is no longer necessary to select a topic of application in the menu, instead customers will be able to create an open question and receive a response immediately. A share of unique customers completed the service in the IVR with the help of the Voice Bot without being switched to the operator is about 40%. NPS of users is approximately 45%. In 2022, we plan to roll out the solution to all regions.
In 2021, we witnessed a launch of customer service in such popular messengers as WhatsApp, Telegram, and Apple Messages. An allocated support for new digital products of MTS ecosystem was launched.
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We continued developing tools for technical diagnostics of fixed-line customers, set up integration with key self-service services: IVR and chat bot. Now a customer can receive a technical advice and register an incident in case of problems in the network without contacting specialists.
Thus, all customer service projects and activities are aimed at implementation of the MTS customer-focused strategy - CLV 2.0.
Network Infrastructure—Technology Strategy
Our technology strategy is formed in accordance with the overall company’s business strategy and intended to support the existing business operations, as well as to introduce new technologies allowing us to launch new services in the future. Our technology strategy considers world technology trends in telecommunications.
The main focus of the technology strategy is the consistent development of the network meeting future technology requirements: higher throughputs, lower latencies and flexible network core as enablers of the new services.
LTE is our the main priority while deploying Radio Access Network (82% of the RAN deployment was LTE in 2021) and 2G/3G investments decrease gradually in accordance with changes in network UE penetration structure and traffic migration.
According to Technology Strategy in 2021 we continued frequencies re-farming in 1800 MHz , 2100 MHz and 900 MHz bands from 2G/3G to the most efficient technology—LTE. Besides, we use Carrier Aggregation, 256 QAM, high order MIMO, and other cutting edge technologies to provide better user experience for our customers
5G is the next key step for telecommunications companies, and in 2021 MTS launched Russia’s first multi-location pilot 5G network for end consumers. Our subscribers now can test 5G experience at speeds up to 1.5 Gbps.
We strongly believe that Open RAN architecture is the future of Radio Access Networks, and in 2021 we launch Open RAN lab to test new solutions functionality and raise in-house Open RAN integration expertise.
We continue using modular architecture for Data Centers construction and, in 2021, we launched a new data center in Novosibirsk
Our strategy is to develop distributed computing network with high scalability. That is why we are not limited to building large data centers, but we also build small Far Edge DC’s. In 2021 we launched 2 Far EDGE data centers.
Network Infrastructure—Site Construction and Sharing
In October 2014, MTS and VEON Ltd. (VimpelCom) had signed a contract about shared LTE networks deployment and operation. According to this contract, one shared LTE network should be deployed for servicing subscribers of both companies in several regions of Russia.
By the end of 2021 we had 10,617 LTE base stations shared with VEON Ltd. (VimpelCom) in 22 regions and VEON Ltd. (VimpelCom) had 8,212 LTE base stations shared with MTS in other 20 regions of Russia. Total amount of shared infrastructure nodes is 18,829 base stations servicing in 800 MHz, 1800 MHz and 2600 MHz bands FDD&TDD networks.
In addition to network deployment investments and operational costs savings target architecture of the site sharing project includes frequency resources shared usage: by the end of 2021 networks in 34 regions of Russia ran in shared 2600 band spectrum usage mode (MOCN concept). The project is being completed in 7 regions.
Network Infrastructure and Frequency Allocation
We use switching and other network equipment supplied by Nokia Solutions and Networks, Ericsson, Huawei, Alcatel Lucent, Samsung and other major network equipment manufacturers.
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In Moscow and Moscow region license area, we have been allocated frequencies spanning 2 × 12 MHz of spectrum in the 900 frequency band and 2 × 24.8 MHz of spectrum in the 1800 frequency band for operation of a dual GSM 900/1800 network and UMTS900 network, LTE900 and LTE1800 networks. In St. Petersburg and the Leningrad region, we have been allocated frequencies spanning 2 × 9.8 MHz of spectrum in the 900 frequency band (including 2 × 1.6 MHz in the E GSM band) and 2 × 18.6 MHz of spectrum in the 1800 frequency band for operation of a dual GSM 900/1800 network, UMTS900 network, LTE900 and LTE1800 networks.
We have different amounts of spectrum in the 900 MHz band for GSM 900 and UMTS and LTE networks and in the 1800 MHz band for GSM 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 for UMTS and LTE network deployment for the entire territory of the Russian Federation.
In addition, we have been allocated frequencies 453 457,4 MHz/463 467,4 MHz for IMT MC and LTE networks and 1920 1935 MHz/2110 2125 MHz for UMTS and LTE networks in Khanty Mansi Autonomous Okrug and Republic of Bashkortostan.
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 believe that we have been allocated adequate spectrum in each of our license areas.
Network Infrastructure—Virtual Infrastructure
The following projects have been launched in 2021:
● | EPC—1-st stage prepared for initialization; |
● | UDR—1-st stage prepared for initialization; |
● | SBC 3rd stage—prepared for initialization; |
● | IMS (IP Multimedia Subsystem) core extension—prepared to initialization;and |
● | S3 & Open Stack—prepared for initialization |
The following projects were finished in 2021:
● | SBC 2 nd stage; and |
● | U2020 in MR Moscow. |
Two new multi-purpose modules of data-center started operating in Novosibirsk for deployment of virtual platforms for telecommunication services and cloud services in 2021.
Network Infrastructure—Energy Infrastructure
One of the main goals in energy infrastructure is to decrease operational costs for electric energy.
Under the legislative acts of Russian Federation electric energy payment categories were introduced in 2012. This payment category can be chosen by a consumer in case of introduction of the electric energy accounting system, which allows to hourly monitor an electric energy usage and to report this information to the power supply companies with an accepted procedure.
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Considering these conditions we decided to deploy Electric Energy Accounting Automatic System (EEAAS).
Introduction of the EEAAS allowed to:
● | Reduce the electricity payments and operational costs; |
● | Increase the level of precise accounting; |
● | Implement an energy usage management and track energy usage dynamics. |
The project is now finished and the EEAAS is successfully working allowing to reduce costs of electric energy
payments.
In 2022 we are planning to deploy the Hardware and Software Complex of power storage based on Li-Ion battery packs for base stations. The purpose of this Complex is to switch power supply from an external power source to a Li-Ion battery pack during the time when an electrical power has the most expensive cost and to charge up the batteries in those hours when an electrical power has the least expensive cost. Trial tests, which were implemented in Moscow, have shown that the Complex is fully functional and is able to ensure about 18% energy cost reduction. Throughout 2022, we plan to provide more than a thousand base stations with the Hardware and Software Complex.
Development and maintenance of the network
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’ve used special radio planning tools supplied by TEOCO Corporation and radio propagation models supplied by Siradel SAS to assess new sites so that the network design and site development are coordinated. This software could create digital cellular coverage maps of our licensed areas, taking into account the specifics of the urban landscape, including the reflection of radio waves from buildings and other obstacles, and support all necessary technologies, such as 2G, 3G, LTE and NB-IoT. In 2021 we’ve replaced the TEOCO radio planning tool with the new one, Atoll, which is provided by Forsk. This new tool allows us to make calculations of 5G networks and has better performance. In addition we improved our customized tool for investment planning to speed up the process of RAN development planning and make it more accurate. 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.
We also continued employing the functionality that allowed us to increase the speed of data transmission and improve customer experience for our subscribers. The carrier aggregation functionality is activated at 98% of base stations where it is technically possible. It accounts for 48% of the MTS entire network base stations.
We continue our work of refarming the frequency spectrum. The refarming of 1800 band has been completed by 54% of the network. In 2022, we plan to additionally refarm 14% of the network. The feasibility of refarming the remaining network is under study. The refarming of 2100 band is carried out gradually, starting from the most strategic regions, following the market demand and customer base migration from 3G to LTE-based services.
In 2021, we continued expanding our network coverage. At the end of 2021 the 2G network coverage was provided for 97% of the population, 3G for 88% of the population, 4G for 86% of the population and IoT coverage was provided for 85% of the population of Russia.
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. In 2018 we started the NB IoT technology During 2018-2021, NB IoT technology was implemented on 45,055 base stations of LTE.
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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.To provide high quality service to our subscribers in Russia, we have a global network operation center (“GNOC”) in Krasnodar The GNOC experts have the technical ability to monitor network problems and unusual situations online in all regional branches of MTS in Russia 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. The GNOC strengthens our network’s reliability and safety, as well as creates the necessary conditions to launch and implement new technologies and network standards.
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 GFNOC combined functions of monitoring and controlling the equipment in 55 regions of Russia where we offer 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. Our subsidiary company MGTS performs these functions in Moscow region of Russia.
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 monitoring head end station and satellite TV services.
Our networks in Armenia 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, where we also manage the cross functional coordination of our networks in all countries of operation.
Our principal suppliers are Huawei, Iskratel, Oracle - PSTN switching equipment and SBC; Ericsson, Harmonic, SumaVision, Cisco Systems - equipment of Digital TV station; Irdeto, Verimatrix - CAS TV systems; MediaKind, Huawei - Hybrid TV platform; Cisco Systems, Huawei, D Link, Fibercom, EdgeCore - FTTB core and access; Juniper Networks, Huawei, ECI Telecom, Tellabs and Alcatel Lucent for transport network equipment. Please see also “Item 3. Key Information—D. Risk Factors—Political and Social Risks—Further deterioration in relations between Russia and other states that were parts of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the risks connected with sanctions.
All of our equipment is supplied directly through authorized dealers.
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.
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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. We have also built our own local networks in certain cities within Russia (including Moscow) to provide local telephone numbering capacity to our subscribers. Telephone numbering capacity is allocated by the government and we provide interconnect services to other operators 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-off connection fee per each point of interconnect (“E1”) and a usage charge based on minutes of traffic. Operators with a substantial 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 to all the cellular operators. We believe that sufficient numbering capacity has been allocated to 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” 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 subscriber’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 is for an unlimited period of time. As of December 31, 2021, we had numbering capacity (federal and local) for approximately 39.16* 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, VEON Ltd. (VimpelCom) 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 for connecting users of other operators’ fixed line and wireless networks to our network are based on a one-off connection fee and charge for usage by minute which varies depending on the destination called.
Russian legislation provides that fixed line operators with a substantial market power cannot refuse to provide interconnect or discriminate against one operator in relation to another, and the interconnect rates of operators with a substantial market power are regulated by the government. See “Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation—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, which may diminish our market share and result in a loss of 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 or through 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: Rostelecom and VEON Ltd. (VimpelCom). For ILD traffic transit we primarily use our DLD/ILD network which is interconnected with 52 international carriers. We also have an interconnect between the DLD/ILD MTS network and the ILD networks of our subsidiary, MTS Armenia, in order to provide transit for international traffic.
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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. Those handsets, which function in accordance with the GSM 900, GSM 1800 and PCS-1900 standards, provide users with greater automatic roaming possibilities in Russia, Europe, the United States and Canada. All LTE handsets support bandwidth LTE-FDD 2100 MHz (band 1), LTE-FDD 1800 MHz (Band 3), 2600 MHz (Band 7), LTE-FDD 900 MHz (band 8), 800 MHz (Band 20) and LTE-TDD 2600 MHz (band 38), also there are smartphones in our sales with LTE Advanced support. In 2021, we continued the process of implementation Voice over LTE and Wi-Fi Calling functions.
From 2009, RTC, our 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 Apple, Samsung, Oppo, Vivo, Realme, Nokia, Alcatel, Xiaomi, Philips, Huawei, Honor, ZTE and others to purchase handsets. In 2021, we continued our cooperation with A-brand smartphone vendors. We also offer an array of mobile telephone accessories. In February and March 2022, a number of handsets vendors, including Apple and Samsung, paused their product sales in Russia. Further limitation of handsets supplies may lead to the decrease in turnover of our retail operations and reduction in the range of products offered. Please see “Item 3. Key Information—D. Risk Factors —Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the impact of sanctions on relations with the suppliers.
Fixed Line Services
We offer fixed-line communications services in 56 regions across Russia, covering about 25 million households.
Our other fixed line operations include the following communication services: voice, data and broadband 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, 2021, we were the largest operator in the Moscow residential broadband market in terms of subscribers, with a 38% market share. We also operate in Armenia, where we provide digital telephony communications services, data transmission, Internet access and the renting of channels.
For a list of the telecommunications licenses held by us, see “Item 4. Information on Our Company—B. Business Overview—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, 2021, MGTS had approximately 3.72 million active lines in service, a cable network of over 42,409 km, a fiber optic network of over 46,193 km and 1 321 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 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 0.367 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, 2021.
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Moscow fixed line operations customers consist of the following subscribers:
| | | | | | | |
| | December 31, |
| December 31, |
| December 31, |
|
Moscow fixed line operations | | 2021 |
| 2020 |
| 2019 | |
Residential subscribers | | 84 | % | 84 | % | 84 | % |
Corporate subscribers | | 7 | % | 8 | % | 8 | % |
Public sector subscribers | | 9 | % | 8 | % | 8 | % |
MGTS holds licenses and regulatory approvals to provide, among others, the following services:
● | local telephony; |
● | DLD/ILD voice telephony through licensed DLD/ILD operators, including us; |
● | interconnect to other operators; |
● | Internet and data transmission, including leased DLD/ILD services; |
● | IP TV for B2C and B2B subscribers; |
● | MVNO mobile telephony and Internet; |
● | inquiry and information, including telephone directories; |
● | local telephony with use of payphones; |
● | telematic communications services; |
● | telecommunications services associated with providing of communication channel; |
● | telecommunications services associated with voice data transmission; |
● | telecommunications services associated with cablecasting; |
● | movable radiotelephony services; |
● | measures and (or) services for the protection of State secrets;and |
● | capital construction projects engineering. |
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 Antimonopoly 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. Revenues from regulated services accounted for approximately 28% of service operating revenues of our Moscow fixed line operations in 2021, 32% in 2020 and 33% in 2019.
The percentage decline is connected with gradual growth of operating revenues from non regulated services as a proportion of the overall operating revenues in 2021, 2020 and 2019. The Federal Antimonopoly 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 Antimonopoly 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 per year. The Federal Antimonopoly Service of the Russian Federation has permitted MGTS to increase its tariffs several times.
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MGTS also provides a number of unregulated services. According to Russian legislation, DLD/ILD services provided by licensed non monopoly operators, 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:
● | various value-added services, including call forwarding, call waiting, call holding, caller ID, provision of second direct inward dialing (DID) number; |
● | Internet access for residential subscribers and corporations; |
● | IP TV for B2C and B2B subscribers; |
● | MVNO mobile telephony and Internet; |
● | alarm signaling; |
● | domestic maintenance services, including electric installation, sanitary engineering, cleaning, computer emergency, and consumer electronics installation; |
● | video-surveillance; and |
● | rent of space for telecommunications equipment of other operators connected to MGTS’ network. |
MGTS does not have 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, 2021, 2020 and 2019.
| | | | | | |
| | December 31, |
| December 31, |
| December 31, |
Moscow fixed line operations |
| 2021 |
| 2020 |
| 2019 |
Installed telephone lines on TDM (000s)(1) | | 0,367 | | 0,595 | | 0,683 |
Installed telephone lines on IMS (000s)(1) |
| 5,180 |
| 5,180 |
| 5,180 |
Residential |
|
|
|
|
|
|
Number of subscribers (000s) |
| 2,362 |
| 2,545 |
| 2,684 |
CPP traffic (millions of minutes) |
| 166 |
| 214 |
| 240 |
Corporate(2) |
|
|
|
|
|
|
Number of active lines (000s) |
| 465 |
| 492 |
| 525 |
Number of subscribers (000s) |
| 39 |
| 43 |
| 46 |
CPP traffic (millions of minutes) |
| 164 |
| 185 |
| 205 |
(1) | Telephone lines on TDM and IMS can be installed at one household. |
(2) | Includes state-owned enterprises and government agencies. |
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.
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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:
| | | | | | |
| | March 24, |
| January 12, |
| March 1, |
MGTS Regulated Tariffs |
| 2022 |
| 2021 |
| 2020 |
Residential(1) | |
| |
| |
|
Line rental |
|
|
|
|
|
|
RUB per month |
| 214 |
| 214 |
| 214 |
Per minute tariff plan—local connection fee |
|
|
|
|
|
|
RUB per minute |
| 0.60 |
| 0.60 |
| 0.60 |
Unlimited tariff plan—connection fee (unlimited connection) |
|
|
|
|
|
|
RUB per month |
| 513 |
| 513 |
| 299 |
Combined tariff plan—fee for fixed amount of minutes(2) |
|
|
|
|
|
|
RUB per month |
| 438 |
| 438 |
| 224 |
Combined tariff plan—fee for each additional minute |
|
|
|
|
|
|
RUB per minute |
| 0.58 |
| 0.58 |
| 0.58 |
Combined tariff plan—fee for fixed amounts of minutes(3) |
|
|
|
|
|
|
RUB per month |
| 242 |
| 242 |
| 28 |
Combined tariff plan���fee for each additional minute |
|
|
|
|
|
|
RUB per minute |
| 0.59 |
| 0.59 |
| 0.59 |
Corporate (non‑governmental)(1) |
|
|
|
|
|
|
Line rental |
|
|
|
|
|
|
RUB per month |
| 225 |
| 225 |
| 225 |
Per minute tariff plan—local connection fee |
|
|
|
|
|
|
RUB per minute |
| 0.60 |
| 0.60 |
| 0.60 |
Unlimited tariff plan—connection fee (unlimited connection) |
|
|
|
|
|
|
RUB per month |
| 641 |
| 641 |
| 416 |
Combined tariff plan—fee for fixed amount of minutes(4) |
|
|
|
|
|
|
RUB per month |
| 804 |
| 804 |
| 224 |
Combined tariff plan—fee for each additional minute |
|
|
|
|
|
|
RUB per minute |
| 0.58 |
| 0.58 |
| 0.58 |
Corporate (governmental and state‑funded organizations)(1) |
|
|
|
|
|
|
Line rental |
|
|
|
|
|
|
RUB per month |
| 215 |
| 225 |
| 215 |
Per minute tariff plan—local connection fee |
|
|
|
|
|
|
RUB per minute |
| 0.60 |
| 0.60 |
| 0.60 |
Unlimited tariff plan—connection fee (unlimited connection) |
|
|
|
|
|
|
RUB per month |
| 641 |
| 641 |
| 416 |
Combined tariff plan—fee for fixed amount of minutes(4) |
|
|
|
|
|
|
RUB per month |
| 804 |
| 804 |
| 224 |
Combined tariff plan—fee for each additional minute |
|
|
|
|
|
|
RUB per minute |
| 0.58 |
| 0.58 |
| 0.58 |
(1) | Tariffs for residential subscribers are shown including VAT; tariffs for non-governmental corporate subscribers and governmental/state-funded organizations are shown excluding VAT. |
(2) | The plan included 400 minutes per month. |
(3) | This plan included 50 minutes per month. |
(4) | This plan included 300 minutes per month. |
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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.
MGTS provides services for the design and construction of mobile and fixed-line networks for third-party Telecom operators.
Customers and Services Offered—Other Fixed Line Operations
We provide fixed-line communications services to corporate, operator and residential subscribers in 56 regions 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, 2021 and 2020.
| | | | |
| | December 31, | | December 31, |
Other fixed line operations |
| 2021 |
| 2020 |
Residential | |
| |
|
Number of subscribers (000s)(1) |
| 6,230 |
| 6,044 |
Corporate(2),(3) |
|
|
|
|
Number of subscribers (000s) |
| 170 |
| 119 |
(1) | Subscribers to broadband Internet, pay-TV, Wi-Max, voice and other services. |
(2) | Includes state-owned enterprises and government agencies. |
(3) | As of December 31, 2021 we had 25,000 voice subscribers, 98,000 Internet subscribers, 30,000 VPN subscribers and 15,000 pay-TV subscribers. |
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 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 corporations 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 corporations, which allow for data exchange between their various branches or offices located within Russia and abroad. 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
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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 corporations, 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 100 Mbps), (4) radio Ethernet (up to 300 Mbps), (5) MRR (up to 1 Gbps), (6) Wi-Fi (up to 600 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 1 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 corporate clients.
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 corporate clients 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 corporate customers 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 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, enabling the 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.
Operators
We 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.
We had 214 local fixed nodes in 67 regions of Russia, including Moscow, and 57 zonal fixed networks to provide telephony services to subscribers as of December 31, 2021. Our integrated intercity/international network is interconnected to 52 international operators.
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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
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 our operational regions 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, 2021, we had 12% market share in the Russian Federation based on our subscriber data and reports of other national operators and TMT Consulting reports.
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 digital TV and since 2017 we broadcast in 4K ultra HD quality. Special auxiliary equipment (set top box) allows pay TV subscribers to access more than 170 channels of digital quality, including channels of HD quality from a home television and channels of 4K ultra HD quality. International and Russian channels are included as part of the base services package.
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 between RUB 500 RUB 990 per month in Moscow and a subscription fee between RUB 300 RUB 2700 in other regions of Russia, depending on the number of channels included in the package. We also offer bundled Internet, pay TV and Internet, Mobile, pay TV services for RUB 780 RUB - 1,290 per month in Moscow and RUB 390 RUB 2,490 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. In 2021, convergent bundles, that included Internet, TV and mobile services, had been developed rapidly, including family subscriptions and special tariff plans for the 1 GB/s network. As a result we have achieved overall growth of convergent subscriber base up to more than 1.8 million subscribers in 57 regions (excluding Moscow), as of December 31, 2021.
Sales and Marketing
Moscow fixed line operations
In 2021, MGTS continued monetization of its own high tech fiber optic network GPON and developed combinations of different services in packages, including convergent packages of mobile and fix services and online cinemas subscriptions. Promotional packages were offered to clients and included basic services, online cinemas subscriptions and high-speed Internet access. In order to expand and consolidate its market share, MGTS continued to enter the Moscow Region market through the construction of its own network, as well as through acquisition of local Internet service providers.
By the end of 2021, 1.8 million subscribers were transferred to GPON. In 2022, MGTS plans to develop and implement new services as part of the concept of Smart Home and Smart City, participate in the cloud solutions market more actively, develop partnerships with delivery services and become a partner of iconic city projects.
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
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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 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:
● | Rostelecom, Russia’s largest national fixed line telecommunications operator with presence in all Russian regions. We compete with Rostelecom in the corporate, operator and residential fixed line telecommunications markets in all regions where we operate in Russia. We also compete with Rostelecom in the mobile telecommunications market. |
● | ER-Telecom, voice telephony, broadband and TV operator. We compete with ER-Telecom in the corporate and residential fixed line telecommunications market in St. Petersburg, Novosibirsk, Omsk, N.Novgorod, Ekaterinburg, Kazan, Novosibirsk, Chelyabinsk and other regions. |
● | VEON Ltd. (VimpelCom), which is also one of our primary competitors in the Russian mobile communications market, offers voice, data and Internet services to corporates, operators and residential subscribers in major cities throughout Russia, Ukraine, Kazakhstan and Uzbekistan. We compete with VEON Ltd. (VimpelCom) in the corporate, operator and residential fixed line telecommunications markets in Moscow and in certain other regions of Russia where we are present, including, among others, St. Petersburg, Rostov, Nizhny Novgorod, Ekaterinburg and Krasnodar. |
● | MegaFon, which acquired operators Synterra and Net by Net, and offers services in the operator, corporate and residential fixed line telecommunications markets in Moscow, St. Petersburg, and other regions. |
● | Akado Group, provider of pay TV, broadband Internet and digital telephony in Moscow. We compete with the Akado Group primarily in the residential fixed line telecommunications market of Moscow. |
Corporate subscribers
The following table sets forth the corporate subscriber market shares of the primary fixed line operators in Moscow as of December 31, 2021:
| | | |
MTS |
| 25 | % |
VEON Ltd. (VimpelCom) |
| 18 | % |
Akado |
| 7 | % |
Rostelecom |
| 16 | % |
Other |
| 34 | % |
Total |
| 100 | % |
Source: TMT Consulting.
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.
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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, 2021:
| | | |
Company |
| Russia |
|
MTS |
| 18 | % |
Rostelecom |
| 73 | % |
Other |
| 9 | % |
Total |
| 100 | % |
Source: TMT Consulting.
Internet
According to TMT Consulting, as of December 31, 2021, broadband Internet penetration of households was 61% 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, 2021:
| | | |
Company |
| Russia |
|
MTS |
| 12 | % |
VEON Ltd. (VimpelCom) |
| 8 | % |
ER‑Telecom |
| 11 | % |
Rostelecom |
| 36 | % |
Other |
| 33 | % |
Total |
| 100 | % |
Source: TMT Consulting.
Pay-TV
According to TMT Consulting, as of December 31, 2021, pay TV penetration was 82% in Russia. The following table sets forth the market shares of the primary operators in the TV market in Russia as of December 31, 2021:
| | | |
Company |
| Russia |
|
MTS |
| 10 | % |
Rostelecom |
| 23 | % |
Tricolor TV |
| 26 | % |
ER‑Telecom |
| 8 | % |
Orion |
| 7 | % |
Other |
| 26 | % |
Total |
| 100 | % |
Source: 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.
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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 corporate clients, 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.
Network Infrastructure
Network Infrastructure—Transmission Networks
Backbone and Internet Networks
Mobile, fixed and inter‑carrier aggregated traffic increased in 2021: downlink (towards users) data throughput reached 8.27 Tbps (7.06 Tbps in 2020), uplink (from users) data throughput reached 2.54 Tbps (2.27 Tbps in 2020).
The size of MTS fiber‑optic networks increased by 10,058 km in 2021 and reached 259,770 km in total.
The main factor impacting network infrastructure in 2021 was the integration of the Data Center Network (DC NET) and multiservice network divisions into the backbone of the Internet department. Centralization of network infrastructure management competencies should have a positive effect on network infrastructure optimization.
Development of the backbone network in 2021:
● | NEC equipment SWAP on the Moscow - Tambov section. |
● | The capacity of the Moscow core has been expanded to 3.2 Tb/s. |
● | The first 1*400G client solution has been launched. |
● | DCI (data center infrastructure) 1*600G solution launched in Rostov and Ufa. |
Convergent network
In accordance with our deployment plans, we completed the following projects in 2021:
● | Built or purchased new 5112 km regional fiber-optic for interconnect sites. |
● | New MBH transport nodes were deployed: 2,477 ; replacement of obsoleted MBH equipment is ongoing . |
● | Micro wave links were deployed: 5,746. |
● | Launched more than 10 5G test zones in different cities of Russia. |
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The tender for the selection of equipment for the converged regional network has been completed. Three vendors were identified for different regions of the country. Three contracts for the supply of equipment and work are in the process of preparation. Detailed plans for the modernization of convergent networks of the regions are being worked out.
We have successfully completed testing of automated provisioning of new network elements. RFP has been launched. We plan to implement network automation in 2022.
The test generation of the configuration for the converged network element was successfully carried out.
Three private LTE commercial zones have been launched.
SD-WAN solution was successfully deployed on MTS regional sites and prepared for on-boarding customers. Based on references from customers and results of pilot projects, business owners (Telecom B2B Block) made a decision to relaunch this project with the new product strategy.
Public 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 organically grown, 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. At present, the telephone network in Moscow and Moscow region has a capacity of more than 1,095,638 telephone numbers.
All of our PSTN switching centers (TDM and Soft switch) are connected to a digital transport network, which uses SDH and IP technology. The network ensures connectivity with a digital equipment of PSTNs of other operators.
The SDH network will be operated to support existing clients, but we also provide the moving traffic and clients from SDH/TDM technology to IP.
The management of the transport network and digital PSTN is carried out remotely from network operation centers.
As of December 31, 2021, in Moscow and the Moscow region we had a wireless broadband network including 405 base and subscriber stations in the 5-6 GHz frequency band and also near 169 radio relay lines in the 70-80 GHz frequency band.
For the provision of Internet access, IP‑telephony and other services, we have our own IP network, the core of which is constructed as IP MPLS rings with routers connected to each other by means of 10/100 GE channels. In addition, separate routers are used for inter‑carrier connections and are connected to the core routers by means of 10/100 GE interfaces.
Russia
As of December 31, 2021 we provided cable Internet access to about 10.8 million households and cable TV access to about 10.7 million households. The access equipment used are Ethernet switches, Optic Line Terminal, IP DSLAM and Optical Receivers. We mainly use FTTB technology for Internet ( 10.5 million households) and CATV access, which can provide speeds up to 1 Gb/s per building and up to 300 channels CATV (analog and digital). Since 2020, we have started building and upgrading networks using GPON technology. As of 31 December, 2021, more than 15 thousand households have been built. In 2011, we started to roll‑out DVB‑C technology for a cable TV service. Currently, we have digital TV service (DVB‑C&DVB‑S2) in approximately 200 cities and localities with 5,17 millionsubscribers. In 2014, we started to roll‑out an advanced hybrid TV service (DVBC/DVB‑S2/IPTV+IP/VOD, CatchUp). By December 2021, we launched Hybrid TV platform with an IPTV commercial service in Moscow (including Moscow Region) and more than 85 other regions, DVB‑C/IP Hybrid commercial service in more than 100 regional cities and DVB‑S2/IP Hybrid commercial service all over Russia including 6 UHD channels using HEVC (H.265) format. Total number of connected hybrid TV users is about 1,23 million. During 2019 and 2020 MTS was executing migration from existing Hybrid TV platform to new unified TV platform which is almost complete as of December 2021. Only B2B subscribers of IPTV segment remain to be migrated until mid-2022 due to the need for an IT systems upgrade in order to support the migration. Since 2020, the target technology for providing television services is IPTV technology. As of 31 December, 2021, the service was launched
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at a capacity of 6.3 million households.In September 2019 MTS has launched new unified TV platform and started sales in OTT (mobile) TV segment with TV applications for smartphones, pads, Smart TV, Android-based STBs and PC browsers. Now MTS TV service is expanding to more specific devices such as MTS.Auto appliances and . Migration process for fixed segments (Hybrid IPTV, DVB-C, DVB-S) started in the middle of 2020 with its active phase completed in December 2020. During first half of 2021 migration in DVB-S and B2B segments was fully completed and by November 2021 mobile (OTT) subscribers were also migrated to the new platform which allowed MTS to stop partnership with previous OTT TV platform provider (SPB TV). Number of subscribers activated in OTT segment as of December 31, 2021 was 10,05 million. In order to deliver video traffic to OTT users MTS launched 8 CDN points of presence including Far East with total bandwidth up to 430 Gbits/sec. In order to process traffic peaks MTS also implemented CDN offload setup which allows to MTS to transfer traffic excess to partner CDN network (G-Core). Maximum traffic at the end of 2021 was more than 305 Gbits/sec. During 2022 according to MTS TV expansion forecast CDN bandwidth is planned to be increased by more than twice its current size In Moscow and regions as an Internet traffic supplier, we mainly use our own IP Backbone network.
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
Principal suppliers
Our principal suppliers are: Huawei, Iskratel, Oracle‑PSTN switching equipment and SBC; Ericsson, Harmonic, Summavision, Teleste, Lifestream — equipment of Digital TV station; Irdeto, Verimatrix — CAS TV systems; Huawei — Hybrid TV platform; Cisco Systems, Huawei, Juniper‑FTTB core; Cisco Systems, Alcatel, Coreant, Huawei, FiberHome, D‑Link‑FTTB aggregation‑access. Please see “Item 3. Key Information—D. Risk Factors—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the risks connected with sanctions.
All of our equipment is supplied directly through authorized dealers.
Seasonality
Our results of operations are impacted by certain seasonal trends. Generally, revenue is higher during the second and third quarter due to 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.
In 2020, the measures for combating COVID-19 which included restrictions on movement had a significant impact on the seasonality of our roaming revenues and resulted in the reduction in international roaming of our subscribers and income from guest subscribers.
The decreased risk of mortality from COVID-19 in 2021, prompted the removal of some of the government restrictions on international tourism. As a result, we increased the volume of roaming services provided to subscribers, while the peak of roaming revenues shifted to the third and fourth quarters.
The COVID-19 outbreak has had a significant impact on the development of the telecommunications industry and continues to contribute to the development of digital services. We recorded an increase in the consumption of internet traffic in mobile and fixed networks as well as, an increase in the number of users of online services, TV users and others OTT applications. This trend continued in 2021. We expect that digitalization processes will gradually affect all spheres of social interaction. The greatest demand in 2022 will stem from both online entertainment services and digital services of state federal and municipal services.
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Regulation of Telecommunications in the Russian Federation
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:
● | licensing of telecommunications services; |
● | requirements for obtaining a radio frequency allocation; |
● | equipment certification; |
● | equal rights for individuals and legal entities, including foreign individuals and legal entities, to offer telecommunications services; |
● | fair competition; |
● | freedom of pricing other than pricing by companies with a substantial position in public telecommunication networks; and |
● | liability for violations of Russian legislation on telecommunications. |
The Federal Law on Communications came into force on January 1, 2004. 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 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—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. 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 Digital Development, Communications and Mass Media of the Russian Federation 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.
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The Federal Service for Supervision of Communications, Information Technology and Mass Media (Roskomnadzor) is a federal executive body that supervises and controls certain areas of communications and information technologies, including:
● | the issuance of licenses and permissions in the area of communications and information technologies; |
● | the registration of radio-electronic and high-frequency equipment; |
● | the assignment of radio frequencies based on decisions taken by the State Commission For Radio Frequencies and registration of such assignments; |
● | the technical supervision of networks and network equipment throughout Russia; |
● | the monitoring of compliance by network operators with applicable regulations, terms of their licenses and terms of the use of frequencies allocated and assigned to them; |
● | the enforcement of equipment certification requirements; |
● | the examination of electromagnetic compatibility of equipment with existing civil radio-electronic equipment; |
● | the organization of tenders with respect to licenses in the sphere of communications; |
● | the control of activity in processing of personal data; and |
· | the creation, building and maintenance of a unified automated information system Unified Register of Domain Names, Internet Website Page Locators and Network Addresses which allow Roskomnadzor to identify Internet websites containing information prohibited for distribution in the Russian Federation. |
The State Commission For Radio Frequencies is an inter-agency coordination body acting under the Ministry of Digital Development, Communications and Mass Media of the Russian Federation 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.
The 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. The FAS controls certain activities 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. In addition, the FAS 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 Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor) 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 Registration, Cadastre and Cartography (Rosreestr) is responsible for registering certain telecommunications infrastructure that is considered real property. The Federal Financial Monitoring Service (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
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Communications, Information Technology and Mass Media. Officials of the Federal Service for Supervision of Communications, Information Technology 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:
● | receive a license from the Federal Service for Supervision of Communications, Information Technology and Mass Media to provide communications services; |
● | obtain approval to use specific frequencies within the specified band from the State Commission For Radio Frequencies if providing wireless telecommunications services; and |
● | obtain permission from the Federal Service for Supervision of Communications, Information Technology and Mass Media for network operations. To receive this permission, a wireless telecommunications services provider must develop a frequency assignment and site plan, which is then reviewed and certified by the Federal Service for Supervision of Communications, Information Technology and Mass Media for electromagnetic compatibility of the proposed cellular network with other radio equipment operating in the licensed area. The Federal Service for Supervision of Communications, Information Technology and Mass Media has discretion to modify this plan, if necessary, to ensure such compatibility. As of January 1, 2004, licenses may be transferred in case of mergers or other reorganizations of the licensee upon application by a transferee as a new license holder. Additionally, the Ministry of Digital Development, Communications and Mass Media of the Russian Federation has declared that agreements on the provision of telecommunications services must be concluded and performed by the license holder. |
If the terms of a license are not fulfilled or the service provider violates applicable legislation, the license may be suspended or terminated. Licenses may be suspended for various reasons, including:
● | detection of violations which may cause damage to rights, interests, life or health of individuals or to interests of government administration including, but not limited to, presidential and government telecommunication networks, defense, security and protection of legal order in the Russian Federation; |
● | annulment of a frequency allocation if it results in the inability to render communications services; and |
● | failure to timely meet the requirements of the licensing authority, which commits to eliminate detected violations, including provisions that had been granted under reprimand to suspend the license. |
In addition, licenses may be terminated for various reasons by a court, including:
● | failure to remedy in a timely manner a violation that led to the suspension of the license; |
● | provision of inaccurate information in documents on the basis of which a license was issued; and |
● | failure to fulfill obligations undertaken in the process of a tender or auction. |
The license may also be terminated by the Federal Service for Supervision of Communications, Information Technology 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.
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The following one-time license fee is payable irrespective of the number of regions covered by the license: RUB 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. The official fee of RUB 750 is to be paid for renewing (re-issuing) the license.
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. 2385 dated December 30, 2020. 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 Agency of Communications issues certificates of compliance with technical requirements to equipment suppliers based on the Agency’s internal review. In addition, a Presidential decree No. 960 adopted on August 11, 2003 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 Technology and Mass 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 Technology 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) authorized the FAS to set the following tariffs for the natural monopolies in the communications market, including:
● | provision of access to a local telephone network; |
● | permanent use of a subscriber’s line; and |
● | local and intra-zone calls. |
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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 FAS 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 FAS based on analysis of the operator’s activities and the market conditions.
Our subsidiary, MGTS, was added to the Register of Natural Monopolies in 2000 and, therefore, is subject to the requirements of the Federal Law on Natural Monopolies including, inter alia, the following:
● | the FAS regulates and controls tariffs for services provided by MGTS, including installation fees, monthly subscription fees (for subscribers to the unlimited tariff plan) and local call charges (for subscribers who do not use the unlimited tariff plan); |
● | MGTS must obtain prior FAS approval for any transaction involving the acquisition, disposal or lease of assets not related to the regulated activity, if the value of such assets exceeds 10% of MGTS’ share capital, additional capital, retained profits and reserves; |
● | MGTS is required to maintain separate accounting records for each type of activity; |
● | MGTS is required to publicly disclose information on tariffs, products, material conditions of contracts with customers, capital expenditure programs and certain other information; and |
● | MGTS is required to comply with Federal law No. 223-FZ dated July 18, 2011 “On Procurement of Goods, Works, Services by Certain Types of Legal Entities” while active in the procurement of goods and services. |
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, companies which are found to have dominant position on relevant markets may be subject to certain FAS restrictions in conducting their business, including in relation to pricing, acquisitions, geographical expansion, and associations and agreements with competitors. 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 exceeding 35% were repealed. Nowadays, dominant position is established on case-by-case basis. 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 FAS may be entitled to regulate our subscriber tariffs and impose 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. MGTS was added to the register of telecommunications operators occupying a substantial position and, therefore, 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:
● | MGTS must develop interconnect rules and procedures in accordance with the requirements set forth by the federal government; |
● | MGTS must ensure that interconnect agreements with operators who intend to interconnect to our networks are entered on the same terms and conditions as the agreements between MGTS, us and our affiliates; MGTS also cannot refuse to provide interconnect or discriminate against one operator over another; |
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● | MGTS must comply with the mandatory orders of the Federal Service for Supervision of Communications, Information Technology and Mass Media issued if non-compliance with law was identified as a result of monitoring of MGTS’ interconnect terms; and |
● | MGTS must comply with the tariffs for interconnect and traffic transit where determined by the the Ministry of Digital Development, Communications and Mass Media of the Russian Federation. |
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 network 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 Technology and Mass Media and is known as the settlement rate.
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 affects the mobile services market in Russia and leads to intensification of competition.
Anti-terror law
The Federal Law No. 374 dated July 6, 2016, amended some legislative acts and established additional measures to counter terrorism and to maintain public safety.
In accordance with the abovementioned amendments to the Federal Law on Communications (came into force in July, 2018) the telecommunications operators have to store and to provide to the authorities upon request the information on the facts of receiving, transmitting, delivering and (or) processing of voice information, text messages, images, sounds, video, or other communications by their subscribers, as well as relevant messages themselves.
The implementation of these amendments has a material effect on telecommunications operators’ financials and performance, see also “Item 3. Key Information—D. Risk Factors.”
Subscribers identification
The Federal Law No 245 dated July 29, 2017, amended the Federal Law on Communications to prevent the conclusion of the contract on the provision of services of mobile communications without proper identification of the subscriber (user) of communication services.
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These amendments (came into force in June, 2018) have material effect on telecommunication operators since they are required to implement measures to organize the interaction with state resources for verification of information on subscribers.
Sovereign Internet
The Federal Law No. 90 dated May 1, 2019, establishes the obligation of telecommunications operators to install equipment to counter threats to the stability, security and integrity of the Internet on the territory of the Russian Federation. The provisions of this Federal Law regarding the national domain-name system and national crypto security standards came into force in January 2021. In February 2021, the Russian President signed Federal Law No. 19-FZ that introduced penalties of up to 6 million rubles for violating the applicable rules governing sovereign Internet. Consequently, operators are likely to face additional costs for the maintenance and operation of this equipment. For more information on the law, see “Item 3. Key Information—Legal Risks and Uncertainties—Regulatory changes in Russia as well as regulatory changes at the international level may have a material adverse effect on our financial condition and results of operations.”
Personal data
We are subject to laws and regulations regarding privacy and protection of the user data, including the Federal Law No. 152-FZ “On Personal Data” dated July 27, 2006 (the “Personal Data Law”). The notion of “personal data” under Russian law includes any data which relates (directly or indirectly) to an identified or identifiable individual. There is no closed list of information which denotes personal data and any data (or set of data) which identifies a specific individual is treated as personal data. Typically name and contact details are considered to be personal data. The amendments to the Personal Data Law implemented by the Federal Law No. 519 dated December 30, 2020 (which entered into force on March 1, 2021) set forth new rules on processing of a specific type of personal data, specifically personal data which are made available to the general public (the “Relevant Data”).
Russian law uses the term “data operator” to denote a person who determines the scope and purposes of the processing (this notion is equivalent to the notion of the “data controller” under the European Union General Data Protection Regulation). Russia also has a notion of “person involved into the data processing by the data operator” which is equivalent to the notion of “data processor” under the European Union General Data Protection Regulation.
The Personal Data Law, among other things, requires, subject to a limited number of exceptions, that an individual provide specific, informed and conscious consent to any processing (i.e. any action or combination of actions performed on personal data, including the collection, recording, systematization, accumulation, storage, use, transfer (distributing, providing or authorizing access to), blocking, deleting and destroying) of his/her personal data. In respect of most types of data, the Personal Data Law does not require the consent to be in writing (under the Personal Data Law, “in writing” means hand-written or subject to qualified electronic signature) but requires that the consent be in a form that, from an evidential perspective, sufficiently attests tothe data subject.
The consent must be in writing in certain cases, including: (i) where the processing relates to special categories of personal data (regarding the data subject’s race, nationality, political views, religion, philosophical beliefs, health conditions or intimate information); (ii) where the processing of personal data relates to any biometrics; (iii) cross-border transfers to a state that does not provide adequate protection of rights of subjects (e.g. under Russian law, the United States is one of such states); and (iv) the certain types processing of an employee’s personal data, etc. The written consent of subjects must meet a number of formal requirements and must be signed by holographic or electronic signature.
Big Data
In 2021, the National Centre for Digital Economics announced the development of the Russian national standard corresponding with ISO/IEC TR 20547-1:2020 Information technology – Big data reference architecture – Part 1: Framework and applicable process.
Procedure for concluding subscription contracts
The Federal Law No 533-FZ dated December 30, 2020 (has come into force on June 1, 2021), amended the Federal Law on Communications to tighten the procedure for concluding subscription contracts, including:
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● | The Federal Law introduces the concept of “IMEI”. Subscribers have the right to enter in their profile in the Integrated Identification and Authentication System (IIAS) information about the subscriber number and (or) IMEI used by them. If the subscriber’s device is lost, he may report this to the operator through the IIAS. Subject to the confirmation of an IMEI number, telecommunications operators should stop providing telecommunications services for the lost device. The introduction of IMEI control in the presence of subscriber devices with the same IMEI, including bona fide owners (users), will lead to a violation of the rights of such bona fide owners. |
● | The possibility of remote conclusion of subscription contracts by means of a Simple Electronic Signature obtained during a personal visit to the office of the telecommunications operator will be excluded. |
● | The conclusion of subscription contracts for devices with eSIM technology on the Internet will be possible only through the Unified Biometric System and the Enhanced Qualified Signature. |
● | Provision of telecommunications services to corporate clients will be possible only if information about their users is entered in the IIAS. Telecommunications operators are required to check the availability of such information in the IIAS from December 1, 2021 and stop providing telecommunications services to users with unreliable personal data. |
● | Provision of telecommunications services to corporate clients for M2M devices will be possible only if information about the subscriber number, address of the corporate client or location of the device, and other information is entered in the IIAS which will create additional restrictions for the development of M2M services, including Internet of Things projects. |
Roskomnadzor will create an information system for monitoring to check the work of telecommunications operators. Telecommunications operators will need to refine their business processes and IT-systems to connect to the information system for monitoring.
Providing free access to social resources
The Federal Law No 319-FZ dated July 02, 2021, establishes the obligation of telecommunications operators that provide communication services for data transmission and providing access to the Internet to subscribers to provide such subscribers with free access to the websites of state bodies, extra-budgetary funds, portals of state and municipal services (came into force in December 1, 2021), as well as to other sites that are determined by the Government Commission. The Government of the Russian Federation will have to determine the criteria for selecting socially significant resources, the requirements for their owners and the conditions under which operators will have to provide free access. Such criteria are not defined at the moment.
Monitoring compliance with the requirements for the provision of communication services, traffic transmission services, connection of communication networks
The Federal Law No 319-FZ dated July 02, 2021, amended the Federal Law on Communications to expand the list of requirements for the procedure for passing traffic and for telecommunications operators, including:
● | The Government of the Russian Federation will establish the procedure for identifying subscribers initiating a connection for the purpose of transmitting voice information in the data transmission network (will come into force in May 1, 2022). |
● | The register of communication lines crossing the state border of the Russian Federation and the means of communication to which these communication lines are connected will be formed. Telecommunications operators will be required to comply with the requirements established by Roskomnadzor for such lines and means of communication, and send a notification to Roskomnadzor about their implementation in order to include relevant information in the register. Telecommunications operators are not entitled to connect such communication lines to communication facilities and communication facilities to communication lines if there is no information about them in the register (will come into force in January 1, 2023). |
● | Telecommunications operators will be obliged to connect and send/receive information through a special system to ensure that telecommunications operators comply with the requirements for the provision of communication services and |
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traffic services in the public communications network, which will be created by the radio frequency service. This information will be used to monitor the compliance of operators with the requirements of the Federal Law on Communications in the provision of communication services and traffic services in the communication network (will come into force in January 1, 2023). |
● | Telecommunications operators will be obliged to stop providing communication services and (or) traffic services to their communication network in case of identification of risky traffic, the parameters of which are set out in the Federal Law No 319-FZ (will come into force in January 1, 2023). |
Regulation of Banking Activities in the Russian Federation
General
MTS Bank, our subsidiary, operates as a credit organization in Russia and is therefore subject to a number of laws and regulations applicable to banks. Federal Law No. 395-1 “On Banks and Banking Activity” dated December 2, 1990, as amended (the “Banking Law”), is the principal law regulating the Russian banking sector, among other things, defining credit organizations, setting forth the list of banking operations and other transactions that credit organizations may perform and establishing the framework for the registration, licensing of credit organizations and the regulation of banking activities by the CBR. Pursuant to the Banking Law, a banking group is described as an association of legal entities under control of a credit organization, and a banking holding is defined as an association of legal entities, at least one of which is a credit organization, under control of a parent legal entity that is not a credit organization, provided that a share of banking activities in the banking holding is at least 40% of the overall activities of such group.
Licensing
A license must be obtained from the CBR in order for any institution to engage in banking activities as defined in the Banking Law. Applicants must be incorporated within Russia and registered with the CBR as a credit organization, and submit, among other things, a feasibility report and detailed information on the suitability of the applicant’s management team. A banking license may be denied for a number of reasons, including if the financial standing of the founders of the bank is deemed by the CBR to be unsatisfactory or if the proposed candidates for the senior management of the bank, including members of the management board and the chief executive officer, are deemed to be unsuitable or do not meet the qualification requirements.
Charter Capital Requirements
The Banking Law sets out the minimum charter capital for newly-established banks in Russia the amount of RUB 1 billion for a bank with a general license and RUB 300 million for a bank with a basic license. As of the date of this document, charter capital of MTS Bank that holds a general license amounts to RUB 15,015,046,500. Further, under the Banking Law, the minimum regulatory capital amounts to RUB 1 billion for banks applying for the status of a bank with a general license and to RUB 300 million for banks applying for the status of a bank with a basic license. As of the date of this document, regulatory capital of MTS Bank amounted to RUB 52,968 million.
Reporting Requirements
Russian banks must regularly submit balance sheets to the CBR, together with financial statements showing their actual respective financial positions. They must also inform the CBR in respect of providing large loans (exceeding 5% of a bank's capital). Banking groups and banking holdings must regularly submit consolidated accounts to the CBR. The CBR may at any time carry out full or selective checks of a bank’s submissions, and may inspect all books and records of the bank. In addition, annual audits must be carried out by an audit company that is a member of a self-regulatory organization of auditors. Starting from 2004, all credit organizations in Russia have been required to prepare financial statements according to both RAS and IFRS. Banks must file IFRS standalone and audited consolidated annual financial statements with the CBR on an annual basis.
Mandatory Reserve Deposit Requirements
To cover loan losses and currency, interest and financial risks, the CBR requires banks to form mandatory reserve deposits and keep them in designated non-interest bearing accounts with the CBR. Particular reserve requirements are set by the Board of
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Directors of the CBR from time to time. As of the date of this document, mandatory reserves of MTS Bank amounted to RUB 1,790 million.
Licenses
Mobile Services
The following table shows, as of April 5, 2022, information with respect to the license areas in which we and our subsidiaries and affiliates provide or expect to provide GSM, LTE and UMTS services:
| | | | | | | | |
---|---|---|---|---|---|---|---|---|
License Region |
| License |
| Radio Access Networks Technologies |
| License |
| Expiry date |
| | | | | | | | |
Moscow License Area | | | | | | | | |
Moscow | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/UMTS/LTE −1800 | | 182375 | | April 28, 2023 |
Moscow region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/UMTS/LTE −1800 | | 182375 | | April 28, 2023 |
St. Petersburg License Area | | | | | | | | |
St. Petersburg | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Leningrad region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Russian Regional License Areas | | | | | | | | |
European Russia | | | | | | | | |
Adygeya Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 160409 | | April 28, 2023 |
Arkhangelsk region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Astrakhan region | | MTS PJSC | | GSM/LTE-1800 | | 162943 | | October 18, 2026 |
Astrakhan region | | MTS PJSC | | GSM-900 | | 168186 | | December 11, 2023 |
Bashkortostan Republic | | MTS PJSC | | IMT-MC/LTE-450, IMT-MC/UMTS/LTE-2100 | | 170616 | | November 21, 2026 |
Bashkortostan Republic | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 172049 | | August 22, 2022 |
Belgorod region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Bryansk region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Chechen Republic | | MTS PJSC | | GSM/LTE-1800 | | 186313 | | April 28, 2026 |
Chechen Republic | | MTS PJSC | | GSM-900 | | 173072 | | June 10, 2024 |
Chuvashia Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 168624 | | December 30, 2023 |
Dagestan Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 168612 | | December 30, 2023 |
Ingushetia Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 168623 | | December 30, 2023 |
Ivanovo region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Kabardino-Balkar Republic | | MTS PJSC | | GSM/LTE-1800 | | 168617 | | December 30, 2023 |
Kabardino-Balkar Republic | | MTS PJSC | | GSM-900 | | 173071 | | June 10, 2024 |
Kaliningrad region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Kalmykia Republic | | MTS PJSC | | GSM-900 | | 184789 | | January 25, 2026 |
Kalmykia Republic | | MTS PJSC | | GSM/LTE-1800 | | 168620 | | December 30, 2023 |
Kaluga region | | MTS PJSC | | GSM/UMTS-900, GSM/LTE −1800 | | 174800 | | April 28, 2023 |
Karachaevo-Cherkesia Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 168613 | | December 30, 2023 |
Karelia Republic | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Kirov region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 171610 | | April 28, 2023 |
Komi Republic | | MTS PJSC | | GSM/LTE-900, GSM/LTE-1800 | | 184256 | | August 22, 2022 |
Kostroma region | | MTS PJSC | | GSM/LTE-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Krasnodar region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 152085 | | May 30, 2027 |
Kursk region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Lipetsk region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Mari-El Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 148177 | | January 15, 2027 |
Mordovia Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 168618 | | December 30, 2023 |
Murmansk region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Nenetsk Autonomous region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Nizhny Novgorod region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Novgorod region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Orel region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Orenburg region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 171610 | | April 28, 2023 |
Orenburg region | | MTS PJSC | | GSM/LTE-1800 | | 136448 | | October 21, 2025 |
Penza region | | MTS PJSC | | GSM-900 | | 86436 | | May 6, 2026 |
Penza region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 162944 | | September 2, 2022 |
Perm region | | MTS PJSC | | GSM/UMTS-900, GSM/LTE −1800 | | 171610 | | April 28, 2023 |
Perm region (Komi-Permyak region) | | MTS PJSC | | GSM/LTE-1800 | | 136451 | | October 21, 2025 |
Perm region (excluding Komi-Permyak region) | | MTS PJSC | | GSM/LTE-1800 | | 136450 | | October 21, 2025 |
Pskov region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Rostov region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 182093 | | July 1, 2025 |
Ryazan region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
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| | | | | | | | |
---|---|---|---|---|---|---|---|---|
License Region |
| License |
| Radio Access Networks Technologies |
| License |
| Expiry date |
| | | | | | | | |
Samara region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 156890 | | December 30, 2022 |
Saratov region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 153739 | | July 11, 2022 |
Severnaya Osetia-Alania Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 144270 | | September 1, 2026 |
Severnaya Osetia-Alania Republic | | MTS PJSC | | GSM/LTE-1800 | | 136449 | | October 21, 2025 |
Smolensk region | | MTS PJSC | | GSM/LTE -900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Stavropol region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 168615 | | December 30, 2023 |
Tambov region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Tatarstan Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 152516 | | June 26, 2027 |
Tula region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Tver region | | MTS PJSC | | GSM/LTE -900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Udmurt Republic | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 171610 | | April 28, 2023 |
Ulyanovsk region | | MTS PJSC | | GSM-900 | | 86435 | | May 6, 2026 |
Ulyanovsk region | | MTS PJSC | | GSM/LTE-1800 | | 168614 | | December 30, 2023 |
Vladimir region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Volgograd region | | MTS PJSC | | GSM/LTE-1800 | | 145059 | | October 4, 2026 |
Volgograd region | | MTS PJSC | | GSM-900 | | 172368 | | February 26, 2024 |
Vologda region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161213 | | April 28, 2023 |
Voronezh region | | MTS PJSC | | GSM/LTE-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Yaroslavl region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 174800 | | April 28, 2023 |
Asian Russia | | | | | | | | |
Altai Republic | | MTS PJSC | | GSM/LTE-900 | | 182985 | | July 19, 2026 |
Altai Republic | | MTS PJSC | | GSM/LTE-1800 | | 168621 | | December 30, 2023 |
Altai region | | MTS PJSC | | GSM/LTE-900, GSM/LTE-1800 | | 167990 | | September 8, 2026 |
Amur region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Amur region | | MTS PJSC | | GSM/LTE 1800 | | 136447 | | October 21, 2025 |
Buryatiya Republic | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Chelyabinsk region | | MTS PJSC | | GSM/UMTS-900, GSM/LTE −1800 | | 171610 | | April 28, 2023 |
Chukotsk Autonomous region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Irkutsk region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Jewish Autonomous region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Kamchatka region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Kemerovo region | | MTS PJSC | | GSM/LTE -900, GSM/LTE-1800 | | 168616 | | December 30, 2023 |
Khabarovsk region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Khakassiya Republic | | MTS PJSC | | GSM/LTE-900, GSM/LTE-1800 | | 177989 | | September 13, 2026 |
Khanty Mansiysk Autonomous region | | MTS PJSC | | IMT-MC/LTE-450, IMT-MC/UMTS/LTE-2100 | | 165418 | | May 23, 2023 |
Khanty Mansiysk Autonomous region | | MTS PJSC | | GSM/UMTS-900, GSM/LTE −1800 | | 171610 | | April 28, 2023 |
Krasnoyarsk region | | MTS PJSC | | GSM/LTE-900, GSM/LTE-1800 | | 182986 | | May 7, 2023 |
Kurgan region | | MTS PJSC | | GSM/UMTS-900, GSM/LTE −1800 | | 171610 | | April 28, 2023 |
Magadan region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Novosibirsk region | | MTS PJSC | | GSM/LTE-900, GSM/LTE-1800 | | 167216 | | February 21, 2027 |
Omsk region | | MTS PJSC | | GSM/LTE-900, GSM/LTE-1800 | | 170007 | | December 20, 2026 |
Primorsky region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Sakha Republic (Yakutia) | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Sakhalin region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Sverdlovsk region | | MTS PJSC | | GSM/UMTS-900, GSM/LTE −1800 | | 171610 | | April 28, 2023 |
Tomsk region | | MTS PJSC | | GSM/LTE-900, GSM/LTE-1800 | | 167991 | | June 5, 2023 |
Tyumen region | | MTS PJSC | | GSM/UMTS-900, GSM/LTE −1800 | | 171610 | | April 28, 2023 |
Tyva Republic | | MTS PJSC | | GSM/LTE-1800 | | 168622 | | December 30, 2023 |
Tyva Republic | | MTS PJSC | | GSM/UMTS/LTE-900 | | 182984 | | July 19, 2026 |
Yamalo-Nenetsk Autonomous region | | MTS PJSC | | GSM-900, GSM/LTE-1800 | | 171610 | | April 28, 2023 |
Zabaykalsky region | | MTS PJSC | | GSM/UMTS/LTE-900, GSM/LTE −1800 | | 161216 | | April 28, 2023 |
Russian Federation | | | | | | | | |
European Russia | | MTS PJSC | | LTE-800,2600 | | 101247 | | July 25, 2022 |
European Russia, except Crimea Republic, Sevastopol | | MTS PJSC | | UMTS/LTE-2100 | | 167215 | | May 21, 2027 |
European Russia, except Moscow, Moscow region, Crimea Republic, Sevastopol | | MTS PJSC | | LTE-2600 | | 142343 | | April 15, 2026 |
Moscow, Moscow region | | MTS PJSC | | LTE | | 147353 | | December 29, 2026 |
Russian Federation, except Crimea Republic, Sevastopol | | MTS PJSC | | 5G/IMT-2020 | | 183416 | | July 16, 2025 |
Armenia | | | | | | | | |
Armenia | | MTS Armenia CJSC | | LTE-800, GSM/UMTS-900, GSM/LTE-1800, UMTS-2100, LTE-2600 | | | | November 4, 2034 |
Belarus | | | | | | | | |
Belarus | | Mobile Telesystems LLC | | GSM/UMTS/NB-IoT-900, GSM-1800, UMTS-2100, LTE-1800/2600 (MOCN sharing)(1) | | | | April 30, 2022 |
113
(1) | The LTE radio access network in Belarus is owned by a national company beCloud as a Single Wholesale Network, implemented on-board of existing MNOs infrastructure (MTS, A1, Life), using 1800 and 2600 MHz frequency bands. |
Mobile Virtual Network
| | | | |
License Region |
| Licensee |
| Expiry date |
Moscow, Moscow region |
| MGTS PJSC | | August 2, 2023 |
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 34 to our audited consolidated financial statements). 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.
114
Fixed Line Services
The following table shows, as of April 5, 2022, information with respect to our fixed line licenses:
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
International, national, intra-zonal and local communications services | ||||||
MTS PJSC | | Russian Federation | | 178568 | | February 16, 2027 |
MTS PJSC | | Moscow | | 185275 | | February 16, 2026 |
MTS PJSC | | Moscow | | 150064 | | March 30, 2027 |
MTS PJSC | | Moscow region | | 135027 | | November 21, 2027 |
MTS PJSC | | Moscow region | | 150058 | | March 30, 2027 |
MGTS PJSC | | Moscow | | 166444 | | December 11, 2023 |
MGTS PJSC | | Moscow | | 161957 | | July 10, 2023 |
MGTS PJSC | | Moscow region | | 169795 | | April 17, 2024 |
MGTS PJSC | | Moscow, Moscow region | | 180455 | | July 28, 2025 |
MTS PJSC | | St. Petersburg | | 169450 | | January 19, 2024 |
MTS PJSC | | St. Petersburg, Leningrad region, Arkhangelsk region, Karelia Republic, Murmansk region, Novgorod region, Vologda region | | 150052 | | April 17, 2027 |
MTS PJSC | | Leningrad region | | 147354 | | December 7, 2026 |
MTS PJSC | | Altai Republic | | 148176 | | February 17, 2027 |
MTS PJSC | | Altai region | | 146073 | | October 24, 2026 |
MTS PJSC | | Altai region | | 158899 | | February 27, 2023 |
MTS PJSC | | Amur region | | 146092 | | October 24, 2026 |
MTS PJSC | | Arkhangelsk region | | 169456 | | January 19, 2024 |
MTS PJSC | | Astrakhan region | | 146080 | | October 24, 2026 |
MTS PJSC | | Astrakhan region | | 169454 | | January 19, 2024 |
MTS PJSC | | Bashkortostan Republic | | 135028 | | November 21, 2026 |
MTS PJSC | | Bashkortostan Republic | | 149173 | | March 5, 2027 |
MTS PJSC | | Belgorod region | | 173482 | | April 10, 2024 |
MTS PJSC | | Belgorod region, Bryansk region, Kursk region, Lipetsk region | | 158901 | | February 7, 2023 |
MTS PJSC | | Buryatiya Republic | | 159602 | | April 18, 2023 |
MTS PJSC | | Chelyabinsk region | | 146074 | | October 24, 2026 |
MTS PJSC | | Chelyabinsk region | | 135967 | | December 15, 2026 |
MTS PJSC | | Chuvashia Republic | | 159599 | | April 11, 2023 |
MTS PJSC | | Dagestan Republic | | 152517 | | June 5, 2023 |
MTS PJSC | | Irkutsk region (except for the Ust-Ordyn Buryat Autonomous District) | | 146069 | | October 24, 2026 |
MTS PJSC | | Ivanovo region | | 146068 | | October 24, 2026 |
MTS PJSC | | Kaliningrad region | | 156888 | | December 17, 2023 |
MTS PJSC | | Kaliningrad region | | 169457 | | January 19, 2024 |
MTS PJSC | | Kaluga region | | 182094 | | July 3, 2025 |
MTS PJSC | | Karelia Republic | | 169448 | | January 19, 2024 |
MTS PJSC | | Kemerovo region | | 168619 | | December 26, 2023 |
MTS PJSC | | Kemerovo region | | 169451 | | January 19, 2024 |
MTS PJSC | | Khabarovsk region | | 149647 | | March 15, 2027 |
MTS PJSC | | Khabarovsk region | | 146066 | | October 24, 2026 |
MTS PJSC | | Khakassiya Republic | | 140458 | | June 6, 2026 |
MTS PJSC | | Khanty Mansiysk Autonomous region | | 160629 | | December 1, 2026 |
MTS PJSC | | Khanty Mansiysk Autonomous region | | 164187 | | October 24, 2026 |
115
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS PJSC | | Kirov region | | 149653 | | March 15, 2027 |
MTS PJSC | | Kirov region | | 146089 | | October 24, 2026 |
MTS PJSC | | Komi Republic | | 146079 | | October 24, 2026 |
MTS PJSC | | Komi Republic | | 169449 | | January 19, 2024 |
MTS PJSC | | Krasnodar region | | 146067 | | October 24, 2026 |
MTS PJSC | | Krasnodar region | | 163840 | | August 1, 2023 |
MTS PJSC | | Krasnoyarsk region | | 158902 | | February 27, 2023 |
MTS PJSC | | Krasnoyarsk region (except for the Evenk Autonomous District) | | 146087 | | October 24, 2026 |
MTS PJSC | | Kurgan region | | 170433 | | February 17, 2024 |
MTS PJSC | | Kurgan region | | 146086 | | October 24, 2026 |
MTS PJSC | | Kursk region | | 176685 | | August 28, 2024 |
MTS PJSC | | Mari El Republic | | 159600 | | April 11, 2023 |
MTS PJSC | | Murmansk region | | 169455 | | January 19, 2024 |
MTS PJSC | | Nizhny Novgorod region | | 146075 | | October 24, 2026 |
MTS PJSC | | Nizhny Novgorod region | | 174356 | | October 1, 2024 |
MTS PJSC | | Novgorod region | | 169453 | | January 19, 2024 |
MTS PJSC | | Novosibirsk region | | 146071 | | October 24, 2026 |
MTS PJSC | | Novosibirsk region | | 158896 | | February 27, 2023 |
MTS PJSC | | Omsk region | | 146088 | | October 4, 2026 |
MTS PJSC | | Omsk region | | 145060 | | October 4, 2026 |
MTS PJSC | | Orel region | | 155416 | | October 3, 2022 |
MTS PJSC | | Orel region, Voronezh region | | 155415 | | October 24, 2023 |
MTS PJSC | | Orenburg region | | 149644 | | March 15, 2027 |
MTS PJSC | | Orenburg region | | 146072 | | October 24, 2026 |
MTS PJSC | | Penza region | | 149649 | | March 15, 2027 |
MTS PJSC | | Penza region | | 150057 | | March 14, 2027 |
MTS PJSC | | Perm region | | 146078 | | October 24, 2026 |
MTS PJSC | | Perm region | | 135956 | | December 15, 2026 |
MTS PJSC | | Primorsky region | | 149648 | | March 15, 2027 |
MTS PJSC | | Primorsky region | | 146070 | | October 24, 2026 |
MTS PJSC | | Rostov region | | 146084 | | October 24, 2026 |
MTS PJSC | | Rostov region | | 163838 | | August 1, 2023 |
MTS PJSC | | Ryazan region | | 138952 | | December 23, 2026 |
MTS PJSC | | Ryazan region | | 182084 | | July 3, 2025 |
MTS PJSC | | Sakha Republic (Yakutia) | | 146076 | | October 24, 2026 |
MTS PJSC | | Sakhalin region | | 146081 | | October 24, 2026 |
MTS PJSC | | Samara region | | 146090 | | October 24, 2026 |
MTS PJSC | | Samara region | | 176558 | | December 31, 2024 |
MTS PJSC | | Saratov region | | 149654 | | March 15, 2027 |
MTS PJSC | | Saratov region | | 159597 | | April 18, 2023 |
MTS PJSC | | Severnaya Osetia-Alania Republic | | 163839 | | August 1, 2023 |
MTS PJSC | | Severnaya Osetia-Alania Republic | | 152518 | | June 5, 2023 |
MTS PJSC | | Smolensk region | | 158900 | | February 27, 2023 |
MTS PJSC | | Sverdlovsk region | | 185834 | | March 15, 2026 |
MTS PJSC | | Sverdlovsk region | | 149645 | | March 15, 2027 |
MTS PJSC | | Tambov region | | 149180 | | February 28, 2027 |
MTS PJSC | | Tatarstan Republic | | 146082 | | October 24, 2026 |
MTS PJSC | | Tatarstan Republic | | 161954 | | May 23, 2023 |
MTS PJSC | | Tomsk region | | 146094 | | October 24, 2026 |
MTS PJSC | | Tomsk region | | 158904 | | February 27, 2023 |
MTS PJSC | | Tver region | | 157431 | | August 4, 2022 |
MTS PJSC | | Tver region | | 158903 | | February 27, 2023 |
116
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS PJSC | | Tyumen region, YamaloNenetsk Autonomous region | | 135962 | | December 1, 2026 |
MTS PJSC | | Tyumen region, YamaloNenetsk Autonomous region | | 154794 | | August 31, 2023 |
MTS PJSC | | Udmurt Republic | | 149650 | | March 15, 2027 |
MTS PJSC | | Udmurt Republic | | 146091 | | October 4, 2026 |
MTS PJSC | | Ufa, Bashkortostan Republic | | 131715 | | September 8, 2026 |
MTS PJSC | | Ulyanovsk region | | 149171 | | February 28, 2027 |
MTS PJSC | | Ulyanovsk region | | 135960 | | December 15, 2026 |
MTS PJSC | | Volgograd region | | 146085 | | November 17, 2026 |
MTS PJSC | | Volgograd region | | 170831 | | March 4, 20124 |
MTS PJSC | | Vologda region | | 169452 | | January 19, 2024 |
MTS PJSC | | Yaroslavl region | | 146077 | | October 24, 2026 |
MTS PJSC | | Zabaykalsky region | | 180446 | | May 6, 2025 |
MTS PJSC | | Sakha Republic (Yakutia) | | 184096 | | August 25, 2025 |
MTS PJSC | | Kemerovo region (Mezhdurechensk) | | 184255 | | December 27, 2026 |
MTS PJSC | | Khakassiya Republic | | 186516 | | February 19, 2026 |
MTS PJSC | | Irkutsk region | | 187365 | | June 07, 2026 |
MTS PJSC | | Bryansk region | | 187364 | | June 07,2026 |
MTS PJSC | | Stavropol region | | 187530 | | June 26, 2026 |
MTS PJSC | | Stavropol region | | 187532 | | June 26, 2026 |
MTS PJSC | | Yaroslavl region | | 188751 | | January 12, 2027 |
MTS PJSC | | Tambov region | | Л030-00114-77/00002954 | | March 17, 2027 |
Promsvyaz Invest | | Lipetsk region | | 185629 | | February 16, 2026 |
Zelenaya Tochka Group | | Lipetsk region | | 180988 | | February 16, 2025 |
Zelenaya Tochka Group | | Tambov region | | 135050 | | November 21, 2026 |
Zelenaya Tochka Group | | Stavropol region | | 164791 | | July 12, 2023 |
Zelenaya Tochka Group | | Lipetsk region | | 133869 | | October 31, 2026 |
Zelenaya Tochka Group | | Stavropol region | | 157699 | | December 6, 2023 |
Telematic Services | ||||||
MTS PJSC | | Russian Federation | | 101246 | | July 25, 2022 |
MTS PJSC | | Russian Federation except Moscow, Moscow region, Republic of Crimea, Sevastopol | | 142346 | | April 15, 2026 |
Navigation Information Systems CJSC | | Russian Federation | | 161286 | | December 26, 2022 |
MGTS PJSC | | Moscow, Moscow region | | 145447 | | December 11, 2026 |
MTS PJSC | | St. Petersburg, Leningrad region, Arkhangelsk region, Kaliningrad region, Karelia Republic, Murmansk region, Nenetsk Autonomous region, Novgorod region, Vologda region | | 145056 | | October 4, 2026 |
MTS PJSC | | 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 region, Omsk region, Kurgan region, Khanty Mansiysk Autonomous region, Chelyabinsk region, Pskov region, Yaroslavl region, Ryazan region, Vladimir region, Udmurt Republic, Tver region, Tula region, Tambov region, YamaloNenetsk Autonomous region, Amur region | | 184788 | | February 15, 2026 |
117
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS PJSC | | Adygeya Republic | | 182548 | | July 15, 2025 |
MTS PJSC | | Altai Republic | | 152081 | | May 22, 2027 |
MTS PJSC | | Altai region | | 147352 | | December 1, 2026 |
MTS PJSC | | Astrakhan region | | 182549 | | July 15, 2025 |
MTS PJSC | | Bashkortostan Republic | | 140459 | | June 21, 2026 |
MTS PJSC | | Buryatiya Republic, Kamchatka region (excluding the excluding the Koryak Autonomous Area), Magadan region, Sakhalin region | | 182082 | | June 17, 2025 |
MTS PJSC | | Chechen Republic | | 156889 | | December 6, 2022 |
MTS PJSC | | Chukotsk Autonomous region, Jewish Autonomous region, Irkutsk region, Koryak District of the Kamchatka region | | 182535 | | August 13, 2025 |
MTS PJSC | | Chuvashia Republic, Mordovia Republic | | 131717 | | September 14, 2026 |
MTS PJSC | | Dagestan Republic, Ingushetia Republic, Kabardino-Balkar Republic, Karachaevo-Cherkesia Republic, Severnaya Osetia-Alania Republic | | 131721 | | September 14, 2026 |
MTS PJSC | | Kalmykia Republic | | 182550 | | July 28, 2025 |
MTS PJSC | | Khabarovsk region | | 181220 | | June 17, 2025 |
MTS PJSC | | Khakassiya Republic | | 182085 | | June 17, 2025 |
MTS PJSC | | Krasnodar region | | 182541 | | July 15, 2025 |
MTS PJSC | | Krasnoyarsk region | | 161221 | | May 7, 2023 |
MTS PJSC | | Mari El Republic | | 131716 | | September 14, 2026 |
MTS PJSC | | Novosibirsk region | | 186312 | | April 13, 2026 |
MTS PJSC | | Penza region | | 179663 | | April 1, 2025 |
MTS PJSC | | Primorsky region | | 135961 | | December 21, 2026 |
MTS PJSC | | Republic of Khakassia | | 181217 | | May 31, 2025 |
MTS PJSC | | Rostov region | | 134507 | | October 26, 2026 |
MTS PJSC | | Sakha Republic (Yakutia) | | 182088 | | July 15, 2025 |
MTS PJSC | | Samara region | | 181215 | | May 26, 2025 |
MTS PJSC | | Saratov region | | 181210 | | May 31, 2025 |
MTS PJSC | | Stavropol region | | 181221 | | May 26, 2025 |
MTS PJSC | | Tatarstan Republic | | 182545 | | July 15, 2025 |
MTS PJSC | | Tomsk region | | 182086 | | June 17, 2025 |
MTS PJSC | | Tyva Republic | | 182546 | | July 28, 2025 |
MTS PJSC | | Ulyanovsk region | | 181208 | | May 31, 2025 |
MTS PJSC | | Volgograd region | | 181213 | | May 30, 2025 |
MTS PJSC | | Zabaykalsky region | | 172247 | | June 5, 2024 |
MTS Media | | Russian Federation | | 182309 | | April 6, 2025 |
Zelenaya Tochka Group | | Belgorod region | | 178213 | | December 11, 2024 |
Zelenaya Tochka Group | | Lipetsk region | | 179043 | | December 9, 2024 |
Zelenaya Tochka Group | | Tomsk region | | 179714 | | March 06, 2025 |
Zelenaya Tochka Group | | Bashkortostan Republic | | 179060 | | February 16, 2025 |
Zelenaya Tochka Group | | Tambov region | | 135052 | | October 5, 2026 |
Zelenaya Tochka Group | | Stavropol region | | 164792 | | July 12, 2023 |
Zelenaya Tochka Group | | Stavropol region | | 171466 | | February 17, 2024 |
118
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
Zelenaya Tochka Group | | Primorsky region | | 181008 | | March 31, 2025 |
Zelenaya Tochka Group | | Stavropol region | | 140769 | | April 28, 2026 |
Zelenaya Tochka Group | | Russian Federation | | 133870 | | September 8, 2026 |
Zelenaya Tochka Group | | Stavropol region: Stavropol | | 158709 | | July 28, 2026 |
Zelenaya Tochka Group | | Stavropol region | | 136783 | | December 1, 2026 |
Zelenaya Tochka Group | | Stavropol region | | 157700 | | December 6, 2022 |
Zelenaya Tochka Group | | Russian Federation | | 152526 | | April 16, 2022 |
Zelenaya Tochka Group | | Stavropol region | | 169446 | | November 15, 2023 |
MTS MWS | | Russian Federation except Republic of Crimea, Sevastopol | | 188148 | | October 14, 2026 |
Leased Communications Circuits | ||||||
MTS PJSC | | Russian Federation, except Crimea Republic, Sevastopol | | 167992 | | December 29, 2026 |
Sputnikovoe TV LLC | | Russian Federation | | 176892 | | August 2, 2023 |
MTS PJSC | | Moscow, Moscow region, Komi Republic, Kostroma region, Tver region | | 166958 | | November 24, 2023 |
MGTS PJSC | | Moscow, Moscow region | | 166443 | | December 11, 2023 |
MTS PJSC | | St. Petersburg, Leningrad region, Arkhangelsk region, Karelia Republic, Murmansk region, Nenetsk Autonomous region, Novgorod region, Vologda region | | 149174 | | March 1, 2027 |
MTS PJSC | | Adygeya Republic, Krasnodar region | | 182544 | | July 15, 2025 |
MTS PJSC | | Aginski Buryatski Autonomous District | | 135959 | | December 1, 2026 |
MTS PJSC | | Aginski Buryatski Autonomous District of the Penza region | | 135963 | | December 1, 2026 |
MTS PJSC | | Astrakhan region, Stavropol region | | 181206 | | May 31, 2025 |
MTS PJSC | | Bashkortostan Republic | | 161223 | | May 7, 2023 |
MTS PJSC | | Belgorod region, Bryansk region, Kursk region, Lipetsk region, Orel region, Voronezh region | | 173073 | | July 2, 2024 |
MTS PJSC | | Buryatiya Republic | | 130983 | | August 25, 2026 |
MTS PJSC | | Chukotsk Autonomous region | | 174038 | | August 6, 2024 |
MTS PJSC | | Chuvashia Republic | | 182552 | | July 28, 2025 |
MTS PJSC | | Dagestan Republic | | 152083 | | May 21, 2027 |
MTS PJSC | | Ingushetia Republic, Kabardino-Balkar Republic, Karachaevo-Cherkesia Republic, Volgograd region | | 159601 | | April 18, 2023 |
MTS PJSC | | Irkutsk region | | 152082 | | May 21, 2027 |
MTS PJSC | | Ivanovo region, Kirov region, Nizhny Novgorod region, Yaroslavl region | | 134509 | | October 13, 2026 |
MTS PJSC | | Jewish Autonomous region | | 175252 | | November 14, 2024 |
MTS PJSC | | Kaliningrad region | | 149147 | | March 1, 2027 |
MTS PJSC | | Kalmykia Republic, Severnaya Osetia-Alania Republic | | 161219 | | May 7, 2023 |
MTS PJSC | | Kaluga region, Pskov region, Ryazan region, Smolensk region, Tula region, Vladimir region | | 134506 | | October 7, 2026 |
MTS PJSC | | Kamchatka region, Koryakski Autonomous region | | 152084 | | May 21, 2027 |
MTS PJSC | | Kemerovo region, Tomsk region | | 161214 | | May 7, 2023 |
119
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS PJSC | | Khabarovsk region, Sakha Republic (Yakutia), Zabaykalsky region (excluding the Aginski Buryatski Autonomous District) | | 135026 | | November 21, 2026 |
MTS PJSC | | Khakassiya Republic | | 182091 | | June 17, 2025 |
MTS PJSC | | Krasnoyarsk region | | 161220 | | May 7, 2023 |
MTS PJSC | | Magadan region | | 152080 | | May 21, 2027 |
MTS PJSC | | Mari El Republic | | 134511 | | October 5, 2026 |
MTS PJSC | | Mordovia Republic | | 135965 | | December 23, 2026 |
MTS PJSC | | Omsk region | | 147357 | | December 27, 2026 |
MTS PJSC | | Primorsky region | | 180447 | | May 10, 2025 |
MTS PJSC | | Rostov region, Rostov region | | 166424 | | October 2, 2023 |
MTS PJSC | | Sakhalin region | | 130986 | | August 25, 2026 |
MTS PJSC | | Samara region, Saratov region, Ulyanovsk region | | 181219 | | May 31, 2025 |
MTS PJSC | | Tatarstan Republic | | 161218 | | May 7, 2023 |
MTS PJSC | | Tyva Republic | | 182542 | | July 28, 2025 |
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 | | 186314 | | April 13, 2026 |
MTS PJSC | | Altai Republic, Altai region, Novosibirsk region | | 182555 | | July 28, 2025 |
Zelenaya Tochka Group | | Belgorod region | | 178211 | | February 16, 2025 |
Zelenaya Tochka Group | | Lipetsk region | | 180191 | | February 16, 2025 |
Zelenaya Tochka Group | | Bashkortostan Republic | | 179061 | | February 16, 2025 |
Zelenaya Tochka Group | | Tambov region | | 135053 | | November 21, 2026 |
Zelenaya Tochka Group | | Stavropol region | | 164794 | | July 12, 2023 |
Zelenaya Tochka Group | | Primorsky region | | 181009 | | March 31, 2025 |
Zelenaya Tochka Group | | Lipetsk region | | 159633 | | December 6, 2022 |
Zelenaya Tochka Group | | Stavropol region | | 157701 | | December 6, 2022 |
Zelenaya Tochka Group | | Kalmykia Republic | | 149193 | | December 29, 2026 |
Zelenaya Tochka Group | | Tomsk region | | 179713 | | March 06, 2025 |
MTS MWS | | Altaisk region | | 188108 | | October 14, 2026 |
MTS MWS | | Ingushetia Republic | | 188094 | | October 14, 2026 |
MTS MWS | | Perm region | | 188095 | | October 14, 2026 |
MTS MWS | | Astrakhansk region | | 188109 | | October 14, 2026 |
MTS MWS | | Tomsk region | | 188110 | | October 14, 2026 |
MTS MWS | | Nizhny Novgorod region | | 188111 | | October 14, 2026 |
MTS MWS | | Nizhny Novgorod region | | 188111 | | October 14, 2026 |
MTS MWS | | Bryansk region | | 188112 | | October 14, 2026 |
MTS MWS | | Leningrad region | | 188119 | | October 14, 2026 |
MTS MWS | | Karachaevo-Cherkesia Republic | | 188105 | | October 14, 2026 |
120
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS MWS | | Voronezh region | | 188106 | | October 14, 2026 |
MTS MWS | | Belgorod region | | 188107 | | October 14, 2026 |
MTS MWS | | Moscow region | | 188133 | | October 14, 2026 |
MTS MWS | | Arkhangelsk region | | 188118 | | October 14, 2026 |
MTS MWS | | Orenburg region | | 188087 | | October 14, 2026 |
MTS MWS | | Kabardino-Balkar Republic | | 188129 | | October 14, 2026 |
MTS MWS | | Kursk region | | 188127 | | October 14, 2026 |
MTS MWS | | Altai Republic | | 188063 | | October 14, 2026 |
MTS MWS | | Kirov region | | 188056 | | October 14, 2026 |
MTS MWS | | Novosibirsk region | | 188057 | | October 14, 2026 |
MTS MWS | | Pskov region | | 188055 | | October 14, 2026 |
MTS MWS | | Amur region | | 188065 | | October 14, 2026 |
MTS MWS | | Vladimir region | | 188088 | | October 14, 2026 |
MTS MWS | | Chukotskiy Autonomous region | | 188086 | | October 14, 2026 |
MTS MWS | | Buryatiya Republic | | 188130 | | October 14, 2026 |
MTS MWS | | Kemerov region | | 188132 | | October 14, 2026 |
MTS MWS | | Murmansk region | | 188131 | | October 14, 2026 |
MTS MWS | | Khanty Mansiysk Autonomous region | | 188046 | | October 14, 2026 |
MTS MWS | | Nenetsk Autonomous region | | 188045 | | October 14, 2026 |
MTS MWS | | Tyumen region | | 188041 | | October 14, 2026 |
MTS MWS | | Kaliningrad region | | 188089 | | October 14, 2026 |
MTS MWS | | Volgograd region | | 188037 | | October 14, 2026 |
MTS MWS | | Sakhalin region | | 188016 | | October 14, 2026 |
MTS MWS | | Jewish Autonomous region | | 188138 | | October 14, 2026 |
MTS MWS | | Kalmykia Republic | | 188139 | | October 14, 2026 |
MTS MWS | | Tula region | | 188140 | | October 14, 2026 |
MTS MWS | | Orel region | | 188141 | | October 14, 2026 |
MTS MWS | | Kurgan region | | 188142 | | October 14, 2026 |
MTS MWS | | Yaroslavl region | | 188143 | | October 14, 2026 |
MTS MWS | | Lipetsk region | | 188144 | | October 14, 2026 |
MTS MWS | | Irkutsk region | | 188147 | | October 14, 2026 |
MTS MWS | | Chelyabinsk region | | 188019 | | October 14, 2026 |
MTS MWS | | Russian Federation, except Crimea Republic, Sevastopol | | 188020 | | October 14, 2026 |
MTS MWS | | Moscow | | 188023 | | October 14, 2026 |
MTS MWS | | Ulyanovsk region | | 188024 | | October 14, 2026 |
MTS MWS | | Tambov region | | 188025 | | October 14, 2026 |
MTS MWS | | Kostroma region | | 188027 | | October 14, 2026 |
MTS MWS | | Primorsky region | | 188152 | | October 14, 2026 |
MTS MWS | | Krasnoyarsk region | | 188157 | | October 14, 2026 |
MTS MWS | | YamaloNenetsk Autonomous region | | 188159 | | October 14, 2026 |
MTS MWS | | Omsk region | | 188030 | | October 14, 2026 |
MTS MWS | | Ivanovo region | | 188031 | | October 14, 2026 |
MTS MWS | | Tver region | | 188073 | | October 14, 2026 |
MTS MWS | | Kaluga region | | 188074 | | October 14, 2026 |
MTS MWS | | Dagestan Republic | | 188076 | | October 14, 2026 |
MTS MWS | | Vologda region | | 188077 | | October 14, 2026 |
MTS MWS | | Penza region | | 188078 | | October 14, 2026 |
MTS MWS | | Krasnodar region | | 188079 | | October 14, 2026 |
MTS MWS | | Novgorod region | | 188160 | | October 14, 2026 |
MTS MWS | | Zabaykalsky region | | 188161 | | October 14, 2026 |
MTS MWS | | Kamchatka region | | 188162 | | October 14, 2026 |
121
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS MWS | | Adygeya Republic | | 188165 | | October 14, 2026 |
MTS MWS | | Khabarovsk region | | 188080 | | October 14, 2026 |
MTS MWS | | Bashkortostan Republic | | 188026 | | October 14, 2026 |
MTS MWS | | Magadan region | | 188153 | | October 14, 2026 |
MTS MWS | | St. Petersburg | | 188232 | | October 25, 2026 |
MTS MWS | | Chuvashia Republic | | 188222 | | October 25, 2026 |
MTS MWS | | Ryazan region | | 188225 | | October 25, 2026 |
MTS MWS | | Chechen Republic | | 188230 | | October 25, 2026 |
MTS MWS | | Rostov region | | 188221 | | October 25, 2026 |
MTS MWS | | Stavropol region | | 188217 | | October 25, 2026 |
MTS MWS | | Tyva Republic | | 188227 | | October 25, 2026 |
MTS MWS | | Khakassiya Republic | | 188218 | | October 25, 2026 |
MTS MWS | | Udmurt Republic | | 188233 | | October 25, 2026 |
MTS MWS | | Saratov region | | 188223 | | October 25, 2026 |
MTS MWS | | Sverdlovsk region | | 188231 | | October 25, 2026 |
MTS MWS | | Samara region | | 188234 | | October 25, 2026 |
MTS MWS | | Smolensk region | | 188226 | | October 25, 2026 |
MTS MWS | | Karelia Republic | | 188224 | | October 25, 2026 |
MTS MWS | | Komi Republic | | 188216 | | October 25, 2026 |
MTS MWS | | Mari El Republic | | 188228 | | October 25, 2026 |
MTS MWS | | Mordovia Republic | | 188220 | | October 25, 2026 |
MTS MWS | | Sakha Republic (Yakutia) | | 188235 | | October 25, 2026 |
MTS MWS | | Severnaya Osetia-Alania Republic | | 188229 | | October 25, 2026 |
MTS MWS | | Tatarstan Republic | | 188219 | | October 25, 2026 |
Data Transmission Services | ||||||
MTS PJSC | | Russian Federation | | 101248 | | July 25, 2022 |
Navigation Information Systems CJSC | | Russian Federation | | 161285 | | December 26, 2022 |
MTS PJSC | | Russian Federation except Moscow, Moscow region, Republic of Crimea, Sevastopol | | 142344 | | April 15, 2026 |
MGTS PJSC | | Moscow | | 166445 | | December 11, 2023 |
MGTS PJSC | | Moscow region | | 169794 | | April 17, 2024 |
MTS PJSC | | Moscow, Moscow region | | 150056 | | April 17, 2027 |
MTS PJSC | | St. Petersburg, Leningrad region, Arkhangelsk region, Kaliningrad region, Karelia Republic, Komi Republic, Murmansk region, Nenetsk Autonomous region, Novgorod region, Pskov region, Vologda region | | 150054 | | April 17, 2027 |
MTS PJSC | | Adygeya Republic | | 182554 | | July 15, 2025 |
MTS PJSC | | Altai Republic | | 182547 | | July 15, 2025 |
MTS PJSC | | Altai region | | 166425 | | October 31, 2023 |
MTS PJSC | | Amur region | | 150053 | | April 17, 2027 |
MTS PJSC | | Astrakhan region | | 182536 | | July 15, 2025 |
MTS PJSC | | Bashkortostan Republic | | 182087 | | June 30, 2025 |
MTS PJSC | | Belgorod region, Bryansk region, Kursk region, Lipetsk region, Orel region, Voronezh region | | 150062 | | April 17, 2027 |
MTS PJSC | | Buryatiya Republic, Kamchatka region (excluding the Koryak Autonomous Area), Magadan region, Sakhalin region | | 182081 | | June 17, 2025 |
MTS PJSC | | Chechen Republic | | 156887 | | December 6, 2022 |
122
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS PJSC | | Chukotsk Autonomous region, Jewish Autonomous region, Irkutsk region, Koryak Autonomous Area of the Kamchatka region | | 182551 | | August 13, 2025 |
MTS PJSC | | Chuvashia Republic, Mordovia Republic | | 131718 | | September 14, 2026 |
MTS PJSC | | Dagestan Republic, Ingushetia Republic, Kabardino-Balkar Republic, Karachaevo-Cherkesia Republic, Severnaya Osetia-Alania Republic | | 131719 | | September 14, 2026 |
MTS PJSC | | Ivanovo region, Kaluga region, Kostroma region, Ryazan region, Smolensk region, Tambov region, Tula region, Tver region, Vladimir region, Yaroslavl region | | 150059 | | April 17, 2027 |
MTS PJSC | | Kalmykia Republic | | 182539 | | July 28, 2025 |
MTS PJSC | | Kemerovo region | | 181218 | | May 31, 2025 |
MTS PJSC | | Khabarovsk region | | 181209 | | May 31, 2025 |
MTS PJSC | | Khakassiya Republic | | 182092 | | June 17, 2025 |
MTS PJSC | | Kirov region, Nizhny Novgorod region, Udmurt Republic | | 150063 | | April 17, 2027 |
MTS PJSC | | Krasnodar region | | 182538 | | July 15, 2025 |
MTS PJSC | | Krasnoyarsk region | | 161217 | | May 7, 2023 |
MTS PJSC | | Mari El Republic | | 131720 | | September 14, 2026 |
MTS PJSC | | Novosibirsk region | | 182543 | | July 15, 2025 |
MTS PJSC | | Sakha Republic (Yakutia) | | 182089 | | June 17, 2025 |
MTS PJSC | | Orenburg region | | 150055 | | April 17, 2027 |
MTS PJSC | | Penza region | | 179661 | | April 1, 2025 |
MTS PJSC | | Perm region, Chelyabinsk region, Khanty Mansiysk Autonomous region, Kurgan region, Omsk region, Sverdlovsk region, Tyumen region, YamaloNenetsk Autonomous region | | 150060 | | April 17, 2027 |
MTS PJSC | | Primorsky region | | 135957 | | December 21, 2026 |
MTS PJSC | | Rostov region | | 185833 | | April 3, 2026 |
MTS PJSC | | Samara region | | 181214 | | May 26, 2025 |
MTS PJSC | | Saratov region | | 181216 | | May 31, 2025 |
MTS PJSC | | Stavropol region | | 181211 | | May 26, 2025 |
MTS PJSC | | Tatarstan Republic | | 182537 | | July 15, 2025 |
MTS PJSC | | Tomsk region | | 182083 | | June 17, 2025 |
MTS PJSC | | Tyva Republic | | 182540 | | July 28, 2025 |
MTS PJSC | | Ulyanovsk region | | 181207 | | May 31, 2025 |
MTS PJSC | | Volgograd region | | 182090 | | June 30, 2025 |
MTS PJSC | | Zabaykalsky region | | 172249 | | June 5, 2024 |
Zelenaya Tochka Group | | Belgorod region | | 178212 | | February 16, 2025 |
Zelenaya Tochka Group | | Lipetsk region | | 180190 | | February 16, 2025 |
Zelenaya Tochka Group | | Bashkortostan Republic | | 179062 | | February 16, 2025 |
Zelenaya Tochka Group | | Tambov region | | 135051 | | October 5, 2026 |
Zelenaya Tochka Group | | Stavropol region | | 164795 | | July 12, 2023 |
Zelenaya Tochka Group | | Primorsky region | | 181007 | | March 31, 2025 |
Zelenaya Tochka Group | | Russian Federation | | 133872 | | September 8, 2026 |
123
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
Zelenaya Tochka Group | | Stavropol region: Stavropol | | 158711 | | July 28, 2026 |
Zelenaya Tochka Group | | Kabardino-Balkar Republic, Stavropol region | | 157698 | | December 6, 2022 |
Zelenaya Tochka Group | | Kalmykia Republic | | 149194 | | December 29, 2026 |
Zelenaya Tochka Group | | Tomsk region | | 179715 | | March 06, 2025 |
MTS MWS | | Russian Federation, except Crimea Republic, Sevastopol | | 188146 | | October 14, 2026 |
Data Transmission Services for Voice | ||||||
MTS PJSC | | Russian Federation | | 101245 | | July 25, 2022 |
MTS PJSC | | Russian Federation except Moscow, Moscow region, Crimea Republic, Sevastopol | | 142345 | | April 15, 2026 |
MTS PJSC | | Moscow | | 150061 | | March 30, 2027 |
MGTS PJSC | | Moscow | | 184084 | | February 16, 2026 |
MTS PJSC | | Moscow region | | 134508 | | October 26, 2026 |
MGTS PJSC | | Moscow region | | 146656 | | January 26, 2027 |
MTS PJSC | | St. Petersburg | | 177389 | | January 28, 2025 |
MTS PJSC | | Leningrad region | | 170435 | | February 17, 2024 |
MTS PJSC | | Adygeya Republic | | 149164 | | March 15, 2027 |
MTS PJSC | | Altai Republic | | 149176 | | March 15, 2027 |
MTS PJSC | | Altai region | | 149161 | | March 15, 2027 |
MTS PJSC | | Amur region | | 149178 | | March 15, 2027 |
MTS PJSC | | Arkhangelsk region | | 170427 | | February 17, 2024 |
MTS PJSC | | Astrakhan region | | 176557 | | December 18, 2024 |
MTS PJSC | | Bashkortostan Republic | | 186311 | | April 11, 2026 |
MTS PJSC | | Belgorod region, Bryansk region, Kursk region, Lipetsk region, Orel region, Voronezh region | | 182553 | | July 28, 2025 |
MTS PJSC | | Buryatiya Republic | | 149156 | | March 15, 2027 |
MTS PJSC | | Chechen Republic | | 149157 | | March 15, 2027 |
MTS PJSC | | Chelyabinsk region | | 149166 | | March 15, 2027 |
MTS PJSC | | Chukotsk Autonomous region, Jewish Autonomous region | | 159596 | | March 25, 2023 |
MTS PJSC | | Chuvashia Republic | | 149186 | | March 15, 2027 |
MTS PJSC | | Dagestan Republic | | 149179 | | March 15, 2027 |
MTS PJSC | | Ingushetia Republic | | 149160 | | March 15, 2027 |
MTS PJSC | | Irkutsk region, Primorsky region, Sakhalin region | | 135029 | | December 12, 2026 |
MTS PJSC | | Ivanovo region | | 134510 | | October 31, 2026 |
MTS PJSC | | Kabardino-Balkar Republic | | 149163 | | March 15, 2027 |
MTS PJSC | | Kaliningrad region | | 149146 | | March 15, 2027 |
MTS PJSC | | Kalmykia Republic | | 149162 | | March 15, 2027 |
MTS PJSC | | Kaluga region | | 134512 | | October 26, 2026 |
MTS PJSC | | Kamchatka region | | 149181 | | March 15, 2027 |
MTS PJSC | | Karachaevo-Cherkesia Republic | | 149159 | | March 15, 2027 |
MTS PJSC | | Karelia Republic | | 149167 | | March 15, 2027 |
MTS PJSC | | Kemerovo region | | 170425 | | February 17, 2024 |
MTS PJSC | | Khabarovsk region | | 149170 | | March 15, 2027 |
MTS PJSC | | Khakassiya Republic | | 149184 | | March 15, 2027 |
MTS PJSC | | Khanty Mansiysk Autonomous region, Sverdlovsk region | | 159595 | | March 25, 2023 |
MTS PJSC | | Kirov region | | 149152 | | March 15, 2027 |
MTS PJSC | | Komi Republic | | 149151 | | March 15, 2027 |
124
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS PJSC | | Kostroma region | | 149175 | | March 15, 2027 |
MTS PJSC | | Krasnodar region | | 153738 | | August 31, 2022 |
MTS PJSC | | Krasnoyarsk region | | 170428 | | February 17, 2024 |
MTS PJSC | | Kurgan region | | 149169 | | March 15, 2027 |
MTS PJSC | | Magadan region | | 149188 | | March 15, 2027 |
MTS PJSC | | Mari El Republic | | 149148 | | March 15, 2027 |
MTS PJSC | | Mordovia Republic | | 149158 | | March 15, 2027 |
MTS PJSC | | Murmansk region | | 149153 | | March 15, 2027 |
MTS PJSC | | Nenetsk Autonomous region | | 159593 | | March 25, 2023 |
MTS PJSC | | Nizhny Novgorod region | | 170426 | | February 17, 2024 |
MTS PJSC | | Novgorod region | | 170429 | | February 17, 2024 |
MTS PJSC | | Novosibirsk region | | 170431 | | February 17, 2024 |
MTS PJSC | | Omsk region | | 170430 | | February 17, 2024 |
MTS PJSC | | Orenburg region | | 149182 | | March 15, 2027 |
MTS PJSC | | Penza region | | 149155 | | March 15, 2027 |
MTS PJSC | | Perm region | | 158898 | | February 27, 2023 |
MTS PJSC | | Pskov region | | 149177 | | March 15, 2027 |
MTS PJSC | | Rostov region | | 185276 | | February 16, 2026 |
MTS PJSC | | Ryazan region, Vladimir region | | 159594 | | March 25, 2023 |
MTS PJSC | | Sakha Republic (Yakutia) | | 149183 | | March 15, 2027 |
MTS PJSC | | Samara region | | 176556 | | December 31, 2024 |
MTS PJSC | | Saratov region | | 149165 | | March 15, 2027 |
MTS PJSC | | Severnaya Osetia-Alania Republic | | 149149 | | March 15, 2027 |
MTS PJSC | | Smolensk region | | 170434 | | February 17, 2024 |
MTS PJSC | | Stavropol region | | 149154 | | March 15, 2027 |
MTS PJSC | | Tambov region | | 176559 | | December 18, 2024 |
MTS PJSC | | Tatarstan Republic | | 159598 | | March 25, 2023 |
MTS PJSC | | Tomsk region | | 149150 | | March 15, 2027 |
MTS PJSC | | Tula region | | 170432 | | February 17, 2024 |
MTS PJSC | | Tver region | | 176259 | | November 24, 2024 |
MTS PJSC | | Tyumen region, YamaloNenetsk Autonomous region | | 135966 | | December 1, 2026 |
MTS PJSC | | Tyva Republic | | 149172 | | March 15, 2027 |
MTS PJSC | | Udmurt Republic | | 158897 | | February 27, 2023 |
MTS PJSC | | Ulyanovsk region | | 149168 | | March 15, 2027 |
MTS PJSC | | Volgograd region | | 170436 | | February 17, 2024 |
MTS PJSC | | Vologda region | | 149187 | | March 15, 2027 |
MTS PJSC | | Yaroslavl region | | 181212 | | June 4, 2025 |
MTS PJSC | | Zabaykalsky region | | 149185 | | March 15, 2027 |
Zelenaya Tochka Group | | Tambov region | | 144280 | | July 28, 2026 |
Zelenaya Tochka Group | | Stavropol region | | 164793 | | July 12, 2023 |
Zelenaya Tochka Group | | Lipetsk region | | 133871 | | September 8, 2026 |
Zelenaya Tochka Group | | Stavropol region | | 157702 | | November 2, 2022 |
Zelenaya Tochka Group | | Kalmykia Republic | | 155121 | | May 26, 2022 |
MTS MWS | | Russian Federation, except Crimea Republic, Sevastopol | | 188117 | | October 14, 2026 |
125
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
Mobile Radio Services | ||||||
MTS PJSC | | Irkutsk region | | 178743 | | November 18, 2024 |
MTS PJSC | | Kemerovo region | | 177489 | | October 2, 2024 |
MTS PJSC | | Khanty Mansiysk Autonomous region | | 138956 | | December 15, 2026 |
MTS PJSC | | Magadan region | | 178740 | | November 18, 2024 |
MTS PJSC | | Tatarstan Republic | | 178744 | | November 18, 2024 |
MTS PJSC | | Tyumen region | | 178741 | | November 18, 2024 |
MTS PJSC | | YamaloNenetsk Autonomous region | | 135964 | | December 15, 2026 |
MTS PJSC | | Zabaykalsky region | | 178742 | | November 18, 2024 |
MTS PJSC | | Sakha Republic (Yakutia) | | 181284 | | March 2, 2025 |
MTS PJSC | | Khabarovsk Territory | | 182244 | | April 6, 2025 |
MTS PJSC | | Krasnoyarsk Territory | | 182245 | | April 6, 2025 |
MTS PJSC | | Tyva Republic | | 182246 | | April 6, 2025 |
MTS PJSC | | Perm region | | 182247 | | April 6, 2025 |
MTS PJSC | | Buryatiya Republic | | 182248 | | April 6, 2025 |
MTS PJSC | | Komi Republic | | 182249 | | April 6, 2025 |
MTS PJSC | | Omsk region | | 182251 | | April 6, 2025 |
MTS PJSC | | Moscow | | 183415 | | July 16, 2025 |
MTS PJSC | | St. Petersburg | | 183417 | | July 16, 2025 |
MTS PJSC | | Sverdlovsk | | 183418 | | July 16, 2025 |
MTS PJSC | | Leningrad region | | 183419 | | July 16, 2025 |
MTS PJSC | | Moscow region | | 183420 | | July 16, 2025 |
MTS PJSC | | Samara region | | 185031 | | October 27, 2025 |
MTS PJSC | | Murmansk region | | 187531 | | July 26, 2026 |
MTS PJSC | | Karelia Republic | | 187623 | | August 13, 2026 |
MTS PJSC | | Khakassiya Republic | | 188373 | | November 26, 2026 |
MTS PJSC | | Primorsky region | | 188922 | | February 25, 2027 |
Telecommunications Services for Cablecasting | ||||||
MTS PJSC | | Adygeya Republic (Adygeya), Altai Republic, Bashkortostan Republic, Buryatiya Republic, Dagestan Republic, Ingushetia Republic, Kabardino-Balkar Republic, Kalmykia Republic, Karachaevo-Cherkesia Republic, Karelia Republic, Komi Republic, Mari-El Republic, Mordovia Republic, Sakha Republic, Severnaya Osetia—Alania Republic, Tatarstan Republic (Tatarstan), Tyva Republic, Udmurt Republic, Khakassiya Republic, Chechen Republic, Chuvash Republic—Chuvashia; | | 176260 | | November 24, 2024 |
| | Altai region, Zabaikalye region, Kamchatka region, Krasnodar region, Krasnoyarsk region, Perm region, Primorsky region, Stavropol region, Khabarovsk region; | | | | |
126
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
| | Amur region, Arkhangelsk region, Astrakhan region, Belgorod region, Bryansk region, Vladimir region, Volgograd region, Vologda region, Voronezh region, Ivanovo region, Irkutsk region, Kaliningrad region, Kaluga region, Kemerovo region—Kuzbass, Kirov region, Kostroma region, Kurgan region, Kursk region, Leningrad region, Lipetsk region, Magadan region, Moscow region, Murmansk region, Nizhny Novgorod region, Novgorod region, Novosibirsk region, Omsk region, Orenburg region, Orel region, Penza region, Pskov region, Rostov region, Ryazan region, Samara region, Saratov region, Sakhalin region, Sverdlovsk region, Smolensk region, Tambov region, Tver region, Tomsk region, Tula region, Tyumen region, Ulyanovsk region, Chelyabinsk region, Yaroslavl region; | | | | |
| | Moscow, Saint Petersburg; | | | | |
| | Jewish Autonomous Region; | | | | |
| | Nenetsk Autonomous region, Khanty Mansiysk Autonomous region—Yugra, Chukotskiy Autonomous region, Yamalo-Nenetsk Autonomous region | | | | |
MGTS PJSC | | Moscow | | 184083 | | January 27, 2026 |
MGTS PJSC | | Moscow region | | 161531 | | June 18, 2023 |
Zelenaya Tochka Group | | Tambov region | | 184573 | | February 14, 2026 |
Zelenaya Tochka Group | | Stavropol | | 158710 | | July 28, 2026 |
Zelenaya Tochka Group | | Russian Federation | | 165886 | | September 25, 2023 |
Zelenaya Tochka Group | | Stavropol region: Nevinnomyssk | | 176466 | | November 1, 2023 |
MTS MWS | | Smolensk region | | 188113 | | October 14, 2026 |
MTS MWS | | Adygeya Republic | | 188102 | | October 14, 2026 |
MTS MWS | | Nenetsk Autonomous region | | 188116 | | October 14, 2026 |
MTS MWS | | Pskov region | | 188124 | | October 14, 2026 |
MTS MWS | | Dagestan Republic | | 188123 | | October 14, 2026 |
MTS MWS | | Saratov region | | 188098 | | October 14, 2026 |
MTS MWS | | Altai Republic | | 188092 | | October 14, 2026 |
MTS MWS | | Severnaya Osetia-Alania Republic | | 188120 | | October 14, 2026 |
MTS MWS | | Ryazan region | | 188099 | | October 14, 2026 |
MTS MWS | | Chuvashia Republic | | 188100 | | October 14, 2026 |
MTS MWS | | Udmurt Republic | | 188101 | | October 14, 2026 |
MTS MWS | | Perm region | | 188125 | | October 14, 2026 |
MTS MWS | | Moscow region | | 188093 | | October 14, 2026 |
MTS MWS | | Sverdlovsk region | | 188134 | | October 14, 2026 |
MTS MWS | | Tyva Republic | | 188135 | | October 14, 2026 |
MTS MWS | | Lipetsk region | | 188136 | | October 14, 2026 |
MTS MWS | | Jewish Autonomous region | | 188137 | | October 14, 2026 |
MTS MWS | | Tomsk region | | 188114 | | October 14, 2026 |
MTS MWS | | Karelia Republic | | 188115 | | October 14, 2026 |
MTS MWS | | Belgorod region | | 188122 | | October 14, 2026 |
MTS MWS | | Bashkortostan Republic | | 188096 | | October 14, 2026 |
127
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS MWS | | Kabardino-Balkar Republic | | 188128 | | October 14, 2026 |
MTS MWS | | Irkutsk region | | 188121 | | October 14, 2026 |
MTS MWS | | Leningrad region | | 188103 | | October 14, 2026 |
MTS MWS | | Volgograd region | | 188104 | | October 14, 2026 |
MTS MWS | | Kaluga region | | 188126 | | October 14, 2026 |
MTS MWS | | Novosibirsk region | | 188053 | | October 14, 2026 |
MTS MWS | | Kamchatka region | | 188060 | | October 14, 2026 |
MTS MWS | | Ivanovo region | | 188061 | | October 14, 2026 |
MTS MWS | | Kursk region | | 188058 | | October 14, 2026 |
MTS MWS | | Arkhangelsk region | | 188062 | | October 14, 2026 |
MTS MWS | | Rostov region | | 188052 | | October 14, 2026 |
MTS MWS | | Novgorod region | | 188054 | | October 14, 2026 |
MTS MWS | | Kaliningrad region | | 188064 | | October 14, 2026 |
MTS MWS | | Kurgan region | | 188059 | | October 14, 2026 |
MTS MWS | | Sakha Republic (Yakutia) | | 188083 | | October 14, 2026 |
MTS MWS | | Mari El Republic | | 188084 | | October 14, 2026 |
MTS MWS | | Tambov region | | 188085 | | October 14, 2026 |
MTS MWS | | Tatarstan Republic | | 188034 | | October 14, 2026 |
MTS MWS | | Magadan region | | 188035 | | October 14, 2026 |
MTS MWS | | Ulyanovsk region | | 188090 | | October 14, 2026 |
MTS MWS | | Komi Republic | | 188091 | | October 14, 2026 |
MTS MWS | | Moscow | | 188044 | | October 14, 2026 |
MTS MWS | | Nizhny Novgorod region | | 188043 | | October 14, 2026 |
MTS MWS | | Sakhalin region | | 188097 | | October 14, 2026 |
MTS MWS | | YamaloNenetsk Autonomous region | | 188047 | | October 14, 2026 |
MTS MWS | | Kalmykia Republic | | 188050 | | October 14, 2026 |
MTS MWS | | Orenburg region | | 188051 | | October 14, 2026 |
MTS MWS | | Tyumen region | | 188048 | | October 14, 2026 |
MTS MWS | | Altaisk region | | 188049 | | October 14, 2026 |
MTS MWS | | Bryansk region | | 188042 | | October 14, 2026 |
MTS MWS | | Khabarovsk region | | 188033 | | October 14, 2026 |
MTS MWS | | Vladimir region | | 188036 | | October 14, 2026 |
MTS MWS | | Astrakhansk region | | 188040 | | October 14, 2026 |
MTS MWS | | Murmansk region | | 188039 | | October 14, 2026 |
MTS MWS | | Karachaevo-Cherkesia Republic | | 188038 | | October 14, 2026 |
MTS MWS | | Buryatiya Republic | | 188145 | | October 14, 2026 |
MTS MWS | | Zabaykalsky region | | 188017 | | October 14, 2026 |
MTS MWS | | Orel region | | 188018 | | October 14, 2026 |
MTS MWS | | Primorsky region | | 188021 | | October 14, 2026 |
MTS MWS | | Voronezh region | | 188022 | | October 14, 2026 |
MTS MWS | | Samara region | | 188028 | | October 14, 2026 |
MTS MWS | | Tula region | | 188149 | | October 14, 2026 |
MTS MWS | | Mordovia Republic | | 188150 | | October 14, 2026 |
MTS MWS | | Kostroma region | | 188151 | | October 14, 2026 |
MTS MWS | | Tver region | | 188154 | | October 14, 2026 |
MTS MWS | | Khakassiya Republic | | 188155 | | October 14, 2026 |
MTS MWS | | Amur region | | 188156 | | October 14, 2026 |
MTS MWS | | Khanty Mansiysk Autonomous region | | 188158 | | October 14, 2026 |
MTS MWS | | Krasnoyarsk region | | 188029 | | October 14, 2026 |
MTS MWS | | Yaroslavl region | | 188066 | | October 14, 2026 |
MTS MWS | | Chelyabinsk region | | 188067 | | October 14, 2026 |
128
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
MTS MWS | | St. Petersburg | | 188068 | | October 14, 2026 |
MTS MWS | | Penza region | | 188069 | | October 14, 2026 |
MTS MWS | | Omsk region | | 188070 | | October 14, 2026 |
MTS MWS | | Krasnodar region | | 188071 | | October 14, 2026 |
MTS MWS | | Vologda region | | 188072 | | October 14, 2026 |
MTS MWS | | Stavropol region | | 188075 | | October 14, 2026 |
MTS MWS | | Chechen Republic | | 188163 | | October 14, 2026 |
MTS MWS | | Kemerov region | | 188164 | | October 14, 2026 |
MTS MWS | | Ingushetia Republic | | 188081 | | October 14, 2026 |
MTS MWS | | Kirov region | | 188082 | | October 14, 2026 |
MTS MWS | | Chukotskiy Autonomous region | | 188032 | | October 14, 2026 |
Telecommunications Services for Broadcasting | ||||||
Sputnikovoe TV | | Moscow, Moscow region, St. Petersburg, Leningrad region, Adygeya Republic, Arkhangelsk region, Astrakhansk region, Bashkortostan Republic, Belgorod region, Bryansk region, Chuvashia Republic, Dagestan Republic, Ivanovo region, Ingushetia Republic, Kabardino-Balkar Republic, Kaliningrad region, Kalmykia Republic, Kaluga region, Karachaevo-Cherkesia Republic, Karelia Republic, Kirov region, Komi Republic , Kostroma region, Krasnodar region, Kursk region, Lipetsk region, Mari El Republic, Mordovia Republic, Murmansk region, Nizhny Novgorod region, Novgorod region, Orel region, Orenburg region, Perm region, Rostov region, Pskov region, Ryazan region, Samara region, Saratov region, Severnaya Osetia-Alania Republic, Smolensk region, Stavropol region, Tambov region, Tatarstan Republic, Tula region, Tver region, Udmurt Republic, Ulyanovsk region, Vladimir region, Volgograd region, Vologda region, Voronezh region, Yaroslavl region, Altaisk region, Altai Republic, Amur region, Buryatiya Republic, Chelyabinsk region, Jewish Autonomous region, Irkutsk region, Kemerov region, Khabarovsk region, Khakassiya Republic, Khanty Mansiysk Autonomous region, Krasnoyarsk region, Kurgan region, Novosibirsk region, Omsk region, Primorsky region, Sakha Republic (Yakutia), Sakhalin region, Sverdlovsk region, Tomsk region, Tyumen region, Tyva Republic, YamaloNenetsk Autonomous region, Chechen Republic, Zabaykalsky region, Penza region, Krym Republic, Sevastopol, Nenetsk Autonomous region, Magadan region | | 176894 | | October 1, 2024 |
129
| | | | | | |
| | | | License | | |
Licensee | | License Region(s) | | number | | Expiry Date |
Cable Radio (communication services for the purpose of wire broadcasting) | ||||||
MGTS PJSC | | Moscow region, Moscow | | 154857 | | May 16, 2023 |
MTS PJSC | | Moscow region | | 188345 | | January 18, 2023 |
MTS PJSC | | St. Petersburg, Leningrad region | | 176686 | | August 28, 2024 |
MTS PJSC | | Chelyabinsk region | | 137711 | | November 20, 2026 |
MTS PJSC | | Irkutsk region | | 174442 | | May 23, 2024 |
MTS PJSC | | Ivanovo region | | 173166 | | March 28, 2024 |
MTS PJSC | | Kirov region | | 149715 | | November 16, 2026 |
MTS PJSC | | Krasnodar region | | 169190 | | October 4, 2023 |
MTS PJSC | | Nizhny Novgorod region | | 175253 | | October 1, 2024 |
MTS PJSC | | Novosibirsk region | | 171678 | | January 29, 2024 |
MTS PJSC | | Penza region | | 159702 | | October 31, 2023 |
MTS PJSC | | Perm region | | 179662 | | April 22, 2025 |
MTS PJSC | | Rostov region | | 152165 | | February 8, 2027 |
MTS PJSC | | Ryazan region | | 162597 | | February 19, 2023 |
MTS PJSC | | Saratov region | | 168309 | | September 3, 2023 |
MTS PJSC | | Smolensk region | | 179430 | | December 11, 2024 |
MTS PJSC | | Sverdlovsk region | | 172248 | | May 23, 2024 |
MTS PJSC | | Volgograd region | | 156543 | | July 5, 2023 |
MTS PJSC | | Vologda region | | 172369 | | February 26, 2024 |
MTS PJSC | | Yaroslavl region | | 173165 | | March 28, 2024 |
MTS PJSC | | Udmurt Republic | | 182250 | | April 6, 2025 |
Banking Services
The following table shows information with respect to the license areas in which MTS Bank provides financial services:
License |
| License number |
| Banking services |
| Issue date |
MTS Bank | | 2268 | | General license | | December 17, 2014 |
MTS Bank | | 2268 | | Attraction of deposits and placement of precious metals | | December 17, 2014 |
MTS Bank | | 17283 | | Development, production, distribution of encryption (cryptographic) facilities, information and telecommunication systems, which are protected with encryption (cryptographic) facilities, for works and services in the field of data encryption, technical support services of encryption (cryptographic) facilities, information and telecommunication systems, which are protected with encryption (cryptographic) facilities (except where technical support services of encryption (cryptographic) facilities, information and telecommunication systems, which are protected with encryption (cryptographic) facilities, are performed for the own needs of the legal entity or individual entrepreneur) | | June 06, 2019 |
MTS Bank | | 177-04635-010000 | | Dealer activity | | January 24, 2001 |
MTS Bank | | 177-04613-100000 | | Broker activity | | January 24, 2001 |
MTS Bank | | 177-04660-000100 | | Depository activity | | January 24, 2001 |
All licenses with expiry date before the date of this Annual Report on Form 20-F for the year ended December 31, 2021 were renewed.
130
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, 2021.
| | | | | | |
| | | | | | Place of |
| | Accounting | | Ownership | | Incorporation/ |
Subsidiary |
| Method |
| Interest |
| Organization |
RTC | | Consolidated | | 100.0 | % | Russia |
MTS Bank | | Consolidated | | 99.9 | % | Russia |
MGTS Group |
| Consolidated |
| 94.7 | % | Russia |
Multiregional TransitTelecom |
| Consolidated |
| 100.0 | % | Russia |
MTS Armenia |
| Consolidated |
| 100.0 | % | Armenia |
NVision Czech Republic |
| Consolidated |
| 100.0 | % | Czech Republic |
MTDZK LLC (Ticketland) |
| Consolidated |
| 100.0 | % | Russia |
Kulturnaya Sluzhba (Ponominalu) |
| Consolidated |
| 100.0 | % | Russia |
Sputnikovoe TV |
| Consolidated |
| 100.0 | % | Russia |
IT Grad |
| Consolidated |
| 100.0 | % | Russia |
MTS Avto (former Stopol Group) |
| Consolidated |
| 100.0 | % | Russia |
Zelenaya Tochka Group – (Achemar Holdings) |
| Consolidated |
| 100.0 | % | Russia |
Oblachny Retail LLC |
| Consolidated |
| 100.0 | % | Russia |
MTS Media |
| Consolidated |
| 100.0 | % | Russia |
Navigation Information Systems Group |
| Consolidated |
| 94.7 | % | Russia |
MTS Didgital (former MTS IT) |
| Consolidated |
| 100.0 | % | Russia |
Kinopolis |
| Consolidated |
| 100.0 | % | Russia |
Sistema Capital |
| Consolidated |
| 100.0 | % | Russia |
Stream |
| Consolidated |
| 100.0 | % | Russia |
MTS Turkmenistan |
| Consolidated |
| 100.0 | % | Turkmenistan |
MTS Artificial Intelligence |
| Consolidated |
| 100.0 | % | Russia |
MWS |
| Consolidated |
| 100.0 | % | Russia |
Energy Group |
| Consolidated |
| 100.0 | % | Russia |
Dega |
| Consolidated |
| 100.0 | % | British Virgin Islands |
Stream Digital |
| Consolidated |
| 100.0 | % | Russia |
Bastion(1) |
| Consolidated |
| 100.0 | % | Russia |
MTS International Funding Limited(2) (“MTS International”) |
| Consolidated |
| SE | | Ireland |
MTS Belarus |
| Equity |
| 49.0 | % | Belarus |
(1) | A wholly-owned subsidiary, through which the Group currently repurchases its own shares. |
(2) | A company organized and existing as a private limited company under the laws of Ireland. The Group does not have any equity in MTS International. It 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. The notes are guaranteed by MTS in the event of default. 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. Accordingly, the Group concluded that it exercises control over the entity. |
See also Note 2 to our audited consolidated financial statements.
131
D. | Property, Plant and Equipment |
Property, Plant and Equipment
We own and occupy premises in Moscow at 4 Marksistskaya Street Bldgs. 1-4 (1 – 3156.6 sq.m.; 2 – 168.6 sq.m; 3 - 227.7 sq.m; 4 – 89.5 sq.m), 34 Marksistskaya Street Bldg. 10 (902), 1/3 Vorontsovskaya Street Bldgs. 2 (3970.2 sq.m) and 2a (1584.1 sq.m), 5 Vorontsovskaya Street Bldgs. 1 (873.6 sq.m) and 2 (3408.6 sq.m), 13/14 Vorontsovskaya Street Bldg. 4 (879.3 sq.m), 8 Vorontsovskaya Street Bldg. 4À (1379.6 sq.m), 12/12 Pankratievsky Pereulok (2940.1 sq.m), 2/10 Perviy Golutvinskiy Pereulok Bldg. 1 (658.9 sq.m) and 2 (2234.2 sq.m), 4 Perviy Golutvinskiy Pereulok Bldg. 1 (450.5 sq.m), 9 Magnitogorskaya Street (6273.4 sq.m), 6 Vtoroy Vyazovskiy Proezd Building 1-3 (1 – 8962.6 sq.m; 2 – 328.5 sq.m; 3 – 16.9 sq.m), 2A Konstantina Simonova Street (807), 19 Dmitrovskoye shosse Bldg. 2 (417.9 sq.m), 103 Prospect Mira (676.5 sq.m), 42 Profsoyuznaya Street Bldg. 1 (817.1 sq.m), Panfilovskiy prospect Zelenograd Bldg 1101À (542.5 sq.m), 24/2 Malaya Dmitrovka Street (551 sq.m), 5/9 Malaya Dmitrovka Street (455.7 sq.m), 58/1 Ryazanskiy prospect (190 sq.m), 60 Varshavskoe shosse (159.4 sq.m), 27 Smolenskaya-Sennaya square Bldg 2 (7727.1 sq.m), 27 Smolenskaya-Sennaya square Bldg 3 (20.2 sq.m), 6 Ostrovitjanova Street (12.1 sq.m), 2 Mozhayskoe shosse (17.2 sq.m), 51 Second Line of Khoroshevsky Serebryany Bor Bldg.1-3 (1 – 712.9 sq.m; 2 – 266.4 sq.m; 3 – 51 sq.m), 24 Central prospect of Khoroshevsky Serebryany Bor (318 sq.m), 24 Central prospect (574 sq.m), 18 Andropov prospect Bldg. 8-9 (8 – 2588 sq.m; 9 – 30894.6 sq.m), 18 Andropov prospect Bldg.1 (2374.4 sq.m), 18 Andropov prospect Bldg.4 (168.1 sq.m), premises in Moscow region in village Valishevo, 5 Bldg 2 (13104.1 sq.m), in Podolsk, 1 Komsomolskaya street (550,6), in Pushkino, 22 Gorky street 207,6), Pushkin district, village Pushkino, 7A, Yaroslavl shosse (499.7 sq.m), Mytishchi district, Pirogovo village, 8, Timiryazev street (19 sq.m), Lytkarino, Children's town “ZIL”, bldg. 60 (27704 sq.m), which we use for administration, sales and other service centers as well as the operations of mobile switching centers. The size of premises is indicated in square meters.
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 118 properties and rent buildings and premises at approximately 122 addresses located throughout Moscow, which serve as sales and customer service offices, house MGTS’ telecommunication equipment. We also own office buildings in some of our regional license areas, and we lease office space on an as- 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 of radio access network from one supplier can be combined with core network equipment of another supplier to expand the network. Thus, there are no technical limitations to using equipment from different suppliers.
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 IFRS.
132
A. | Operating Results |
Overview
We are a leading telecommunications group in Russia, providing a wide range of mobile and fixed line voice, data telecommunications and digital services, including transmission, broadband, pay-TV, various value-added services as well as financial and integration services and selling equipment and accessories. According to AC&M-Consulting, we are the largest mobile operator in Russia 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, 2021, we had a total mobile subscriber base of approximately 82.7 million.
Our revenues for the year ended December 31, 2021 increased by 8.0% compared to 2020 to reach RUB 534,403 million on the back of growth in all business verticals: telecom, fintech, media and retail. Our operating income for the year ended December 31, 2021 totaled to RUB 118,279 million, an increase of 4.8% in comparison with prior year. The growth was primarily driven by core connectivity and financial services. In addition, in 2020 our operating income was negatively impacted by impairment of our e-ticketing companies. Our profit for the year ended December 31, 2021 grew by 3.5% to RUB 64,269 million. Profit growth was supported by core operating performance as well as operating performance of MTS Bank, partially offset by greater financing costs amid an increasing interest rate environment, as well as forex operations or operations with derivatives and other factors.
Our revenues for the year ended December 31, 2020 totaled to RUB 494,926 million, an increase of 5.2% year-over-year. The Group’s performance was largely driven by both core telecom services as well as new segments beyond connectivity, with Fintech, Media, and B2B Digital & Cloud services. Our operating income for the year ended December 31, 2020 decreased by 2.3% to RUB 112,893 million. Our operating income was negatively impacted by the COVID-19 outbreak, including loan impairment provisions at MTS bank, impairment of our e-ticketing business as well as a steep decline in international roaming. Our profit for the year ended December 31, 2020 increased by 12.7% to RUB 62,073 million mainly due to lower finance costs as well compensating effect of our operations with derivatives.
Our cash outlays for capital expenditures for the years ended December 31, 2021, 2020 and 2019 were RUB 111,683 million, RUB 97,838 million and RUB 91,736 million, respectively.
We have financed our cash requirements through our operating cash flows and borrowings. Net cash provided by operating activities for the years ended December 31, 2021, 2020 and 2019 was RUB 142,846 million, RUB 155,507 million and RUB 106,652 million, respectively.
Our borrowings consist of notes and bank loans. Our notes comprise of U.S. dollar and ruble denominated notes. As of December 31, 2021 and December 31, 2020 U.S. dollar denominated notes totaled to RUB 33.3 billion and RUB 33.1 billion, and ruble denominated notes amounted to RUB 158.7 billion and RUB 175.1 billion, respectively. Our bank loans consist of ruble-denominated borrowings totaling approximately RUB 270.1 billion as of December 31, 2021 and RUB 221.1 billion as of December 31, 2020.
We repaid approximately RUB 36.4 billion and RUB 162.7 billion of indebtedness in 2021 and 2020, respectively. As of December 31, 2021, the total amount available to us under our credit facilities amounted to RUB 207.3 billion. We had total indebtedness of 462.1 billion as of December 31, 2021, excluding lease obligations, compared to RUB 429.3 billion as of December 31, 2020. See Note 24 to our audited consolidated financial statements for a description of our indebtedness.
Our total finance costs for the years ended December 31, 2021, 2020 and 2019 were RUB 41,352 million, RUB 42,084 million and RUB 47,366 million, net of amounts of interest capitalized, respectively. See Note 9 to our audited consolidated financial statements for a description of our finance costs.
Our reporting currency is Russian rubles. Our and our subsidiaries’ functional currencies are the ruble in Russia, the hryvnia in Ukraine (before it was disposed of on December 3, 2019), the manat in Turkmenistan, the dram in Armenia and the som in Uzbekistan (before UMS was deconsolidated). See “—Certain Factors Affecting our Financial Position and Results of Operations—Currency fluctuations” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
133
The selected financial data presented below as of December 31, 2021, 2020, 2019 and for the years ended December 31, 2021, 2020 and 2019 was derived from the audited consolidated financial statements of the Company, included in this document. The amounts are presented in millions of Russian rubles, except share and per share amounts, industry and operating data and ratios.
| | | | | | | |
| | 2021 | | 2020 | | 2019 |
|
Consolidated statements of profit or loss data: |
|
|
|
|
|
| |
Services revenue |
| 457,677 |
| 425,448 |
| 406,478 | |
Sales of goods |
| 76,726 |
| 69,478 |
| 64,127 | |
Total operating revenues |
| 534,403 |
| 494,926 |
| 470,605 | |
Operating expenses: |
|
|
|
|
|
| |
Cost of services |
| 133,512 |
| 121,943 |
| 114,057 | |
Cost of goods |
| 72,244 |
| 63,482 |
| 58,872 | |
Selling, general and administrative expenses |
| 96,239 |
| 87,983 |
| 89,933 | |
Depreciation and amortization |
| 111,088 |
| 100,234 |
| 96,195 | |
Operating share of the profit of associates and joint ventures |
| (5,565) |
| (5,048) |
| (4,583) | |
Impairment of non‑current assets |
| (10) |
| 2,023 |
| (148) | |
Impairment of financial assets |
| 13,010 |
| 11,912 |
| 7,723 | |
Other operating income(1) |
| (4,394) |
| (496) |
| (7,021) | |
Operating profit |
| 118,279 |
| 112,893 |
| 115,577 | |
Finance income |
| (2,518) |
| (3,437) |
| (4,352) | |
Finance costs |
| 41,352 |
| 42,084 |
| 47,366 | |
Non‑operating share of the loss of associates and joint ventures |
| (181) |
| (273) |
| (3,496) | |
Other non‑operating expenses/(income), net(2) |
| 424 |
| (3,064) |
| 7,821 | |
Profit before tax |
| 79,202 |
| 77,583 |
| 68,238 | |
Income tax expense |
| 15,403 |
| 16,126 |
| 15,667 | |
Profit for the period from continuing operations |
| 63,799 |
| 61,457 |
| 52,571 | |
(Profit)/Loss from discontinued operations, net of tax |
| (470) |
| (616) |
| (2,528) | |
Profit for the period |
| 64,269 |
| 62,073 |
| 55,099 | |
Attributable to: |
|
|
|
|
|
| |
Owners of the company |
| 63,473 |
| 61,412 |
| 54,241 | |
Non‑controlling interests |
| 796 |
| 661 |
| 858 | |
Dividends declared(2) |
| 74,049 |
| 58,948 |
| 83,751 | |
Earnings per share, basic, RUB |
| 37.49 |
| 34.88 |
| 30.46 | |
Earnings per share, diluted, RUB |
| 37.30 |
| 34.86 |
| 30.41 | |
Earnings per share from continuing operations, basic, RUB |
| 37.21 |
| 34.53 |
| 29.04 | |
Earnings per share from continuing operations, diluted, RUB |
| 37.02 |
| 34.51 |
| 28.99 | |
Earnings per share from discontinued operations, basic, RUB |
| 0.28 |
| 0.35 |
| 1.42 | |
Earnings per share from discontinued operations, diluted, RUB |
| 0.28 |
| 0.35 |
| 1.42 | |
Annual Dividends declared per share, RUB |
| 26.51 |
| 20.57 |
| 41.91 | |
Semi‑annual Dividends declared per share, RUB |
| 10.55 |
| 8.93 |
| 8.68 | |
Special Dividends declared per share, RUB |
| — |
| 13.25 |
| — | |
Number of common shares outstanding |
| 1,662,624,118 |
| 1,726,902,169 |
| 1,772,834,153 | |
Weighted average number of common shares outstanding—basic |
| 1,693,244,209 |
| 1,760,467,519 |
| 1,780,935,238 | |
Weighted average number of common shares outstanding—diluted |
| 1,701,786,673 |
| 1,761,777,635 |
| 1,783,617,103 | |
Consolidated statement of cash flows data: |
|
|
|
|
|
| |
Cash provided by operating activities |
| 142,846 |
| 155,507 |
| 106,652 | |
Cash used in investing activities |
| (116,432) |
| (81,133) |
| (29,554) | |
(of which capital expenditures)(3) |
| |
| (97,838) |
| (91,736) | |
Cash used in financing activities |
| (71,214) |
| (27,360) |
| (120,448) | |
Consolidated statement of financial position (end of period): |
|
|
|
|
|
| |
Cash, cash equivalents and short‑term investments |
| 69,562 |
| 108,839 |
| 63,688 | |
Property, plant and equipment and investment property, net |
| 313,748 |
| 286,693 |
| 268,465 | |
Right‑of‑use assets |
| 132,343 |
| 130,503 |
| 138,817 | |
Total assets |
| 1,015,818 |
| 919,203 |
| 823,910 | |
Total debt (long‑term and short‑term)(4) |
| 462,139 |
| 429,268 |
| 343,319 | |
Total shareholders’ equity |
| 14,604 |
| 32,690 |
| 36,394 | |
Common stock less treasury stock |
| (95,995) |
| (74,790) |
| (59,548) | |
Financial ratios (end of period): |
|
|
|
|
|
| |
Total debt/total capitalization(5) |
| 96.9 | % | 92.9 | % | 90.4 | % |
Mobile industry and operating data:(6) |
|
|
|
|
|
| |
Mobile penetration in Russia (end of period) |
| 178 | % | 172 | % | 178 | % |
Mobile subscribers in Russia (end of period, thousands)(7) |
| 80,436 |
| 78,467 |
| 79,072 | |
Overall market share in Russia (end of period) |
| 31 | % | 31 | % | 30 | % |
(1) | “Other non-operating expenses/(income), net” consist mainly of net forex exchange (gains)/losses and net (gains)/losses arising on financial instruments. |
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(2) | Dividends declared in each of the years ended December 31, 2021, 2020, 2019 consisted of dividends in respect of the prior fiscal year (i.e., in respect of each of the years ended December 31, 2020, 2019 and 2018, respectively), semiannual dividends in respect of the current fiscal year (RUB 20,975 million, RUB 17,842 million, RUB 17,345 million, respectively) and special dividends related to sale of Ukraine business in 2019 (RUB 26,478 million). Amounts include dividends on treasury shares RUB 12,082 million, RUB 6,935 million, RUB 9,449 million, in respect of the years ended December 31, 2021, 2020, and 2019, respectively. |
(3) | Capital expenditures are the amounts of property, plant and equipment and intangible assets acquired during respective year. |
(4) | Includes notes, bank loans and other debt. |
(5) | Calculated as book value of total debt divided by the sum of the book values of total shareholders’ equity and total debt at the end of the relevant period. See footnote 5 above for the definition of “total debt.” |
(6) | Source: AC&M-Consulting and GSMA Intelligence. Operating data is presented for mobile operations only. None of this data is derived from our audited consolidated financial statements. |
(7) | We define a subscriber as an organization or individual, whose SIM-card shows traffic-generating activity or accrues a balance for services rendered or is replenished of topped off over the course of any three month period, inclusive within the reporting period, and was not blocked at the end of the period. |
Segments
Management (chief operating decision maker) analyzes and reviews results of the Company’s operating segments separately based on the nature of products and services, regulatory environments and geographic areas. The 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.
Our current reportable segments are the following:
Telecom: 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.
Fintech: represents the results of banking services, investment management and services of credit broker, rendered to customers across multiple regions of Russia.
Our reportable segments previously included the “Ukraine” reportable segment, which has been excluded from operational segments presentation as a result of the disposal of VF Ukraine in December 2019.
In 2021, our management changed the composition of operating segments, by dividing operations of the Group’s subsidiary MGTS (which previously constituted the “Moscow Fixed Line” reportable segment) into two operating segments. Operations of the established “MGTS service” operating segment comprised primarily maintenance and development of fixed-line network infrastructure. The segment generates revenues mainly from renting MGTS’ own network infrastructure. Operations of the established component “MGTS commercial” include client relationships and related fixed-line services, generating revenue from existing subscribers. The operating and financial results of “MGTS commercial” are reviewed jointly with the “Russia convergent” segment (representing results of both mobile and fixed-line services), in line with focus on convergent products development, while the results of “MGTS service” are monitored separately. Consequently, “MGTS service“ represents a separate operating segment. “MGTS commercial” and “Russia convergent” are presented as one reportable segment – “Telecom”.
Financial results of operating segment “MTS-Bank” were supplemented with operations of investment management and credit broker services in connection with the acquisition of LLC Sistema Capital and the acquisition of Credit Consulting. This new reportable segment was called “Fintech”.
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At the end of 2020, our management changed the approach for reviewing the Group’s operational results which led to the separation of two new segments—Cloud and WASD. Cloud represents operational results of the Group’s business focused on cloud services. WASD is the MTS streaming platform. Cloud and WASD were moved from “Telecom” operating segment to the “Other” category.
On October 30, 2020, the Group entered into a sale agreement with Sistema to dispose of its 100% stake in JSC “Nvision Group”, which provided integration services and software sales and constituted the “System Integrator” operating segment included in the “Other” category.
In 2019, management changed the assessment of expenses allocated to HQ in relation with sale of MTS Ukraine.
All figures in the tables below for 2020 and 2019 have been retrospectively restated to reflect the above changes.
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 MGTS Service, Turkmenistan, Armenia, Cloud, Media, Artificial Intelligence and others. Total revenues of our segments for the years ended December 31, 2021, 2020, 2019 were as follows:
| | | | | | |
| | Year Ended December 31, | ||||
|
| 2021 |
| 2020 |
| 2019 |
| | (in millions of Russian rubles) | ||||
Total revenues |
|
|
|
|
|
|
Telecom |
| 448,313 |
| 429,319 |
| 391,104 |
Fintech |
| 49,607 |
| 36,222 |
| 31,185 |
Other |
| 62,824 |
| 49,132 |
| 71,573 |
HQ and eliminations(1) |
| (26,340) |
| (19,746) |
| (23,256) |
Total revenues as reported |
| 534,403 |
| 494,926 |
| 470,605 |
(1) | Represents the elimination of inter-company transaction results, primarily interconnect, roaming, rent of channels and telecommunications infrastructure. |
Certain Operating Data
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, 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, | ||||
|
| 2021 |
| 2020 |
| 2019 |
| | (in millions) | ||||
Subscribers(1) |
|
|
|
|
|
|
Russia |
| 80.4 |
| 78.5 |
| 79.1 |
Armenia |
| 2.2 |
| 2.1 |
| 2.2 |
Total consolidated |
| 82.6 |
| 80.6 |
| 81.3 |
MTS Belarus (unconsolidated) |
| 5.7 |
| 5.7 |
| 5.6 |
(1) | We define a subscriber as an organization or individual, whose SIM-card shows traffic-generating activity or accrues a balance for services rendered or is replenished of topped off over the course of any three-month period, inclusive within the reporting period, and was not blocked at the end of the period. |
We had approximately 80.4 million subscribers in Russia as of December 31, 2021, 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 178%. In
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addition, as of December 31, 2021, we had approximately 2.2 million subscribers in Armenia, representing 59.8% market share, 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.”
Revenues
During the last few years our company has evolved from a leading provider of telecommunication services into an eco-system of telecommunication, financial, media and digital services.
Our principal sources of revenue are:
● | revenue from telecommunication or “сonnectivity” services, which include mobile and fixed service revenue; |
● | revenue from sales of handsets, accessories and other goods; and |
● | revenue from financial services. |
Our mobile tariffs in Russia are not 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. 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 FAS may be entitled to regulate our subscriber tariffs and impose certain restrictions on our operations” and “—If we or any of our mobile network 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
Revenue from telecommunication services primarily include monthly fees paid by our users of tariff plans which contain fixed volume of services such as minutes of usage, sms, mobile internet traffic, pay-TV and broadband internet in case of convergent tariff plans. Telecommunication services also include interconnect fees, roaming fees and other services. Telecommunication services as a percentage of revenues gradually declined and were 77.2% in 2021, 79.2% in 2020 and 80.5% in 2019. We expect revenue from telecommunication services to remain stable as a percentage of total revenue in 2022.
Revenue from financial services which consist primarily of lending services, business funding options, deposit products, cash settlement services, trade finance, foreign currency control, bank cards, payroll projects, merchant acquiring and investment services provided by MTS Bank, comprised 8.8%, 6.8% and 6.2% of our total revenues in 2021, 2020 and 2019, respectively. We expect banking service revenues to remain stable as a percentage of our total operating revenue.
Sales of Goods
Sales of goods primary consist of the sale of handsets and accessories and sales of software products and as a percentage of total revenue comprised 14.4% in 2021, 14.0% in 2020, 13.3% in 2019. The increase in both absolute terms and as a percentage of revenue in 2021 as compared to 2020 is attributable to an increase of handsets retail market in monetary terms and low base of 2020 impacted by store closure due to public health guidelines amid the pandemic. We expect that sales of goods will remain stable or decline as a percentage of total revenue, depending on the continuity of smartphones and devices supplies. We do not subsidize handset sales in Russia.
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Cost of Services
Cost of telecommunication services mainly consist of interconnect and line rental 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. Roaming expense which consist of amounts charged by other cellular operators under agreements for roaming services provided to our subscribers while outside our service area, is also a significant part of our cost of telecommunication services.
Cost of telecommunication services as a percentage of our total revenues represented 22.3% in 2021, 22.3% in 2020 and 22.0% in 2019.
Cost of financial services consists primarily of interests on loans received from banks and other financial institutions and commission fees. Cost of financial services as a percentage of our total revenues represented 2.6% in 2021 and 2.3% in 2020 and 2019.
Cost of goods
This type of expense includes primarily the cost of handsets and accessories sold to subscribers, the cost of SIM cards provided to our customers, the cost of software products sold and inventory obsolescence provision. Cost of handsets, accessories and software sold and SIM cards provided to customers as a percentage of our total revenues represented 13.5% in 2021, 12.8% in 2020 and 12.5% in 2019.
Selling, general and administrative expenses
Our selling expenses comprise of all costs relating to the activities that do not directly increase the value of our products and services, but serve to secure sales. These costs consist primarily of:
● | expenses for advertising and promotion; |
● | dealer commissions for the acquisition of new subscribers and cash collection; and |
● | personnel, utilities and maintenance costs incurred in the area of sales. |
In 2021, 2020 and 2019, selling expenses comprised 8.7%, 9.0% and 9.8% of our total revenue, respectively. Selling expenses remained relatively stable as a percentage of our revenue in 2021 in comparison with 2020. The decrease of 0.8% of selling expenses in 2020 in comparison with 2019 related to cost optimization due to the COVID‑19 outbreak.
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 please see “Item 4. Information on Our Company—B. Business Overview—Mobile Operations—Sales and Marketing—Sales and Distribution.”
Our general 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:
● | personnel costs; |
● | office maintenance expenses and rental of administrative premises; |
● | consulting expenses; |
● | taxes other than income taxes, e.g. property taxes; |
● | billing and data processing expenses; and |
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● | other expenses of administrative nature. |
General and administrative expenses as a percentage of our total revenues represented 9,3%, 8.8% and 9.3% in 2021, 2020 and 2019, respectively. The increase of 0.5% in general and administrative expenses in 2021 compared to 2020 is related to the changes in personnel costs. The decrease of 0.5% in the financial year 2020 compared to 2019, as well as the decrease of selling expenses, was mainly attributable to cost optimization due to the global pandemic situation. 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:
● | operating share of associates’ profit; |
● | impairment of financial assets; |
● | impairment for goodwill and long-lived assets; and |
● | other operating income such as gain/losses on disposal of property, plant and equipment and intangible assets as well as any gain/losses resulting from stock-taking. |
Sundry operating income/expenses as a percentage of our total revenues represented 0.6%, 1.3% and (0.9)% as of December 31, 2021, 2020 and 2019, respectively. The decrease of sundry operating expenses in 2021 compared to 2020 was mainly attributable to the absence of the impairment charges for goodwill and long-lived assets in the financial year 2021. The increase of sundry operating expenses in 2020 compared to 2019 was mainly attributable to an increase in the allowance of expected credit losses (ECL) for bank deposits and loans to customers because of a higher expected credit risk due to the COVID-19 outbreak.
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 was equal to 20.8% for the year ended December 31, 2021 as compared to 20.3% of our total revenues for the year ended December 31, 2020. Our expense for depreciation of property, network equipment and amortization of intangible assets comprised 20.4% of our total revenues for the year ended December 31, 2019.
We expect our expense for depreciation of property, network equipment and amortization of intangible assets to remain relatively stable or decline slightly in 2022.
Finance costs
Our finance costs for 2021 decreased by RUB 732 million, or 1.74%, to RUB 41,352 million from RUB 42,084 million for the year ended December 31, 2020. The decrease was primarily attributable to the effect of the derecognition and modification of debt agreements (RUB 1,151 million), decrease in interest on lease obligations (RUB 457 million) and the effect of our operations with derivatives. The decrease was partly compensated by an increase in total debt and an increase in interest rates due to the growth of Central Bank of Russia key rate (RUB 1,258 million). Our finance costs for 2020 decreased by RUB 5,282 million, or 11.2%, to RUB 42,084 million from RUB 47,366 million for the year ended December 31, 2019. The decrease was primarily attributable to effect arisen on the derecognition of debt agreements (RUB 2,220 million), improved loan terms and decreased Central Bank of Russia key rate (RUB 1,930 million).
We expect our finance costs to increase as a percentage of our revenue in 2022 mainly due to the growth of Central Bank of Russia key rate.
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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 expenses incurred in such operations with certain exceptions.
The statutory income tax rate in Russia is 20%. The effective tax rate applicable to our consolidated group in the year ended December 31, 2021, 2020 and 2019 was 19.4%, 20.8% and 23.0%, respectively. The effective tax rate differs from the statutory rate mainly as a result of prior period tax effects, change in recognized deferred tax assets, and a decrease in the items not deductable for tax purposes.
Certain Factors Affecting our Financial Position and Results of Operations
COVID-19 impact
The COVID-19 outbreak has limited impact on our results of operations. Our operating income was negatively impacted by COVID-19 outbreak, mainly due to the loan impairment provisions at MTS bank and impairment of our e-ticketing business in 2020. In addition, our revenue growth was partly offset by decrease in revenue from roaming services due to a steep decline in international roaming in 2020, which partly recovered in 2021.
For more information, see “Item 3. Key Information—Risk Factors—The outbreak of COVID-19 may have a material adverse effect on our business, financial condition, results of operations and prospects.”
Potential adverse effects of economic instability and sanctions in Russia
In February and March 2022, following the recent geopolitical events, the EU, US, UK and certain other countries have imposed significant new sanctions and export controls on Russian and Belarusian persons and entities. These include, among others, restrictions targeting several major Russian financial institutions and the CBR, a number of companies and individuals as well as technology export controls.
Developments relating to these matters are highly unpredictable, occur swiftly and often with little notice and are mostly outside of our control. Current and future risks to our financial position and results of operations include, among others, the risk of reduced or blocked access to capital markets and ability to obtain financing on commercially reasonable terms (or at all), the risk of restrictions on the import of certain equipment and software, as well as the risk of further depreciation of the Russian ruble against other currencies (which has already occurred to a significant extent), which may adversely impact our investment process as a significant portion of our capital expenditures are denominated in or linked to foreign currencies. In addition, rate hikes by the CBR, which has increased its key rate to 20%, will increase our financing costs due to the impact on floating-rate credit facilities.
Operations of MTS Bank are susceptible to the risks affecting the borrowers’ ability to repay amounts due to us, which may be impacted by the overall macroeconomic environment and business climate. Adverse changes in economic conditions may result in deterioration in the value of collateral held against loans and other obligations.
Our management remains focused on ensuring operational continuity and providing uninterrupted connectivity and other services for customers. Our management believes it is taking the appropriate measures to support the sustainability of the Group’s business in the current circumstances.
For more information, see Note 34 to our consolidated financial statements and “Item 3. Key Information—D. Risk Factors— “Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”.
140
Currency fluctuations
A majority of our capital expenditure and a 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 liabilities, denominated in U.S. dollars, excluding trade accounts payables, is hedged through financial instruments with various banks. We conduct operations within the Russian Federation 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 the fluctuations we may incur significant currency exchange gains/losses which may adversely affect our profit for the year. Please see also “Item 3. Key Information—D. Risk Factors— “Ruble volatility 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” and “Item 3. Key Information—D. Risk Factors— “Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”.
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. 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 our 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.
Below is a list of our major acquisitions during 2021-2019. See also Note 5 to our audited consolidated financial statements for a description and financial effects of these acquisitions.
| | | | | | | | |
| | | | | | | | Purchase |
| | | | Date of | | Stake | | price, RUB |
Company |
| Type |
| acquisition |
| acquired |
| mln |
2021 | | | | | | | | |
Zelenaya Tochka | | Regional fixed-line operations | | April 2021 | | 49 | %* | 3,101 |
Credit Consulting | | Credit broker | | April 2021 | | 100 | % | 60 |
Multiregional TransitTelecom | | B2B intelligent connectivity solutions | | June 2021 | | 100 | % | 5,798 |
GDTs Energy Group | | GreenBush data center | | June 2021 | | 100 | % | 5,200 |
Sistema Capital | | Investment services | | September 2021 | | 70 | %** | 3,500 |
| | | | | | | | 17,659 |
| | | | | | | | |
2020 | | | | | | | | |
Stopol Auto |
| Auto parts and multimedia devices |
| June 2020 |
| 100 | % | 321 |
|
| | | | | | | 321 |
2019 |
|
|
|
|
|
|
|
|
MTS Bank |
| Banking services |
| February 2019 |
| 39.48 | % | 11,409 |
Objedinennye Russkie Kinostudii (Kinopolis) |
| Movie complex |
| April 2019 |
| 100 | % | 2,042 |
RIKT |
| Regional fixed‑line operator |
| June 2019 |
| 97.4 | % | 360 |
Narodnoje property complex |
| Administrative properties |
| August 2019 |
| 100 | % | 329 |
MTS Bank |
| Banking services |
| December 2019 |
| 4.46 | % | 1,446 |
|
| | | | | | | 15,586 |
* Acquisition of 49% in Zelenaya Tochka in addition to the previously held stake of 51% allowed us to obtain control over the entity.
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** Acquisition of 70% in Sistema Capital in addition to the previously held stake of 30% allowed us to obtain control over the entity.
Results of Operations
Our management has identified the following reportable segments: Telecom and Fintech. 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, | ||||
|
| 2021 |
| 2020 |
| 2019 |
Total revenues |
|
|
|
|
|
|
Telecom |
| 448,313 |
| 429,319 |
| 391,103 |
Fintech |
| 49,607 |
| 36,222 |
| 31,185 |
Other |
| 62,823 |
| 49,132 |
| 71,573 |
HQ and eliminations(1) |
| (26,340) |
| (19,747) |
| (23,256) |
Total revenues as reported |
| 534,403 |
| 494,926 |
| 470,605 |
Costs of services and cost of goods |
|
|
|
|
|
|
Telecom |
| 171,315 |
| 157,012 |
| 145,601 |
Fintech |
| 16,284 |
| 13,628 |
| 13,746 |
Other |
| 34,698 |
| 26,274 |
| 29,678 |
HQ and eliminations(1) |
| (16,541) |
| (11,489) |
| (16,096) |
Cost of services and cost of goods as reported |
| 205,756 |
| 185,425 |
| 172,929 |
Sundry operating expenses/(income)(2) |
|
|
|
|
|
|
Telecom |
| 1,509 |
| 3,128 |
| 3,183 |
Fintech |
| 12,266 |
| 10,001 |
| 4,002 |
Other |
| (10,969) |
| (5,014) |
| (11,260) |
HQ and eliminations(1) |
| 235 |
| 277 |
| 46 |
Sundry operating expenses/ (income) as reported |
| 3,041 |
| 8,391 |
| (4,029) |
Selling, general and administrative expenses | | | | | | |
Telecom | | 71,296 | | 68,267 | | 68,309 |
Fintech | | 12,222 | | 8,731 | | 8,864 |
Other | | 14,387 | | 11,865 | | 13,763 |
HQ and eliminations(1) | | (1,666) | | (884) | | (1,003) |
Selling, general and administrative expenses as reported | | 96,239 | | 87,983 | | 89,933 |
Depreciation and amortization expenses |
| |
| |
| |
Telecom |
| 100,988 |
| 90,871 |
| 85,332 |
Fintech |
| 1,783 |
| 1,248 |
| 1,082 |
Other |
| 14,019 |
| 12,836 |
| 13,192 |
HQ and eliminations(1) |
| (5,701) |
| (4,722) |
| (3,411) |
Depreciation and amortization expenses as reported |
| 111,088 |
| 100,234 |
| 96,195 |
Operating profit |
|
|
|
|
|
|
Telecom |
| 103,206 |
| 110,040 |
| 88,678 |
Fintech |
| 7,051 |
| 2,614 |
| 3,492 |
Other |
| 10,689 |
| 3,170 |
| 26,199 |
HQ and eliminations(1) |
| (2,668) |
| (2,928) |
| (2,792) |
Operating profit as reported |
| 118,279 |
| 112,893 |
| 115,577 |
(1) | Represents the elimination of inter-company transaction results, primarily interconnect, roaming, rent of channels and telecommunications infrastructure. |
(2) | For the purposes of this analysis “Sundry operating expenses/(income)” consist of allowance for doubtful accounts, impairment of non-current assets and goodwill, other operating expenses/(income), operating share of profit of associates and provision for investments in distressed banks. |
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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenues and cost of services and cost of goods
Consolidated revenues for the year ended December 31, 2021, increased by RUB 39,477 million, or 8.0%, to RUB 534,403 million from RUB 494,926 million for the year ended December 31, 2020. The principal reason for the growth was the large increase in revenue from telecommunication services (by RUB 20,673 million) attributable to the usage of voice and data tariffs by our subscribers. This was mainly attributable to the 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 value-added services. The growth was also attributable to the growth in sales of handsets, accessories and software products by RUB 7,247 million, or 10,4% compared to the year ended December 31, 2020. Revenue from financial services added to the overall increase of consolidated revenue as it grew by RUB 11,556 million to RUB 44,853 million in 2021 from 33,297 million in 2020. Our revenue remains partly offset by the dynamics in revenue from roaming services due to the COVID-19 pandemic. The revenue from roaming services in the year ended December 31, 2021 increased by RUB 1,291 million, or 15.0% compared to the year ended December 31, 2020, but remains below the level reached in in the year ended December 31, 2019.
Consolidated cost of services and cost of goods for the year ended December 31, 2021 increased by RUB 20,331 million and amounted to RUB 205,756 million as compared to RUB 185,425 million for the year ended December 31, 2020 and comprised 38.5% and 37.5% as a percentage of consolidated revenues for the year ended December 31, 2021 and 2020, respectively. The increase was largely driven by the increase in the device market which led to the growth of handsets sales and the consequent increase in cost of handsets, accessories and software products by RUB 8,762 million compared to the year ended December 31, 2020.
Telecom revenues for the year ended December 31, 2021, increased by 4.4% to RUB 448,313 million from RUB 429,319 million for the year ended December 31, 2020. The increase in Telecom revenues in the year ended December 31, 2021, was primarily due to the growth in revenue from telecommunication services for RUB 13,160 million which increased due to the active promotion of mobile only and convergent tariff plans, significant volume of Internet traffic included, and constant quality improvement of services provided, added with effect from acquisitions. The increase in device market led to the growth of handsets, accessories and software sales of Telecom by RUB 5,835 million compared to the year ended December 31, 2020.
Telecom cost of services and cost of goods for the year ended December 31, 2021, increased by 9.1% to RUB 171,315 million from RUB 157,012 million for the year ended December 31, 2020. The increase in Telecom cost of services and cost of goods is largely attributable to the increase in cost of handsets, accessories and software products by RUB 7,843 million, driven by the growth in sales and shifting brand mix in device sales. Companies acquired in 2021 have contributed RUB 2,947 million to the increase in Telecom cost of services and cost of goods.
Fintech revenues increased by RUB 13,385 million and amounted to RUB 49,607 million for the year ended December 31, 2021 and RUB 36,222 million for the year ended December 31, 2020. Fintech revenues as a percentage of our total revenues represented 9.3% in 2021 and 7.3% in 2020 and its growth is mainly attributable to the increase in the amount of users and expansion of MTS Bank clients portfolio.
Fintech cost of services increased by RUB 2,656 million and amounted to RUB 16,284 million for the year ended December 31, 2021 and RUB 13,628 million for the year ended December 31, 2020, representing 3.0% and 2.8% of our total revenues in 2021 and 2020 respectively.
Other countries and business activities revenues for the year ended December 31, 2021 increased by 27.9% or RUB 13,692 million to RUB 62,824 million as compared to RUB 49,132 million for the year ended December 31, 2020. The increase was mainly attributable to the increase in sales of software products, the increase in revenue of fixed-line infrastructure segment (including intercompany revenue), and the increase in revenue from pay-TV services.
Other countries and business activities cost of goods for the year ended December 31, 2021 increased by 32.1% or RUB 8,424 million to RUB 34,698 million as compared to RUB 26,274 million for the year ended December 31, 2020. The increase was mainly attributable to the increase in cost of goods for software products and the increase in cost of services of fixed-line infrastructure segment.
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Sundry operating expenses/(income)
Consolidated sundry operating expenses for the year ended December 31, 2021, decreased by RUB 5,350 million in comparison with the previous year. We generated RUB 3,041 million expenses and RUB 8,390 million expenses for the year ended December 31, 2021 and 2020, respectively. These amounts comprised (0.6)% and (1.7)% as a percentage of consolidated revenue for the year ended December 31, 2021 and 2020, respectively. The decrease of consolidated sundry operating expenses in 2021 compared to 2020 was attributed to a number of reasons presented below, the main of which was the absence of of goodwill and long-lived assets impairment of other business activities for the year ended December 31, 2021, compared to the year ended December 31, 2020.
Telecom sundry operating expenses for the year ended December 31, 2021, decreased by 51.8% or RUB 1,169 million compared to the year ended December 31, 2020. We generated RUB 1,509 million and RUB 3,128 million expenses for the year ended December 31, 2021 and 2020, respectively. These expenses comprised 0.3% of Telecom revenues for the year ended December 31, 2021 and 0.7% for the year ended December 31, 2020. As of the acquisition date in April 2021 the Group remeasured the previously held equity interest in Achemar Holdings Limited from RUB 1,166 million to fair value of RUB 1,582 million and recognized the resulting gain of RUB 416 million in the operating share of the profit of the associates and joint ventures in the accompanying consolidated statement of profit or loss. Please see Note 16 to the consolidated financial statements for the details of the acquisition.
Fintech sundry operating expenses for the year ended December 31, 2021, increased by RUB 2,266 million to RUB 12,266 million from RUB 10,001 million for the year ended December 31, 2020. Sundry operating expenses as a percentage of banking service revenues decreased to 24.7% for the year ended December 31, 2021, from 27.6% for the year ended December 31, 2020. Increase in Fintech sundry operating expenses was caused by the increase in allowance for expected credit losses (“ECL”) for the bank loans to customers related to the overall increase in loans to customers and impact of COVID-19.
Other countries and business activities sundry operating income for the year ended December 31, 2021, increased by RUB 5,955 million compared to the year ended December 31, 2020. We recognized income of RUB 10,969 million for the year ended December 31, 2021 and RUB 5,014 million for the year ended December 31, 2020. The increase is mainly due to decrease in ECL provision and the absence of goodwill and long-lived assets impairment of other business activities for the year ended December 31, 2021, compared to the year ended December 31, 2020, due to the partial recovery from the COVID-19 pamdemic (see also Note 22 to our audited consolidated financial statements).
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses for the year ended December 31, 2021, increased by RUB 8,257 million and amounted to RUB 96,239 million as compared to RUB 87,893 million for the year ended December 31, 2020 and comprised 18.0% and 17.8% as a percentage of consolidated revenues for the year ended December 31, 2021 and 2020, respectively, driven by the increase in salaries and social contributions, and advertising and marketing expenses.
Telecom selling, general and administrative expenses for the year ended December 31, 2021 increased by RUB 3,028 million to RUB 71,296 million, or 21.5% of Telecom revenue, from RUB 68,267 million, or 20.5% of Telecom revenue, for the year ended December 31, 2020 mainly due to the increase in payroll expenses for RUB 1,135 million and in advertising and marketing expenses for RUB 1,084 million.
Fintech selling, general and administrative expenses for the year ended December 31, 2021, increased by RUB 3,491 million, to RUB 12,222 million, or 24.6% of Fintech revenue, from RUB 8,731 million, or 24.1% of Fintech revenue for the year ended December 31, 2020, driven partially by the increase in salaries and social contributions.
Other countries and business activities selling, general and administrative expenses for the year ended December 31, 2021, increased by RUB 2,521 million or 21.3% to RUB 14,378 million from RUB 11,865 million for the year ended December 31, 2020. Other countries and business activities selling, general and administrative expenses mainly increased due to the effect of an increase in payroll expenses and in advertising and marketing expenses.
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Depreciation and amortization expenses
Consolidated depreciation and amortization of property, network equipment, customer base, license costs, right of use assets, and other intangible assets for the year ended December 31, 2021, increased by 10.8% to RUB 111,088 million from RUB 100,234 million for the year ended December 31, 2020.
Telecom depreciation and amortization for the year ended December 31, 2021, increased by 11.1% to RUB 100,988 million from RUB 90,871 million for the year ended December 31, 2020 mainly due to additions of new assets.
Fintech depreciation and amortization for the year ended December 31, 2021, amounted to RUB 1,783 million showing an increase compared to RUB 1,248 for the year ended December 31, 2020 mainly due to additions of new assets, in particular software.
Other countries and business activities depreciation and amortization for the year ended December 31, 2021, increased by 9.2% to RUB 14,019 million from RUB 12,836 million for the year ended December 31, 2020.
Operating profit
Consolidated operating profit increased by RUB 5,383 million, or 4.8%, to RUB 118,279 million in the year ended December 31, 2021 from RUB 112,896 million in the year ended December 31, 2020. The increase was mainly attributable to higher operating income from Fintech and Other countries and business activities partly offset by the decrease in Telecom operating profit.
Telecom operating profit for the year ended December 31, 2021 decreased by RUB 6,833 million, or 6.2%, and totaled to RUB 103,206 million against RUB 10,040 million for the year ended 2020. The decrease was mainly attributable to the increase in Telecom cost of services and cost of goods attributable to the increase of cost of handsets, accessories and software products by RUB 7,843 million, driven by the gowth in sales and shifting brand mix in device sales and an increase in depreciation due to additions of intangible and fixed assets.
Fintech operating profit for the year ended December 31, 2021 increased by RUB 4,438 million, or 169.8%, and totaled to RUB 7,051 million against RUB 2,614 million for the year ended 2020. MTS Bank operating profit increased as a percentage of MTS Bank revenue to 14.2% for the year ended December 31, 2021 from 7.2% for the year ended December 31, 2020. The increase was caused by an increase in revenues attributable to the amount of users and expansion of MTS Bank clients portfolio.
Other countries and business activities operating income for the year ended December 31, 2021, increased by RUB 7,519 million, or 237.2%, and totaled to RUB 10,689 million from RUB 3,170 million for the year ended December 31, 2020 due to the absence of the impairment charges for goodwill and long-lived assets in the financial year 2021, and due to the increase in cost of goods for software products and the increase in cost of services of the fixed-line infrastructure segment.
Finance costs
Consolidated finance costs for the year ended December 31, 2021, decreased by RUB 732 million, or 1.74%, to RUB 41,352 million from RUB 42,084 million for the year ended December 31, 2020. The decrease was primarily attributable to the effect of the derecognition and modification of debt agreements (RUB 1,151 million), the decrease in interests on lease obligations (RUB 457 million) and the effect of our operations with derivatives. The decrease was partly compensated by an increase in total debt and an increase in interest rates due to the growth of Central Bank of Russia key rate (RUB 1,258 million).
Non-operating share of the profit of associates and joint ventures
Non-operating share of the profit or loss of associates and joint ventures for the year ended December 31, 2021 decreased slightly by RUB 91 million to an income of RUB 181 million compared to an income of RUB 273 million for the year ended December 31, 2020. The decrease is primarily attributable to the decrease in profit of other individually insignificant associates in the year ended December 31, 2021.
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Other non-operating expenses/(income), net
Consolidated other non-operating expenses for the year ended December 31, 2021, was RUB 424 million, compared to an income of 3,064 million for the year ended December 31, 2020. The income from our operations with derivatives decreased by RUB 15,595 million, a loss of RUB 206 million compared to the income of RUB 15,389 for the year ended December 31, 2020. The decrease in a net forex exchange loss by RUB 9,820 million to a loss of RUB 560 million compared to the loss of RUB 10,380 million for the year ended December 31, 2020 was mainly attributable to the strengthening of the Russian ruble against the U.S. dollar and the euro during the year ended December 31, 2021.
Provision for income taxes
Consolidated provision for income taxes for the year ended December 31, 2021 decreased by 4.5% to RUB 15,403 million from RUB 16,126 million for the year ended December 31, 2020 mainly due to the decrease in the effective tax rate, partly offset by the increase in income before provision for income taxes. The effective tax rate decreased to 19.4% in the year ended December 31, 2021, from 20.8% in the year ended December 31, 2020 mainly as a result of a change in the recognition of deferred tax assets, prior period tax effects, and a decrease in expenses not deductible for tax purposes.
Profit attributable to the non-controlling interest
Profit attributable to the non controlling interest for the year ended December 31, 2021 increased by RUB 135 million, or 20.4%, and amounted to RUB 796 million compared to profit attributable to the non-controlling interest of RUB 661 million for the year ended December 31, 2020. The increase was attributable to the overall increase in MGTS profit for the year.
Profit attributable to the Owners of the Company
Profit attributable to the Owners of the Company for the year ended December 31, 2021, increased by RUB 2,061 million, or 3.3%, to RUB 63,473 million, compared to RUB 61,412 million for the year ended December 31, 2020. Profit as a percentage of revenues was 11.9% in the year ended December 31, 2021 and 12.4% in the year ended December 31, 2020.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues and cost of services and cost of goods
Consolidated revenues for the year ended December 31, 2020, increased by RUB 24,321 million, or 5.2%, to RUB 494,926 million from RUB 470,605 million for the year ended December 31, 2019. The principal reason for the growth was the large increase in revenue from telecommunication services (by RUB 14,985 million) attributable to the usage of voice and data tariffs by our subscribers. This was mainly attributable to the 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 value-added services. The growth was also attributable to an increase in in the volume of interconnect traffic consumed by the operators and growth in sales of handsets, accessories and software products by RUB 5,351 million, or 8,3%. Revenue from financial services added to the overall increase of consolidated revenue as it grew by RUB 3,985 million to RUB 33,297 million in 2020 from 29,312 in 2019. The increase of revenues for the year ended December 31, 2020 was partly offset by a decrease in revenue from roaming services by RUB 7,418 million which was attributable to the COVID-19 pandemic.
Consolidated cost of services and cost of goods for the year ended December 31, 2020 increased by RUB 12,496 million and amounted to RUB 185,425 million as compared to RUB 172,929 million for the year ended December 31, 2020 and comprised 37.5% and 36.7% as a percentage of consolidated revenues for the year ended December 31, 2020 and 2019, respectively. The increase in the consolidated cost of services and cost of goods for the year ended December 31, 2020 was supported by the growth in interconnect and line rental expenses by RUB 6,184 million due to an increase in the volume of traffic. Tremendous increase in device market led to the growth of handsets sales and the consequent increase in cost of handsets, accessories and software products by RUB 4,610 million.
Telecom revenues for the year ended December 31, 2020, increased by 9.8% to RUB 429,319 million from RUB 391,104 million for the year ended December 31, 2019. The increase in Telecom revenues in the year ended December 31, 2020, was primarily due to the growth in revenue from telecommunication services (RUB 16,039 million) which increased due to active promotion of
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mobile only and convergent tariff plans, significant volume of Internet traffic included and the constant quality improvement of services provided. Interconnect revenue increased by RUB 5,017 million, and it was driven by the growth in volume of incoming traffic. Telecom revenues were also impacted by reallocation of subscribers to “MGTS Commercial” segment, comprising part of Telecom operations.
The decrease of our revenues from roaming fees of own subscribers by RUB 7,462 million in the year ended December 31, 2020 was due to the COVID-19 pandemic.
The increase in device market led to the growth of handsets, accessories and software sales of Telecom by RUB 3,825 million.
Telecom cost of services and cost of goods for the year ended December 31, 2020, increased by 7.8% to RUB 157,012 million from RUB 145,601 million for the year ended December 31, 2019. The increase in Telecom cost of services and cost of goods is attributable to the growth in interconnect and line rental expenses by RUB 5,404 million due to an increase in the volume of traffic and an increase in network maintenance expenses by RUB 1,067 million.
The overall increase in Telecom cost of services and cost of goods was partly offset by a decrease in roaming expenses by RUB 1,979 million which was caused by the COVID-19 pandemic.
The increase in device market led to the growth of handsets, accessories and software sales of Telecom and consequent increase of cost of sales by RUB 3,908 million.
Fintech revenues increased by RUB 5,037 million and amounted to RUB 36,222 million for the year ended December 31, 2020 and RUB 31,185 million for the year ended December 31, 2019. Fintech revenues as a percentage of our total revenues represented 7.3% in 2020 and 6.6% in 2019. The growth of Fintech revenue is mainly attributable to the increase in the amount of users and expansion of MTS Bank clients portfolio.
Fintech cost of services increased by RUB 96 million and amounted to RUB 13,842 million for the year ended December 31, 2020 and RUB 13,746 million for the year ended December 31, 2019. Cost of Fintech services as a percentage of our total revenues represented 2.8% in 2020 and 2.9% in 2019.
Other countries and business activities revenues for the year ended December 31, 2020 as compared to the year ended December 31, 2019 decreased by RUB 22,441 million and amounted to RUB 49,132 million and RUB 71,573 million, respectively, mainly also impacted by reallocation of subscribers to “MGTS Commercial” segment, comprising part of Telecom operations.
Other countries and business activities cost of goods for the year ended December 31, 2020 as compared to the year ended December 31, 2019 remained relatively stable and amounted to RUB 26,226 million and RUB 29,776 million, respectively.
Sundry operating expenses/(income)
Consolidated sundry operating expenses for the year ended December 31, 2020, increased by RUB 10,395 million in comparison with the previous year. We generated RUB 6,368 million expenses and RUB 4,027 million income for the year ended December 31, 2020 and 2019, respectively. These amounts comprised (1.3)% and 0.9% as a percentage of consolidated revenue for the year ended December 31, 2020 and 2019, respectively. The increase of consolidated sundry operating expenses in 2020 compared to 2019 was attributed to a number of reasons presented below, the main of which was the increase in MTS Bank allowance of expected credit losses (ECL) due to the COVID-19 pandemic.
Telecom sundry operating expenses for the year ended December 31, 2020, decreased slightly by 1.7% or RUB 55 million compared to the year ended December 31, 2019. We generated RUB 3,128 million and RUB 3,183 million expenses for the year ended December 31, 2020 and 2019, respectively. These expenses comprised 0.7% and 0,8% of Telecom revenues for the year ended December 31, 2020 and 2019, respectively.
Fintech sundry operating expenses for the year ended December 31, 2020, increased by RUB 5,999 million to RUB 10,001 million from RUB 4,002 million for the year ended December 31, 2019. Sundry operating expenses as a percentage of fintech revenues increased to 27.6% for the year ended December 31, 2020, from 12.8% for the year ended December 31, 2019. Such a
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significant increase in Fintech sundry operating expenses was caused by the increase in impairment loss of financial assets (bank deposits and loans to customers) related to the COVID-19 pandemic.
Other countries and business activities sundry operating income for the year ended December 31, 2020, decreased by RUB 6,246 million compared to the year ended December 31, 2019. We recognized income of RUB 5,014 million for the year ended December 31, 2020 and RUB 11,260 million for the year ended December 31, 2019. The decrease was mainly due to growth of expenses due to the expansion of our business and the gain recognized as a result of the sale of fixed assets and leaseback in 2019.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses for the year ended December 31, 2020, decreased by RUB 1,950 million and amounted to RUB 87,893 million as compared to RUB 89,933 million for the year ended December 31, 2019 and comprised 17.8% and 19.1% as a percentage of consolidated revenues for the year ended December 31, 2020 and 2019, respectively.
Telecom selling, general and administrative expenses for the year ended December 31, 2020 decreased slightly by RUB 42 million to RUB 68,267 million, or 15.9% of Telecom revenue, from RUB 68,309 million, or 17.5% of Telecom revenue, for the year ended December 31, 2019 mainly due to savings related to retail operations during the COVID-19 pandemic.
Fintech selling, general and administrative expenses for the year ended December 31, 2020, decreased slightly by RUB 133 million, to RUB 8,731 million, or 24.1% of Fintech revenue, from RUB 8,864 million, or 28.4% of Fintech revenue for the year ended December 31, 2019.
Other countries and business activities selling, general and administrative expenses for the year ended December 31, 2020, decreased by RUB 1,989 million or 13.8% to RUB 11,865 million from RUB 13,763 million for the year ended December 31, 2019.
Depreciation and amortization expenses
Consolidated depreciation and amortization of property, network equipment, customer base, license costs, right-of-use assets, and other intangible assets for the year ended December 31, 2020, increased by 4.2% to RUB 100,234 million from RUB 96,195 million for the year ended December 31, 2019.
Telecom depreciation and amortization for the year ended December 31, 2020, increased by 6.5% to RUB 90,871 million from RUB 85,332 million for the year ended December 31, 2019 mainly due to additions of new assets.
Fintech depreciation and amortization for the year ended December 31, 2020, amounted to RUB 1,248 million showing an increase of 15.4% as compared to RUB 1,082 for the year ended December 31, 2019.
Other countries and business activities depreciation and amortization for the year ended December 31, 2020, decreased slightly by 2.7% to RUB 12,836 million from RUB 13,192 million for the year ended December 31, 2019.
Operating profit
Consolidated operating profit decreased by RUB 2,684 million, or 2.3%, to RUB 112,893 million in the year December 31, 2020 from RUB 115,577 million in the year ended December 31, 2019. The decrease was mainly attributable to lower income from Russia convergent, Moscow fixed line and MTS Bank as well as a decrease of other countries and business activities operating loss.
Telecom operating profit for the year ended December 31, 2020 increased by RUB 21,361 million, or 24.1%, and totaled to RUB 110,040 million against RUB 88,678 million for the year ended 2019. Telecom operating profit grew as a percentage of Telecom revenues to 25.6% for the year ended December 31, 2020, from 22.7% for the year ended December 31, 2019. The increase was mainly attributable to the growth in revenue from telecommunication services which increased due to active promotion of mobile only and convergent tariff plans, significant volume of Internet traffic included and the constant quality improvement of services provided, also impacted by reallocation of subscribers to “MGTS Commercial” segment, comprising part of Telecom operations.
Fintech operating profit for the year ended December 31, 2020 decreased by RUB 879 million, or 25.2%, and totaled to RUB 2,614 million against RUB 3,492 million for the year ended 2019. Fintech operating profit decreased as a percentage of Fintech
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revenue to 7.2% for the year ended December 31, 2020 from 11.2% for the the year ended December 31, 2019. The decrease was caused by the increase in impairment loss of financial assets (bank deposits and loans to customers) related to the COVID-19 pandemic.
Other countries and business activities operating loss for the year ended December 31, 2020, decreased by RUB 23,029 million, or 87.9%, and totaled to RUB 3,170 million from RUB 26,199 million for the year ended December 31, 2019. The decrease was partly attributable to the gain recognized in the previous year ended December 31, 2019 as a result of the sale of fixed assets and leaseback and several cost optimization initiatives. The decrease was also attributable to the reallocation of subscribers to “MGTS Commercial” segment, comprising part of Telecom operations.
Currency exchange and transaction gains/losses
Consolidated currency exchange and transaction loss for the year ended December 31, 2020, was RUB 10,380 million, compared to a gain of 5,266 million for the year ended December 31, 2019. The loss recognized in the year ended December, 31 2020 was mainly attributable to the appreciation of the Russian ruble against U.S. dollar and euro during the year ended December 31, 2020.
Finance costs
Consolidated finance costs for the year ended December 31, 2020, decreased by RUB 5,282 million, or 11.2%, to RUB 42,084 million from RUB 47,366 million for the year ended December 31, 2019. The decrease was primarily attributable to effect arisen on the derecognition of debt agreements (RUB 2,220 million), improved loan terms and decreased Central Bank of Russia key rate (RUB 1,930 million).
Non-operating share of the profit of associates and joint ventures
Non-operating share of the profit or loss of associates and joint ventures for the year ended December 31, 2020 decreased by RUB 3,223 million to an income of RUB 273 million compared to an income of RUB 3,496 million for the year ended December 31, 2019. The decrease is primarily attributable to the gain on sale of equity investment in OZON of RUB 3,837 million recognized in 2019 and the increase in profit of other individually insignificant associates in the year ended December 31, 2020.
Other expenses (income), net
Consolidated other expenses for the year ended December 31, 2020 decreased to RUB 553 million, as compared to the expense of RUB 2,449 million for the year ended December 31, 2019 due to a decrease of the realized exchange differences of MTS Bank in the year ended December, 31, 2020.
Provision for income taxes
Consolidated provision for income taxes for the year ended December 31, 2020 increased by 2.9% to RUB 16,126 million from RUB 15,667 million for the year ended December 31, 2019 mainly due to an increase in income before provision for income taxes, partly offset by a decrease in the effective tax rate. The effective tax rate decreased to 20.8% in the year ended December 31, 2020, from 23.0% in the year ended December 31, 2019 mainly as a result of a change in income tax rates of subsidiaries (decrease of income tax rate to 18% from 20% in Armenia), prior period tax effects, a decrease in withholding tax on distributed profits from subsidiaries (decrease of tax rate on dividends to 0% in Armenia) and a decrease in expenses not deductible for tax purposes.
Profit attributable to the non-controlling interest
Profit attributable to the non controlling interest for the year ended December 31, 2020 decreased by RUB 197 million, or 23.0%, and amounted to RUB 661 million compared to profit attributable to the non-controlling interest of RUB 858 million for the year ended December 31, 2019. The decrease was caused by the overall decrease of MGTS net income.
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Profit attributable to the Owners of the Company
Profit attributable to the Owners of the Company for the year ended December 31, 2020, increased by RUB 7,171 million, or 13.2%, to RUB 61,412 million, compared to RUB 54,241 million for the year ended December 31, 2019. Profit as a percentage of revenues was 12.4% in the year ended December 31, 2020, and 11.4% in the year ended December 31, 2019. The increase was mainly caused by the other non-operating income arising on derivatives in the amount of RUB 21,740 million, partly offset by the foreign exchange loss in the amount of RUB 15,646 million.
B. | Liquidity and Capital Resources |
Our borrowings consist of notes and bank loans. Our bank loans consist of ruble-denominated borrowings totaling approximately RUB 270.1 billion as of December 31, 2021. We repaid approximately RUB 36.4 billion of indebtedness in 2021. As of December 31, 2021, the total amount available to us under our credit facilities amounted to RUB 207.3 billion. We had total indebtedness of approximately RUB 616.6 billion as of December 31, 2021, including lease obligations, compared to approximately RUB 580.1 billion as of December 31, 2020. Our total finance costs for the years ended December 31, 2021, 2020 and 2019, were RUB 41,352 million, RUB 42,084 million and RUB 47,366 million, net of amounts of interest capitalized, respectively. See Note 9 to our audited consolidated financial statements for a description of our finance costs.
Capital Requirements
We need capital to finance the following:
● | capital expenditures, consisting of purchases of property, plant and equipment and intangible assets; |
● | acquisitions; |
● | repayment of debt and related interest payments; |
● | changes in working capital; and |
● | general corporate activities, including dividends. |
We anticipate that capital expenditures, acquisitions, repayment of long-term debt and dividends will represent the most significant uses of funds for several years to come.
Our cash outlays for capital expenditures for the years ended December 31, 2021, 2020 and 2019 were RUB 111,683 million, RUB 97,838 million and RUB 91,736 million, respectively. We plan to finance our capital expenditures primarily through operating cash flows, and to the extent necessary, through additional external financing. Historically, a significant portion of our capital expenditures has been related to the installation and build out of our network and expansion into new license areas. In 2022 we plan on spending for further network expansion, special projects relating to the development of big data, media, artificial intelligence and ecosystem products, fixed network modernization, further construction of radio subsystem and additional storage, processing and indexing centers to comply with requirements of “Yarovaya Ozerov bundle of laws,” maintenance capital expenditures, construction of new sites and purchase of software for network managing in Armenia and other initiatives. As the business scale grew, we increased investment until 2021 and plan to stabilize our capital expenditures and change investments structure starting from 2022 by focusing on building the ecosystem and digital products. The actual amount of our capital expenditures for 2022 may vary depending on subscriber growth, demand and network development, as well as currency volatility, vendor terms and the availability of external financing. Additionally, the recent geopolitical events and any future developments thereto may adversely impact our actual capital expenditures for 2022 as a significant portion of such expenditures are denominated in or linked to foreign currencies. Please see also “Item 3. Key Information—D. Risk Factors— “Ruble volatility 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” and “Item 3. Key Information—D. Risk Factors— “Futher deterioration in relations between Russia and states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”.
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In February 2019, we increased our ownership in MTS Bank to 94.97% and later in December 2019 we acquired an additional 4.46% stake for RUB 1.4 billion. As a result of these transactions, MTS’ effective share in MTS Bank increased to 99.9% (including a 0.2% share in the bank held by our subsidiary PJSC MGTS and MTS Bank’s ownership of its own treasury shares).
In June 2019, the Group acquired a 97.4% ownership interest in JSC RIKT (“RIKT”), a fixed-line operator in the Kemerovo region, for cash consideration of RUB 360 million. This acquisition allowed the Group to increase its market share in the Kemerovo region. In September 2019, the Group finalized the mandatory share repurchase from minority shareholders of RIKT and increased its share in RIKT to 100%. In April 2019, the Group acquired JSC Objedinennye Russkie Kinostudii (“Kinopolis”) from Business-Nedvizhimost, a subsidiary of Sistema, for total consideration of RUB 2,042 million. Kinopolis owns fully equipped movie complex in Saint Petersburg. Acquisition of Kinopolis enabled the Group to develop its own entertainment content.
In August 2019, the Group acquired Narodnoje property complex from Sistema for total consideration of RUB 329 million. The property complex comprised office facilities leased by the Group and hostel premises leased by a third party and operated under a management agreement with Business-Nedvizhimost, a subsidiary of Sistema. The acquisition enabled the Group to optimize its rental expenses and enhance its investment property portfolio. In November 2019, we acquired a 7.5% stake in JUST AI Limited, an IT-company specialized in artificial intelligence technologies, machine learning and natural language processing. In December 2019, we acquired a 15.01% stake in SWIPGLOBAL Ltd, an IT-company specialized in face recognition payment without using a smartphone or QR code. Both acquisitions are part of our CLV 2.0 strategy.
In February 2020, we purchased 51% stake in each of Achemar Holdings Limited and Clarkia Holdings Limited, the owners of the operational companies of “Zelenaya Tochka” Group, a fixed-line operator in multiple regions of Russia for RUB 1,370 million. The purchase of this stake was accounted as investment in joint venture, with a call and put option arrangement existing over another 49% of shares.
In June 2020, the Group acquired a 100% ownership interest in LLC “Stopol Auto” and LLC “Koagent Rus” (jointly referred as “Stopol”), wholesalers of auto parts and multimedia devices. The purchase price constituted a cash payment of RUB 312 million paid in July 2020 and contingent consideration. This acquisition allowed the Group to enter into the market of the smart multimedia systems for cars.
In April 2021, the Group increased its stake in Achemar Holdings Limited, owner of the operational companies of “Zelenaya Tochka” Group, to 100% and obtained control over the entity to expand its regional footprint. The “Zelenaya Tochka” Group includes fixed-line operators in Stavropol and Tambov regions. The purchase price constituted a cash payment of RUB 1,512 million paid in April 2021 and deferred payment of RUB 7 million.
In April 2021, the Group acquired a 100% ownership interest in LLC “Credit Consulting”, a credit broker. The purchase price comprised a cash payment of RUB 10 thousand paid in May 2021 and contingent consideration at fair value of RUB 60 million, payable in 5-year period based on operating performance targets.
In June 2021, the Group acquired a 100% ownership interest in OJSC “Multiregional TransitTelecom” (“MTT”), a provider of intelligent connectivity solutions for businesses, to expand its connectivity services portfolio The purchase price included a cash payment of RUB 3,680 million paid in June 2021, transfer of receivables from former owners offset against the purchase price for RUB 1,958 million and deferred payment of RUB 160 million.
In June 2021, the Group acquired a 100% ownership interest in LLC “GDTs Energy Group” (“GreenBush”), the operator of the GreenBush data center in Tehnopolis special economic area, to use the facility’s additional capacity to offer colocation and cloud solutions to customers as well as to facilitate the Group’s own compute and storage needs. The purchase price comprised a cash payment of RUB 5,200 million paid in July 2021.
In September 2021, in addition to the previously held 30% stake, the Group acquired a 70% stake in the investment services company Sistema Capital from subsidiaries of Sistema, for total consideration of RUB 3,500 million. The acquisition of Sistema Capital enabled the Group to enhance its retail financial services portfolio, adding a comprehensive set of investment services.
We have 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
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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. For scheduled maturities of debt principal outstanding as of December 31, 2021 see Note 24 of our audited consolidated financial statements. We generally use the proceeds from our financing activities for our corporate purposes and refinancing existing indebtedness.
On March 21, 2019, our Board of Directors approved a new dividend policy which sets a minimum payout of RUB 28.0 per ordinary MTS share (RUB 56.0 per ADS) per calendar year. In determining actual dividends payout, we will consider a number of factors, including cash flow from operations, capital expenditures and debt position. The policy covered 2019 - 2021. Payments will continue to be made on a semi-annual basis. The Group may take decisions on the 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. A new dividend policy has not been adopted yet.
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, expenses, and applicable tax withholding. 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. Please see also “Item 3. Key Information—D. Risk Factors—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the risks related to the value and recoverability of dividends by holders of ADSs.
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.
As of December 31, 2021, 2020 and 2019 dividends payable were RUB 68 million, RUB 108 million and RUB 23.1 million, respectively, and were included in trade and other payables within the consolidated 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 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, 2021, our outstanding indebtedness consisted of the following notes and bank loans:
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Notes
As of December 31, 2021, our outstanding notes consisted of the following:
| | | | | | |
| | | | Interest rate (actual | | |
| | | | at December 31, | | |
|
| Currency |
| 2021) |
| December 31, 2021 |
MTS International Notes due 2023 | | USD | | 5.00 | % | 33,291 |
MTS PJSC Notes due 2022 | | RUB | | 7.70 | % | 14,991 |
MTS PJSC Notes due 2025 | | RUB | | 8.00 | % | 14,990 |
MTS PJSC Notes due 2023 |
| RUB |
| 6.85 | % | 14,982 |
MTS PJSC Notes due 2027 |
| RUB |
| 6.60 | % | 14,975 |
MTS PJSC Notes due 2022 |
| RUB |
| 9.00 | % | 10,000 |
MTS PJSC Notes due 2026 |
| RUB |
| 7.90 | % | 9,999 |
MTS PJSC Notes due 2022 |
| RUB |
| 5.50 | % | 9,995 |
MTS PJSC Notes due 2022 |
| RUB |
| 6.45 | % | 9,994 |
MTS PJSC Notes due 2025 |
| RUB |
| 7.25 | % | 9,993 |
MTS PJSC Notes due 2024 |
| RUB |
| 8.70 | % | 9,991 |
MTS PJSC Notes due 2023 |
| RUB |
| 6.50 | % | 9,923 |
MTS PJSC Notes due 2024 | | RUB | | 8.60 | % | 7,491 |
MTS PJSC Notes due 2027 |
| RUB |
| 6.60 | % | 6,983 |
MTS PJSC Notes due 2022 |
| RUB |
| 8.40 | % | 4,997 |
MTS PJSC Notes due 2026 |
| RUB |
| 6.60 | % | 4,992 |
MTS PJSC Notes due 2024 |
| RUB |
| 6.50 | % | 4,319 |
MTS PJSC Notes due 2031 |
| RUB |
| 7.50 | % | 78 |
MTS PJSC Notes due 2021 |
| RUB |
| 8.85 | % | — |
MTS PJSC Notes due 2021 |
| RUB |
| 7.10 | % | — |
Other |
| |
| |
| 12 |
Total notes |
| |
|
|
| 191,996 |
Less: current portion |
| |
|
|
| (49,923) |
Total notes, non-current |
| |
|
|
| 142,073 |
We have an unconditional obligation to repurchase certain MTS Notes at par value if claimed by the noteholders subsequent to the announcement of the sequential coupon. The date of the announcement for the particular note issue is as follows:
| |||
MTS PJSC Notes due 2031 |
| February 2026 | |
Notes of the Group are subject to certain covenants limiting the Group’s ability to create liens on properties, dispose assets, including cellular licenses in core Russian regions, issue guarantees and grant loans to the third parties, delay payments for the borrowings, merge or consolidate MTS PJSC with a third party or be a subject to unsatisfied judgments (excluding the total penalty under the agreements with the DOJ). 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 our covenants as of December 31, 2021.
153
Bank loans
As of December 31, 2021, our outstanding loans from banks and other financial institutions consisted of the following:
| | | | | | |
| | | | Interest rate (actual at | | December 31, |
|
| Maturity |
| December 31, 2021) | | 2021 |
RUB‑denominated: | |
| |
| |
|
Sberbank |
| 2022-2024 |
| 5.99%-CBR key rate + 1.19% | | 135,000 |
VTB | | 2024-2026 | | CBR key rate + 0.50% - CBR key rate + 1.25% | | 129,307 |
Related party loans |
| 2022-2024 |
| 8.70% - CBR key rate | | 1,968 |
Subsidized loans |
| 2025 |
| 0,1 CBR key rate + 2.42% | | 1,769 |
| | | | | | |
Other |
| |
| | | 2,099 |
Total bank and other loans |
| |
|
| | 270,143 |
Less: current portion |
| |
|
| | (61,916) |
Total bank and other loans, non-current |
| |
|
| | 208,227 |
See also Note 24 to our audited consolidated financial statements.
Bank loans and notes of the Group are subject to certain covenants limiting the Group’s ability to create liens on properties, dispose assets, including cellular licenses in core Russian regions, issue guarantees and grant loans to the third parties, delay payments for the borrowings, merge or consolidate MTS PJSC with a third party or be a subject to unsatisfied judgments (excluding the total penalty under the agreements with the DOJ). The Group is required to comply with certain financial ratios.We were in compliance with our loan covenants as of December 31, 2021.
The following table presents the aggregate scheduled maturities of debt principal outstanding as of December 31, 2021:
| | | | |
| | December 31, 2021 | ||
| | | | Bank |
| | | | loans and |
|
| Notes |
| other debt |
Payments due in the year ending December 31, | |
| | |
2022 | | 62,772 | | 83,862 |
2023 |
| 66,809 |
| 58,523 |
2024 |
| 27,346 |
| 72,799 |
2025 |
| 28,529 |
| 93,385 |
2026 |
| 17,448 |
| 15,136 |
Thereafter |
| 22,477 |
| — |
Contractual undiscounted cash flows |
| 225,381 |
| 323,705 |
Less: unamortized debt issuance costs |
| (184) |
| — |
Less: interest |
| (33,201) |
| (52,628) |
Less: debt modification |
| — |
| (693) |
Less: subsidized interest rate effect |
| — |
| (241) |
Total debt |
| 191,996 |
| 270,143 |
In addition, we had lease obligations in the amount of RUB 154,509 million and RUB 150,814 million as of December 31, 2021 and 2020, respectively. The terms of our material lease obligations are described in Note 25 to our audited consolidated financial statements.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to our Financial Condition—Indentures relating to some of our notes contain, and some of our loan agreements contain, restrictive covenants, which limit our ability to incur debt and to engage in various activities.”
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Consolidated Cash Flow Summary
A summary of our cash flows and cash outlays for the years ended December 31, 2021, 2020 and 2019 is as follows:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
| | (amounts in million RUB) | ||||
Cash flows from: |
|
|
|
|
|
|
Net cash provided by operating activities |
| 142,846 |
| 155,507 |
| 106,652 |
Net cash used in investing activities |
| (116,432) |
| (81,133) |
| (29,554) |
Net cash used in financing activities |
| (71,214) |
| (27,360) |
| (120,448) |
Effect of exchange rate changes on cash and cash equivalents |
| (79) |
| 385 |
| (2,655) |
Net increase/(decrease) in cash and cash equivalents |
| (44,879) |
| 47,399 |
| (46,005) |
Cash outlays for: |
| |
| |
| |
Capital expenditures(1) |
| (111,683) |
| (97,838) |
| (91,736) |
Acquisition of subsidiaries, net of cash acquired |
| (10,186) |
| (262) |
| (2,052) |
Disposal of subsidiaries, net of cash disposed |
| 3,891 |
| 3,461 |
| 37,386 |
Cash payments for the acquisition of subsidiaries under common control and non‑controlling interests |
| (3,474) |
| — |
| (15,312) |
Cash inflow from sale and liquidation of associates |
| 3,014 |
| 2,450 |
| 3,067 |
(1) | Includes acquisitions of property, plant and equipment and intangible assets |
For the year ended December 31, 2021, net cash provided by operating activities was RUB 142,846 million, a decrease of 8.1% compared to the year ended December 31, 2020. The decrease in amount of RUB 26,000 million or 16.7% related to MTS Bank activities reflecting ongoing rapid growth in consumer banking and lending, was partially offset by a stronger telecom business performance.
Net cash used in investing activities for the year ended December 31, 2021 was RUB 116,432 million, an increase of 43.5% compared to the year ended December 31, 2020 reflecting our deliberate steps to allocate additional capital in 2021 to network development, new growth segments, as well as strategic acquisitions.
Net cash used in financing activities for the year ended December 31, 2021 increased by RUB 43,854 million or 160.3% compared to the year ended December 31, 2020, and totaled to RUB 71,214 million. The increase was mainly driven by cash flows related to our debt.We repaid RUB 126,299 million less of our indebtness than in 2020. At the same time proceeds from loans and issuance of notes decreased by RUB 172,741 million compared to the year ended December 31, 2020.
For the year ended December 31, 2020 net cash provided by operating activities amounted to 155,507 million, a decrease of RUB 6,752 million or 6.3% year-over-year when excluding the one-time payment of RUB 55,607 million made in 2019 under the resolution with the U.S. DOJ and settlement with the SEC. The decrease was mainly driven by the disposal of our Ukraine operations, which contributed RUB 17,156 million of operating cash inflow for the year ended December 31, 2019. The negative impact of the disposal was partially offset by relatively lower tax payments and financing costs.
For the year ended December 31, 2020, the cash outflows generated by the Group investing activities increased by RUB 51,579 million or 174.5% compared to the year ended December 31, 2019 and totaled to RUB 81,133 million. The increase was mainly attributable to cash receipts from the sale of our Ukraine operations and lower net inflows from investing in deposits, traded debt securities and assets in trust management of Sistema-Capital, which declined by RUB 34,388 million and RUB 18,468 million year-over-year, respectively. Our capital expenditures in the financial year 2020 increased by RUB 6,102 million due to increased USD/EUR exchange rates, and were partially offset by inflows from our FX related swap contracts.
For the year ended December 31, 2020, the cash outflows generated by the Group financing activities decreased by RUB 93,088 million or 77.3% from RUB 120,448 million in the year ended December 31, 2019 to RUB 27,360 million mainly due to an increase in borrowed funds. In 2020, net inflows relating to our borrowing activities grew by RUB 100,537 million in the year ended December 31, 2019. Further positive effect resulted from the reduction of cash outflows related to acquisition of subsidiaries under common control by RUB 15,312 million in the year ended December 31, 2019. The dividends paid in the year ended December 31, 2020 increased by RUB 22,418 million due to special dividends distributed following the sale of our Ukraine operations.
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Liquidity
As of December 31, 2021, we had total cash and cash equivalents of RUB 40,590 million (RUB 34,504 million in rubles, RUB 2,899 million in euros, RUB 1,766 million in U.S. dollars, RUB 367 million in Turkmenistan manat, RUB 139 million in Ukrainian hryvnias and RUB 1,839 million in other currencies). In addition, as of December 31, 2021, we had short-term investments of RUB 28,972 million, mostly in form of investments in mutual funds and debt securities as well as deposits. We also had RUB 207,323 million available under existing credit facilities as of December 31, 2021. For a description of our outstanding external financing, see Note 24 to our audited consolidated financial statements.
As of December 31, 2021, we had a working capital deficit of RUB 210,120 million compared to a deficit of RUB 66,260 million as of December 31, 2020. The increase primarily related to an increase in the current portion of our debt by RUB 77,714 million as well as an increase in trade and other payables by RUB 16,061 million. At the same time our cash and cash equivalents deacreased by RUB 44,879 million compared to December 31, 2020. We believe that our operating cash flows, 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 profit for the year under Russian accounting standards for the years ended December 31, 2021 and 2020 that was distributable under Russian legislation amounted to RUB 84,573 million and RUB 61,622 million respectively.
As a result of an escalation in the conflict between Russia and Ukraine, the EU, US, UK and certain other countries have imposed significant sanctions and export controls on Russian and Belarusian persons and entities, which could have a material adverse effect on our liquidity (for more details please refer to“Item 3. Key Information—D. Risk Factors—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the risks related to the value and recoverability of dividends by holders of ADSs”. We remain focused on ensuring operational continuity and providing uninterrupted connectivity and other services for our customers as well as servicing our obligations.
Credit Rating Discussion
Our credit ratings impact our ability to obtain short- and long-term financing and the cost of such financing. In determining our credit ratings, the rating agencies consider a number of factors, including our operating cash flows, total debt outstanding, commitments, interest requirements, liquidity needs and availability of liquidity. Other factors considered may include our business strategy, the condition of our industry and our position within the industry 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. However due to the current geopolitical situation we have no ability to obtain financing from international sources. In March 2022, our international credit ratings were downgraded and further withdrawn following the sovereign ratings of Russia. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We have a significant shareholder, which may limit your ability to influence corporate matters and may give rise to conflicts of interest”.
Accounting Policies
Please refer to the Notes to our audited consolidated financial statements included elsewhere in this document.
Recent Accounting Pronouncements
Please refer to Note 2 to our audited consolidated financial statements included elsewhere in this document.
C. | Research and Development, Patents and Licenses, etc. |
Not applicable.
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D. | Trend Information |
Sales
Our mobile subscriber base in Russia and Armenia increased to 82.7 million subscribers as of December 31, 2021 from 80.6 million subscribers as of December 31, 2020. We expect our consolidated subscriber base to remain stable in 2022 as a result of continued marketing and advertising activity. We expect growth in the long term due to increased use of IoT (M2M) devices. We anticipate our consolidated revenues will remain stable in 2022 mainly based on growth in development of our broadband business and convergent services.
Average monthly minutes per subscriber in Russia decreased and amounted to 375 minutes in 2021 as compared to 397 minutes in 2020 as a result of the spread of the use of instant messaging and voice communication services over IP for everyday communication. We expect an increase in megabytes per subscriber due to our efforts aimed to stimulate data usage, such as increasing the volume of traffic included in the tariff without increasing the cost, facilitating access to social networks, and preferential access to public services.
Our subscriber base in Armenia slightly increased and amounted to 2.23 million subscribers in 2021 as compared to 2.15 million subscribers in 2020. We expect that the growth of competition in these markets may, in turn, lead to decreasing tariffs, the addition of lower-value mass market subscribers and macroeconomic trends calling for “save mode.”
Russia is the largest market for us, both in terms of subscribers and revenue. In 2021, the underlying developments within this market remained positive and included high mobile penetration, strong demand for mobile services and increased consumption of data services, especially remote or online services. We focused our efforts to develop new competencies in the digital economy amid the global pandemic of COVID-19. We expect growth of business activity in Russia to continue throughout 2022.
We expect a challenging operating environment in 2022 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,” and “Item 3. Key Information—D. Risk Factors—Risks Relating to our Financial Condition—Inflation could increase our costs and adversely affect our results of operations.” For information on the risks ensuing from international sanctions against Russia, see “Item 3. Key Information—D. Risk Factors—Risks Relating to our Financial Condition,” and “Item 3. Key Information—D. Risk Factors—Political and Social Risks.”
However, considering current macroeconomic conditions, our management believes that we will experience medium-and long-term growth. Due to the fact that the Russian market is highly penetrated, we believe the next wave of revenue growth for the overall market is likely to come from customers’ increasing use of data and convergent services.
Moscow Fixed Line Operations
In 2021, the total revenue of MGTS decreased by 0.09% compared to 2020. In 2021, MGTS revenue from broadband access services decreased by 7.6% compared to 2020. Revenue from digital television services decreased by 5.5% in 2021 compared to 2020. In 2022, we expect a further decline in revenue from broadband Internet access and digital television services due to the transfer of the subscriber base to MTS and the reorientation of sales to the red brand.
In 2021, revenue from MGTS fixed-line services decreased by 10.3% compared to 2020. In 2021, the subscriber base of the B2C and B2B segments decreased by 7.4% and 8.3%, respectively. Due to the reduction of the subscriber base in 2021, we expect a further decrease in MGTS revenue from fixed-line services.
In 2021, MGTS revenue from data transmission services in the B2G segment increased by 24.5% compared to 2020 due to the increase of services to government customers.
157
Churn
We define churn as the total number of subscribers who cease to be a subscriber during the reference 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 remained relatively stable at around 34% for the year ended December 31, 2021. We continued to offer our popular tariff plans “SMART” (integrated voice and data bundles): “My Smart”, “Tarifische” and “NETARIF”. We expect that the possibility of choosing traffic bundles, connecting of converged services and other our activities will increase customer loyalty and allow us to keep churn rate under control in 2022.
Moscow Fixed Line Operations Churn
The outflow rate in the services provided varies. The main services of MGTS are fixed-line communication services. The level of outflow of fixed-line services in 2021 increased by 1.8% to 7.6% compared to 5.8% in 2020.
In 2021, the percentage of outflow of broadband Internet access services decreased to 13.68% compared to 14.95% in 2020. The percentage of outflow of MGTS digital television services decreased to 14.1% in 2021 compared to 14.4% in 2020.
E. | Critical Accounting Estimates |
Please see Note 4 to our consolidated financial statements.
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 have entered into several cross currency interest rate swap agreements. These contracts are mainly 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 denominated amounts at a specified exchange rate. The rate was determined by the market spot rate upon issuance. Cross-currency interest rate swap contracts mature in 2023 - 2024.
158
Tabular Disclosure of Contractual Obligations
We have various contractual obligations and commercial commitments to make future payments, including debt agreements, 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, 2021:
| | | | | | | | | | |
| | Payments due by period | ||||||||
| | Less than | | | | | | More than | | |
|
| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years |
| Total |
| | (amounts in millions of RUB) | ||||||||
Contractual Obligations:(1) | |
| |
| |
| |
| |
|
Long‑term principal debt obligations(2) |
| 111,999 |
| 182,448 |
| 146,117 |
| 22,000 |
| 462,564 |
Interest payments(3) |
| 34,402 |
| 42,569 |
| 8,381 |
| 477 |
| 85,829 |
MTS Bank deposits and liabilities |
| 215,293 |
| 15,910 |
| 114 |
| 1 |
| 231,318 |
Lease obligations(4) |
| 29,758 |
| 50,983 |
| 50,982 |
| 91,031 |
| 222,754 |
Purchase obligations(5) |
| 41,288 |
| 23,981 |
| 10,647 |
| 122 |
| 76,038 |
Provision for decommissioning and restoration |
| 284 |
| — |
| — |
| 7,206 |
| 7,490 |
Retirement and post‑retirement obligation |
| 270 |
| 18 |
| 14 |
| 50 |
| 352 |
Payments related to business acquisitions |
| 198 |
| 44 |
| — |
| — |
| 242 |
Total |
| 433,492 |
| 315,953 |
| 216,255 |
| 120,887 |
| 1,086,587 |
(1) | Debt payments could be accelerated upon violation of covenants in our debt agreements. |
(2) | Does not include the amount of debt modification. |
(3) | Interest payments are calculated based on indebtedness as of December 31, 2021, scheduled maturities for the debt and interest rates effective as of December 31, 2021. We calculate interest payments on ruble-denominated notes until the dates of their respective put options, as described in Note 24 to our audited consolidated financial statements. Payments under interest rate swap agreements are excluded from the table as their amount and timing cannot be reasonably estimated. |
(4) | Undiscounted. |
(5) | Includes future payments under purchase agreements to acquire property, plant and equipment, intangible assets, costs related thereto, inventory and services. We plan to finance our capital commitments through operating cash flow and additional borrowings. |
Item 6. Directors, Senior Management and Employees
A. | Directors and Senior Management |
Key Biographies
Our directors and executive officers, their dates of birth and positions as of the date of this document are as follows:
Name |
| Year of |
| Position |
Felix V. Evtushenkov(3) | | 1978 | | Chairman of the Board of Directors, Non-Executive Director |
Artem I. Zassoursky(3)(4)(5) | | 1979 | | Non-Executive Director |
Regina von Flemming(1)(2)(3)(4)(5)(6) | | 1965 | | Non-Executive Independent Director, Deputy Chairperson of the Board of Directors |
Shaygan Kheradpir(1)(2)(5)(7) | | 1960 | | Non Executive Independent Director |
Thomas Holtrop(1)(2)(5)(6)(7) | | 1954 | | Non-Executive Independent Director |
Nadia Shouraboura(2)(3)(7)(8) | | 1970 | | Non-Executive Independent Director |
Valentin B. Yumashev(1)(4)(6) | | 1957 | | Non-Executive Independent Director |
Vyacheslav K. Nikolaev | | 1970 | | President and Chief Executive Officer (“CEO”), Executive Director, Chairman of the Management Board |
Pavel A. Voronin | | 1991 | | Member of the Management Board — First Vice President1, Technologies |
Inessa V. Galaktionova | | 1974 | | Member of the Management Board — First Vice President, Telecommunications |
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Alexander E. Gorbunov | | 1967 | | Member of the Management Board — Vice President, Strategy and Development |
Ilya V. Filatov | | 1976 | | Member of the Management Board — Vice President, Financial Services, Chairman of the Management Board of MTS Bank |
Ruslan S. Ibragimov | | 1963 | | Member of the Management Board — Vice President, Government Relations |
Andrey M. Kamenskiy | | 1972 | | Member of the Management Board — Vice President, Finance and Chief Financial Officer (“CFO”) |
Igor N. Mishin | | 1962 | | Member of the Management Board — Vice President, Media |
Alexey V. Barsegian(4)(5) | | 1973 | | Member of the Management Board — Vice President, Corporate & Legal Affairs |
Farid S. Kamalov | | 1980 | | Member of the Management Board — Retail Development, CEO of MTS Retail (RTC) |
Alexander A. Khanin(3) | | 1987 | | Member of the Management Board — Vice President, Artificial Intelligence |
Igor A. Egorov | | 1968 | | Member of the Management Board — Vice President, Infrastructure Development |
Olga N. Ziborova(4)2 | | 1964 | | Member of the Management Board — Vice President, Ecosystem Development & Marketing |
Victor L. Belov | | 1975 | | Member of the Management Board — Vice President, Tech |
(1) | Member of the Remuneration and Nomination Committee. |
(2) | Member of the Audit Committee. |
(3) | Member of the Strategy Committee. |
(4) | Member of the Corporate Governance, Environmental and Social Responsibility Committee (ESG). |
(5) | Member of the Special Committee of the Board of Directors of MTS on compliance. |
(6) | Member of the Special Committee of independent directors for the project of MTS’s staff co-location. |
(7) | Member of the Special Committee. |
(8) | Member of the Special Committee for Cloud & Infrastructure Development. |
1 Mr. Voronin served as a Vice President for Technologies from June 17, 2021 till December 31, 2021. Since January 1, 2022 he has been serving as a First Vice President for Technologies.
2 Became a Member of our ESG Committee on February 10, 2022.
Felix V. Evtushenkov was appointed Chairman of our Board of Directors in June 2019. He is the Chairman of our Strategy Committee of the Board of Directors. He is the Member of the Board of Sistema and Senior Managing Partner, Member of the Strategy Committee of Sistema, as well as the Chairman of the Board of the Sistema Charity Fund. He is also a Member of the Board of Directors of Redline Capital Partners S.A, OJSC “Element,” SCP GROUP HOLDINGS SA. From 2012 he has served as First Vice President at Sistema. Prior to that from 2011 to 2012, he served as First Vice President, Head of Core Assets. In 2008, he was appointed Vice President, Head of Consumer Assets, at Sistema. From 2000 to 2006 he worked as General Director, CJSC Sistema Gals, and from 2006 to 2008 as President OJSC Sistema Gals. Mr. Evtushenkov began his career as an Associate of the President in Sistema Invest CJSC and Executive Director of the Industry Department at Sistema from 1999 to 2000.
Artem I. Zassoursky has served as one of our Directors since June 2017. He also is a Member of our Corporate Governance, Environmental and Social Responsibility Committee, Strategy Committee and Special Committee of the Board of Directors of MTS on compliance. Mr. Zassoursky is also a Vice President for Strategy and Development and a Member of the Management Board of Sistema. He was a Member of the Board of Directors of Business-Real Estate, Agroholding Steppe JSC, Stream LLC, Sitroniks JSC, Detskiy Mir PJSC, Insitel Services Private Limited, and he is now a Member of the Board of Directors of Medsi JSC, Sistema Asia Capital PTE, LTD and Alium JSC. Prior to joining Sistema, he held the position of General Director of Stream LLC, in 2013 he served as a Vice President of SMM OJSC. He held various senior positions at major media companies prior to 2013.
Regina von Flemming has served as one of our Directors since June 2015. She is the Deputy Chairperson of the Board of Directors. She is also the Chairperson of our Remuneration and Nomination Committee and Corporate Governance, Environmental and Social Responsibility Committee. She also is a Member of our Audit Committee, Strategy Committee, Special Committee of the Board of Directors of MTS on compliance and Special Committee of independent directors for the project of MTS’s staff co-location
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of our Board of Directors. Also, she is a Member of the Board of Directors of JSC INTECO, Raspadskaya PJSC and also serves on the Board of Directors of the Russian Standard Charitable Foundation. Ms. Von Fleming also is counselor to the CEO of Accenture in Russia (Russian legal entity). She also served as the Chairman of the nominations and remunerations committee and as a Member of the audit committee of Chelpipe PJSC and Marketing Director at Weinstube in 2020. Previously, from 2016 to 2018, she was a Member of our Remuneration and Nomination Committee. Ms. von Flemming served as the CEO and Publisher of Axel Springer Russia from 2005 to 2015. Prior to that, she was the founder and owner of Flemming & Partner GmbH Berlin—Moscow, a consultancy firm 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.
Shaygan Kheradpir has served as one of our Directors since June 2020. He is also the Deputy Chairman of our Remuneration and Nomination Committee, the Member of the Audit Committee, and Special Committee of the Board of Directors of MTS on compliance and Special Committee of the Board of Directors. He is the Member of the Board of Directors of MTN Group, Cerberus Telecom Acq Corp (CTAC), Aura Network Systems, Pivotal Commware, Untether AI, Red River, Chairman of the Board of Directors Live Earth and President of Shaygan Technology Partners. Previously, from 2015 to 2018 Shaygan was Chairman and CEO of Coriant. He also served as CEO of Juniper Networks in 2014 and from 2011 to 2014 he served as COO of Barclays Bank. Prior to that, from 2000 to 2010 he served in multiple roles, including as CTO and CIO in Telecom, at Verizon. Shaygan holds bachelor’s, master’s, and doctoral degrees in electrical engineering from Cornell University.
Thomas Holtrop has served as one of our Directors since February 2013. He is also the Chairman of our Audit Committee, Special Committee of the Board of Directors of MTS on compliance, Special Committee and Special Committee of independent directors for the project of MTS’s staff co location of our Board of Directors. He is also a Member of Remuneration and Nomination Committee. 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.
Nadia Shouraboura has served as one of our Directors since June 2020. She is also the Deputy Chairperson of our Audit Committee and the Member of the Strategy Committee, Special Committee and the Chairperson of the Special Committee for Cloud and Infrastructure Development of the Board of Directors. Mrs. Shouraboura is a Member of the Board of Directors of X5 Retail Group, Ferguson, Blue Yonder, Ocado PLC and Tosca. She was also a Member of the Board of Directors of Anko Retail from 2018 to 2020. Prior to that from 2012 to 2018 she was founder and CEO of Hointer. From 2004 to 2012 she served as the Vice President for Technology at Amazon and head of systems development at Exelon Power. Previously, from 1994 to 2001 she worked as a Senior Principal Consultant at Diamond Management & Technology. She began her career in 1989 as a robotics engineer at Robcad.
Mrs. Shouraboura holds a bachelor’s degree from Moscow State University, a master’s degree from the University of Tel Aviv, and a PhD in Mathematics from Princeton University.
Valentin B. Yumashev has served as one of our Directors since June 2019. He is also the Deputy Chairman of the Corporate Governance, Environmental and Social Responsibility Committee, a Member of our Remuneration and Nomination Committee, and a Member of the Special Committee of independent directors for the project of MTS’s staff co location of our Board of Directors. He is also the CEO and Chairman of the Management Board counselor of VTB Bank. He is a Member of the Board and Advisor of the Boris Yeltsin Presidential Center Fund. He also serves as Advisor to the President of the Russian Federation on a pro bono basis. In 1997 1998, he served as the head of the Russian Presidential Administration. In 1996, he worked as a media relations advisor to the Russian president. From 1987 to 1995 he served in a series of leadership roles at Ogoniok magazine, including as General Director. Mr. Yumashev began his career in 1978 as a journalist at Moskovsky Komsomolets. Mr. Yumashev holds a degree in journalism from Lomonosov Moscow State University.
Vyacheslav K. Nikolaev has served as our President and CEO since March 2021. He is the Chairman of our Management Board. Prior to that he served as our First Vice President for Customer Experience, Marketing and Ecosystem Development from March 2020, and earlier served as our Vice President for Customer Experience and Marketing from August 2019. Before that he served as our Vice President for Marketing from July 2017. He is a Member of the Board of Directors of MTS Bank, RTC, LLC “Mobile TeleSystems” (MTS associate in the Republic of Belarus) and MTS Media, LLC, LLC “MTS AI”. Mr. Nikolaev has been working for MTS since October 2004 and has held various positions within the Group. Prior to joining MTS, he held various key positions in Renaissance Capital LLC —Financial Consultant and TRUST Investment Bank, OJSC.
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Pavel A. Voronin was appointed Vice President for Technologies in June 2021. Since January 1, 2022 he has served as First Vice President for Technologies. He is a Member of our Management Board. Prior to joining MTS, he worked as Vice President for Technology Development at subsidiaries within the Sberbank ecosystem. From 2016 to 2020, he was Deputy General Director for Information Technologies at S7 Airlines, where he founded and led the S7 Techlab innovation center. He also co-founded business projects in cloud solutions as well as workplace and application virtualization.
In addition, he founded and headed the Department of Information Technologies in Aviation at the Moscow Institute of Physics & Technology. Mr. Voronin is a graduate of the Mechanics & Mathematics Faculty at Moscow State University. He is also a certified specialist (MBA) in IT project management and development in Big Data, and during his studies he won multiple student mathematics Olympiads.
Inessa V. Galaktionova has served as First Vice President for Telecommunications since August 2019, having earlier joined us in February 2019 as our Vice President for Sales and Customer Service. She is a Member of our Management Board. Ms. Galaktionova brings to our team extensive industry experience, deep domain expertise, and a laser sharp focus on operational rigor, having held multiple senior executive roles at leading Russian companies, including as Deputy CEO of Russian Post from 2013 to 2019 and Chief Commercial Officer of Tele2 Russia from 2009 to 2013. She began her career at Philips, where she worked from 1996 to 2009, ascending to Chief Marketing Officer of the Russia & Central Asia region. Ms. Galaktionova is a Member of the Board of Directors of, MGTS, RTC, MTS Armenia, LLC “MTS AI”.
Alexander E. Gorbunov has served as our Vice President for Strategy and Development since April 2018. He is a Member of our Management Board. Before that, he was a Member of our Board of Directors, and Deputy Chairman of our Board of Directors. In addition, Mr. Gorbunov serves as a Chairman of Board of Directors of MTS Bank and a Member of the Board of Directors of YouDo. From 2011 until 2018 he served as Vice-President managing telecom assets of Sistema. From 2010 until 2011, Mr. Gorbunov served as Executive Vice President for the development of telecommunication assets at Core 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.
Ilya V. Filatov has served as our Vice President for Financial Services since August 2019. He is a Member of our Management Board. He also serves as the CEO of MTS Bank. He is also a Member of the Board of Directors of RTC, East-West United Bank S.A. (EWUB), Sistema Capital, MTS Bank and AMARAN LIMITED. Mr. Filatov joined MTS Bank in 2014 as First Deputy Chairman of the Management Board and was appointed MTS Bank’s CEO in 2015. He earlier held a series of leadership positions at UralSib Bank from 2005 to 2014, including Deputy Chairman of the Management Board.
Ruslan S. Ibragimov has served as our Vice President—Government Relations since August 2019. He is a Member of our Management Board. He earlier served as Vice President for Corporate and Legal Affairs from 2008 to 2019 and has been a member of our Management Board since 2007. Mr. Ibragimov is a Member of the Managing Board of Big Data Association, Vice President of the Russian Corporate Counsel Association (RCCA) and Senior Director of the Association of Independent Directors. Mr. Ibragimov also serves as a Member of the Board of Directors of Vysshaya Shkola Publishers OJSC, NPO “Digital economy” - a Member of the Board of Supervisors, a Member of the Management Board of Non-Commercial Partnership “Corporate Counsel Association”, Media Communication Association, a Member of the Management Board and Vice president for GR&PR of Big Data Association and Prosveshcheniye Publishers. Before that, he was a Chairman of the Management Board of the National Payments Council Association until 2018 and a Member of the Board of Directors of the Doctor Ryadom LLC until 2020. 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 heading 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 1996 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.
Andrey M. Kamenskiy has served as our Vice President—Chief Financial Officer since April 2018. He is a Member of our Management Board. He is also a Member of the Board of Directors of Mobile TeleSystems LLC, MTS Bank, RTC, LLC “MTS AI” and MTS Media. Prior to that, he served as Executive Vice President, Finance and Economics for Sistema since 2011. From 1997 to 2011, he held senior positions in finance in Trade House Perekrestok, San InBev and ING Bank (Eurasia).
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Igor N.Mishin has served as our Vice President for Media since September 2019. He is a Member of our Management Board. He serves as CEO and Member of the Board of Directors of MTS Media and Member of the Board of Directors of “URS JSC”. He is also Vice President of the Russian Academy of Television, Member of the European Film Academy, Science & Technology Laureate of the Russian Federation, and Chairman of the Board of Trustees of the Outdoor Film Festival, the world’s largest open-sky movie watching event. From 2014 to 2016, he served as General Director of TNT, one of Russia’s most-watched TV networks. Prior to that, he worked as President of A-One Concept Media, Inc., General Producer for TV Service CJSC (Muz-TV music channel) and General Director of Amedia, President of “Urban quarter”, CEO of MIG Series Production LLC and Member of the Management Board of Association of Film and Television Producers.
Alexey V. Barsegian has served as our Vice President for Corporate & Legal Affairs since September 2019. He is a Member of our Management Board. He is also a Member of our Corporate Governance, Environmental and Social Responsibility Committee and Special Committee on compliance of our Board of Directors. Before that, from 2018 to 2019 he served as Executive Director of Legal Affairs of Sistema and earlier, from 2013 to 2018 as Executive Vice President for Legal Affairs of Sistema. He is also a Member of the Board of Directors of MTS Armenia, LLC “MTS AI”, MGTS and BF “Sistema”. Previously, from 2011 to 2013 he served as Director of Legal Department in Sistema. He began his career as a legal consultant, working at firms such as EM & Co. and Padva & Partners. Alexey holds an MBA from the American Institute of Business & Economics as well as a law degree from Moscow State Institute of International Relations (MGIMO).
Farid S. Kamalov was appointed Vice President for Retail Development in June 2021. He is a Member of our Management Board. Prior to joining MTS, he worked for Russian children’s retailer Detsky Mir PJSC, most recently as Chief Operating Officer (2014-2021) and before that as Director of Sales Management (2012-2014). He earlier headed the sales department at Russia’s Korablik retail chain (2010-2012). He began his career on the sales floor at M.Video, a leading Russian electronics chain, where he worked his way up to senior operational roles. Between 2014 and 2020, Mr. Kamalov participated in the governing boards of JSC RTC, LLC Detmir KGZ, LLP Detsky Mir - Kazakhstan, LLC Detmir BEL, Detsky Mir PJSC. He is also CEO and Member of the Board of Directors of “Russian Telephone Company” JSC.Mr. Kamalov holds an undergraduate degree from the Moscow State Institute of Electronic Engineering as well as an MBA from the Moscow International Higher School of Business.
Alexander A. Khanin has served as Vice President for Artificial Intelligence since October 2020. He is a Member of our Management Board. He is also the head of the MTS Artificial Intelligence Center and Member of its Board of Directors. In addition, he is a Co-founder and Chairman of the Board of Directors at VisionLabs. He is also a Member of our Strategy Committee of the Board of Directors. He is a Member of the Board of Directors of VisionLabs LLC, VL Solutions LLC, VisionLabs B,V and Member of the Coordination Board of AI Alliance Russia.
Igor A. Egorov was appointed Vice President for Infrastructure Development in July 2021, in which capacity he oversees MTS’s strategy to build out high-quality digital infrastructure to help ensure robust connectivity as well as capturing new growth opportunities in next-generation cloud, web, and digital B2B services. He is a Member of our Management Board. Mr.Egorov first joined MTS in 2013 and has held a series of senior leadership roles, most recently as Vice President for Regional Development (2019-2021) and before that as Regional Director for Moscow (2016-2019), Regional Director for Central Russia (2014-2016), and Regional Director of the Far East (2011-2014). Mr.Egorov holds a degree from St. Petersbrug State Electrotechnical University (ETU “LETI”) as well as an MBA from the Russian Presidential Academy of National Economy & Public Administration (RANEPA). He is a Member of the Board of Directors of “GDC ENERGY CROUP” LLC, MGTS and CEO of MTS Web Services.
Olga N. Ziborova was appointed Vice President for Ecosystem Development & Marketing in April 2021, in which capacity she oversees the operational execution of MTS’s strategy to build out an expanding ecosystem of innovative digital products and services. She is a Member of our Management Board. Since February 10, 2022 she has been a member of our Corporate Governance, Environmental and Social Responsibility Committee. Her prior role was as Director for Ecosystem Marketing, where she strengthened the Company’s market position by driving consumer awareness across the full spectrum of MTS products and bundle offers. From 2017 to 2020 she headed MTS’s marketing department, where she was responsible for telecommunications marketing across both B2C and B2B segments. She also oversaw the development and promotion of convergent offers across the Company’s product lines and markets. From 2010 to 2013 she headed MTS’s Tariff Policy Department, and from 2013 to 2017 she served as Marketing Director for Tariffs & Services. Earlier, from 2003 to 2010 she advanced through a series of senior marketing roles across MTS’s regional operations in Russia. She is also a Member of the Board of Directors of “Russian Telephone Company” JSC, MTS Armenia, MTS Media, “United Russian Studios” JSC, MDTZK LLC and Member of the Management Board of Media Communication Association. Ms. Ziborova holds a degree from St. Petersburg State University and has studied digital project management at Moscow’s SKOLKOVO Business School.
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Victor L. Belov was appointed Tech Vice President in January 2020, in which role he serves as MTS’s chief technology officer overseeing our network infrastructure. He is a Member of our Management Board. Victor joined MTS in 2011 and held a series of increasingly senior role across network operations, most recently as Director of Convergent & Backhaul Networks (2018-2020) after having headed the core network department since 2012 and before that the data transmission department. He earlier worked for Comstar-OTS JSC (2009-2011) as head of development of network and platform services. From 1998 to 2008 he held leadership positions at MTU-Intel CJSC, Sistema Multimedia LLC, Enterprise Business Communications JSC, and Zenon N.S.P. LLC. He is a Member of the Board of Directors of METRO-TELEKOM JSC, “IT-GRAD 1 CLOUD” LLC, of “GDC ENERGY CROUP” LLC, MGTS and MTS Turkmenistan.
All members of our Board of Directors were elected at the annual shareholders’ meeting on June 23, 2021 and will serve until their terms expire at the next annual shareholders’ meeting, which will take place no later than June 2022. The business address of each of our directors is 4 Marksistkaya Street, Moscow 109147, Russian Federation.
B. | Compensation of Directors and Senior Management |
We accrued compensation to our directors and senior management during 2021 for services in all capacities provided to us in an aggregate amount of approximately RUB 1,885 million, including social contributions of RUB 374 million. This amount comprised RUB 719 million in base salaries and RUB 1,166 million in bonuses paid pursuant to a bonus plan and in other monetary compensations for our management and directors. Bonuses are awarded annually based on our financial performance.
Our management and directors are also entitled to cash-settled and equity-settled share-based payments. Related compensation accrued in 2021 amounted to RUB 2,929 million, including social contributions amounted to RUB 338 million.
Members of the Board of Directors who are independent non-executive directors receive annual base compensation of $300,000 (RUB 22.1 million) or $400,000 (RUB 29.5 million) in the case of an independent non-executive director who serves as Chairman of the Board of Directors.
Independent non-executive directors who also serve on board committees receive additional compensation as follows. Members of the Remuneration and Nomination Committee, Committee on Corporate Governance and Environmental and Social Responsibility (ESG), Strategy Committee and Audit Committee receive additional annual compensation of $30,000 (RUB 2.2 million), and a director serving as Chairman of the foregoing committees receives additional annual compensation of $50,000 (RUB 3.7 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 of Directors in relation to certain assigned matters, receive additional annual compensation of $30,000 (RUB 2.2 million), and a director serving as Chairman of a special committee receives additional annual compensation of $50,000 (RUB 3.7 million). Members of all other board committees receive additional annual compensation of $25,000 (RUB 1.8 million) and a director serving as Chairman of any other board committee receives additional annual compensation of $30,000 (RUB 2.2 million).
Independent non-executive members of the Board of Directors are also eligible for remuneration in the form of shares. The number of shares to be transferred to each non-employee director based on the results of the corporate year shall be determined as the quotient obtained by:
● | the ruble equivalent of $100,000 (RUB 7.4 million) calculated according to the exchange rate established by the CBR for the date of the annual meeting of shareholders by the end of the corporate year divided by the share price in rubles being the weighted average price of the share for the last 30 calendar days preceding the annual meeting of shareholders, during which the trading was held on the Moscow Exchange. |
The aggregate amount of compensation received by an independent non-executive director (including annual base compensation and remuneration for performance of additional duties for serving as a board committee member should not exceed $400,000 (RUB 29.5 million) and for serving as Chairman of the Board of Directors should not exceed $500,000 (RUB 36.8 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 of Directors.
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.
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C. | Board Practices |
Board of Directors
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 eight members3. The Board of Directors has the authority to make overall management decisions for us, except for 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 per each quarter of a year. See “—B. Compensation of Directors and Senior Management” for a description of compensations for the members of our Board of Directors.
Audit Committee
The members of our Audit Committee are appointed by the Board of Directors and all members of this committee must be independent directors. The current members are Thomas Holtrop, Regina von Flemming, Shaygan Kheradpir and Nadia Shouraboura, all of whom are independent members of the Board of Directors. Mr. Thomas Holtrop serves as the Chairman of the Audit Committee and Mrs Nadia Shouraboura – as Deputy Chairperson of the Audit Committee. The Audit Committee is primarily responsible for the integrity of our financial statements; overseeing our risk management, internal control system and corporate governance system, including reviewing certain related party transactions and interested person transactions; overseeing our accounting and financial reporting processes and the internal and external audits of our financial statements; our compliance system, compliance with the Code of Business Conduct and Ethics of MTS PJSC; 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; resolving matters arising during the course of audits; and since February 25, 2015 exercising functions related to ethics matters.
According to our bylaws, the Audit Committee shall convene with our external auditors at least four times per year, but may convene more frequently if the Audit Committee chooses to do so.
Strategy Committee
Our Strategy Committee consists of nine members appointed by the Board of Directors. The current members are Yury Misnik, Mikhail Khanov, Victor Klimovich, Alexander Khanin (Member of the Management Board-Vice President for Artificial Intelligence), Artem Zassoursky (Non-Executive Director), Nadia Shouraboura (Independent Director), Regina von Flemming (Independent Director), Alexey Katkov (Deputy Committee Chairperson) and Felix Evtushenkov (Chairman of the Board of Directors and Committee Chairperson). The Committee is responsible for preparing recommendations to the Board of Directors upon review of the Company’s strategic development and implementation of its investment projects and long-term investment programs.
According to our bylaws, the Strategy Committee shall be convened by the Committee Chairperson, at his sole discretion, or at the suggestion of any member of this committee, a member of the Board of Directors or our President.
Committee on Corporate Governance and Environmental & Social Responsibility (ESG)
Our ESG Committee currently consists of six members appointed by the Board of Directors. ESG includes Polina Ugryumova - Director of Investor Relations, Olga Ziborova – Member of the Management Board-Vice President for Ecosystem Development & Marketing , Alexey Barsegian – Member of the Management Board-Vice President for Corporate & Legal Affairs, Artem Zassoursky - Non-Executive Director, Valentin Yumashev - Independent Director, Deputy Committee Chairperson and Regina von Flemming - Independent Director, Committee Chairperson. The ESG Committee leads the development of MTS's sustainability strategy as well as coordinates the Board's oversight across corporate governance, environmental initiatives, and corporate social responsibility.
3 In 2021, our Board of Directors consisted of nine members. Currently, due to resignation of one of our directors, our Board of Directors consists of eight members.
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According to our bylaws, the ESG Committee shall be convened by the Committee Chairperson, at her sole discretion, or at the suggestion of any member of this committee, a member of the Board of Directors or our President.
Remuneration and Nomination Committee
Our Remuneration and Nomination Committee consists of four members appointed by the Board of Directors. The current members are, Shaygan Kheradpir, Thomas Holtrop, Valentin Yumashev, and Regina Dagmar Benedicta von Flemming , who serves as the Chairman of the Remuneration and Nomination Committee and Shaygan Kheradpir who serves as Depity Chairman. The Remuneration and Nomination Committee is primarily responsible for developing a remuneration structure and compensation levels for management executives.
According to our 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.
In addition to the above-mentioned committees of the Board of Directors also other special committees were also formed in “MTS” PJSC. The relevant list of committees and their members is presented on our website.
President
Our President is elected by the Board of Directors for a term of three years and can be re-elected 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 the 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.
In March 2021, the Board of Directors elected Vyacheslav Nikolaev, the first vice-president of MTS for customer experience, marketing and ecosystem development, as new President effective from March 13, 2021.
Management Board
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 of Directors 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 14 members.
Disclosure Committee
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. Andrey M. Kamensky, our CFO is the Chairman of the Disclosure Committee. Currently, our Disclosure Committee consists of seven members, three of whom are officers of the Company.
Auditing Commission
Our Auditing Commission supervises our financial and operational activities. Members of the Auditing Commission are nominated and elected by our shareholders at annual meetings of shareholders. A director may not simultaneously be a member of the Auditing Commission. As of the date of this document, our Auditing Commission has three members:
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● | Irina R. Borisenkova, who holds the position of Chief Accountant—Managing Director, Finance and Investment Complex, Sistema; |
● | Natalia A. Mikheeva, who holds the position of Director for internal audit of MTS; and |
● | Evgeniy Madorskiy, who holds the position of the Chief Auditor of Sistema JSFC. |
The members of our Auditing Commission serve until their terms expire at the next annual shareholders’ meeting, which will take place no later than June, 2022.
Audit Committee Financial Expert
Our Board of Directors has determined that Thomas Holtrop and Nadia Shouraboura are “audit committee financial experts” 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 and Mrs Shouraboura experience’s, please see “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Key Biographies.”
Code of Business Conduct and Ethics
MTS strives to comply with applicable legal requirements and leading international practices, and therefore periodically updates its compliance policies and procedures. As one of fundamental documents of the Company, the Code of Business Conduct and Ethics (hereinafter referred to as the Code) was updated in 2021 and has undergone significant changes.
The provisions of the Code apply to all employees and directors of MTS (regardless of position, duties, length of service and place of work), including all subsidiaries, affiliates and joint ventures. The Company also strives to ensure compliance with the Code by affiliated companies, in respect of which MTS does not exercise control, as well as by partners and counterparties.
The content of the Code covers the following main topics relevant to all groups of MTS stakeholders:
1. MTS Values and Principles (introduction on behalf of the Management Board of MTS).
MTS’ business strategy is based, among other things, on building stable value relationships with customers and other stakeholders, in connection with which the Code formulates the principles and values that guide the Company in achieving its goals.
2. Consultations.
The Code contains ways to get advice if there are questions about the topics covered in the Code, doubts about whether a situation is regulated by the Code or whether it is a violation thereof.
3. Responsible business practice (ethics of making business decisions in MTS).
The Code cannot describe all kinds of situations regulated by the Code, however, the Code offers a kind of universal algorithm for making business decisions by persons to whom the Code applies.
4. Compliance with laws (anti-corruption legislation, internal labor regulations, information security and data protection, insider, intellectual property protection, asset protection and reliable reporting).
The Code is a unified regulatory and ethical standard of regulation within the MTS Group and includes various regulatory requirements applicable to the Company’s activities. In terms of compliance with legal requirements, the Company’s Code contains, at a minimum, references to policies and procedures governing certain business processes relevant to the entire MTS ecosystem.
5. Principles of sustainable development (quality of life and service, innovation).
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The company adheres to the principles of sustainable development: it conducts business ethically, takes responsibility for the consequences of its decisions and its activities, as well as for the impact of these consequences on society.
6. Reporting violations, prohibition of retalitation.
In the new version of the Code, the Company has made changes in terms of feedback and the operation of a hotline: the number of channels for appeals has been increased; all appeals are registered by an external independent provider; the possibility of submitting anonymous messages is available. At the same time, the Company strongly supports the culture of open dialogue and guarantees protection from retalitation to persons in case of a conscientious report of a problem or violation.
In order to ensure the effectiveness of the Code, the Company uses a language that is simple and understandable to all stakeholders, an interactive format, provides easy access to the Code, other compliance policies and procedures of the Company on its open resources (internal and external), and also conducts periodic training in accordance with the requirements of the Code.
A copy of our Code of Business Conduct and Ethics is available on our website at http://ir.mts.ru/.
Corporate Governance
We are required under the New York Stock Exchange listing rules to disclose any significant differences between the corporate governance practices that we follow under Russian law and applicable listing standards and those followed by U.S. domestic companies under New York Stock Exchange listing standards. This disclosure is posted on our website (http://ir.mts.ru/about-mts/corporate-governance/default.aspx). See also “Item 16G. Corporate Governance.”
D. | Employees |
At December 31, 2021, we had 57,843 employees. Of our 56,166 employees in Russia, we estimate that 792 were executives; 14,004 were technical and maintenance employees; 25,071 were sales, marketing and customer service staff; and 16,299 were administration and finance staff. In addition, of the 56,166 employees in Russia, we estimate that 12,003 were employed in our retail unit.
As of December 31, 2021, 464 of our employees worked in Czech Republic. Of these employees, we estimate that 14 were executives; 377 were technical and maintenance employees; 7 were sales, marketing and customer service staff; and 66 were administration and finance staff.
As of December 31, 2021, 1,116 of our employees worked in Armenia. Of these employees, we estimate that 10 were executives; 130 were technical and maintenance employees; 668 were sales, marketing and customer service staff; and 308 were administration and finance staff.
As of December 31, 2021, 97 of our employees worked in other countries, such as Turkmenistan, Ukraine and Belarus. Of these employees, we estimate that 9 were executives; 55 were technical and maintenance employees; 6 were sales, marketing and customer service staff; and 27 were administration and finance staff.
The following chart sets forth the number of our employees at December 31, 2021 and 2020:
| | | | |
| | Years ended | ||
|
| December 31, 2021 |
| December 31, 2020 |
Russia |
| 56,166 |
| 56,590 |
Czech Republic | | 464 | | 451 |
Armenia |
| 1,116 |
| 1,169 |
Other |
| 97 |
| 205 |
Total |
| 57,843 |
| 58,415 |
Our employees are not unionized, except for 1,143 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.
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Objectives that we focus on in managing the human capital resources depend on current needs of our ecosystem. We expect to acquire new employees as a consequence of our regular acquisitions in line with the development of new products and services.
E. | Share Ownership |
As of March 24, 2022, we believe, that our directors, senior management and employees owned more than 1% but less than 2% of our outstanding common stock.
The following table sets forth information with respect to the beneficial ownership of our common stock as of March 24, 2022, by our current directors and executive officers. All shares of common stock have the same voting rights.
| | | | | |
| | Beneficial ownership as |
| ||
| | of March 24, 2022 | | ||
Directors and Executive officers |
| Number(1) |
| %(2) | |
Vyacheslav K. Nikolaev*, Executive Director, President and Chief Executive Officer (“CEO”) | | 20,419,297 | | 1.21252 | % |
Ilya V. Filatov, Vice President, Financial Services—Member of the Management Board |
| 3,298,028 |
| 0.19584 | % |
Ruslan S. Ibragimov, Vice President, Government Relations—Member of the Management Board | | 431,338 | | 0.02561 | % |
Igor A. Egorov, Member of the Management Board - Vice President, Infrastructure Development |
| 268,121 |
| 0.01592 | % |
Inessa V. Galaktionova, First Vice President, Telecommunications—Member of the Management Board |
| 126,845 |
| 0.00753 | % |
Andrey M. Kamenskiy, Vice President, Finance—Member of the Management Board and Chief Financial Officer (“CFO”) |
| 108,581 |
| 0.00645 | % |
Pavel A. Voronin, Since 01/01/2022 First Vice President, Technologies —Member of the Management Board |
| 74,170 |
| 0.00440 | % |
Alexander A. Khanin, Vice President, Artificial Intelligence |
| 61,929 |
| 0.00368 | % |
Regina von Flemming, Non Executive Independent Director | | 56,954 | | 0.00338 | % |
Olga N. Ziborova, Member of the Management Board - Vice President, Ecosystem Development & Marketing |
| 52,187 |
| 0.00310 | % |
Thomas Holtrop, Non Executive Independent Director | | 46,172 | | 0.00274 | % |
Victor L. Belov, Member of the Management Board-Vice President, Tech | | 37,634 | | 0.00223 | % |
Farid S. Kamalov, Retail Development, CEO of MTS Retail (RTC) | | 37,332 | | 0.00222 | % |
Alexey V. Barsegian, Vice President, Corporate & Legal Affairs | | 37,241 | | 0.00221 | % |
Alexander E. Gorbunov, Vice President, Strategy and Development—Member of the Management Board | | 37,232 | | 0.00221 | % |
Valentin B. Yumashev, Non Executive Independent Director | | 36,649 | | 0.00218 | % |
Nadia Shouraboura, Non Executive Independent Director | | 15,058 | | 0.00089 | % |
Shaygan Kheradpir, Non Executive Independent Director | | 15,032 | | 0.00089 | % |
Total |
| 25,159,800 |
| 1.49402 | % |
(1) | Based on information provided by our directors and executive ofiicers as of December 31, 2021, and results of execution of share based program and other transactions later in the first quarter of 2022. |
(2) | Percentage of beneficial ownership of each named director and executive officer is based on 1,684,037,318 ordinary shares outstanding as of March 24, 2022. |
* Before March 24, 2022 free float was 41,19%. On March 24, 2022 Viacheslav Nikolaev has received 19,983,816 of our ordinary shares. Before March 24, 2022, he owned 435,481 of our ordinary shares. He has the same voting rights as other shareholders. After March 24, 2022 free float increased to 42,19%.
Our management is 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 three years. The transfer of such shares is probable and is subject to certain employment conditions. In 2021, options related to compensation accrued in the amount of RUB 2,929 million.
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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 March 24, 2022. All shares of common stock have the same voting rights.
| | | | | |
| | Number of ordinary |
| ||
| | shares | | ||
| | as of March 24, 2022 | | ||
Directors and Executive officers |
| Number |
| %(1) | |
Vyacheslav K. Nikolaev, Executive Director, President and CEO | | 3,084,099 | | 0.18314 | % |
Inessa Galaktionova, First Vice President, Telecommunications—Member of the Management Board | | 1,132,175 | | 0.06723 | % |
Pavel A. Voronin, First Vice President, Technologies —Member of the Management Board | | 696,157 | | 0.04134 | % |
Alexander A. Khanin, Vice President, Artificial Intelligence | | 599,673 | | 0.03561 | % |
Olga N. Ziborova, Member of the Management Board-Vice President, Ecosystem Development & Marketing |
| 464,105 |
| 0.02756 | % |
Andrey M. Kamenskiy, Vice President, Finance—Member of the Management Board and CFO |
| 421,362 |
| 0.02502 | % |
Alexander E. Gorbunov, Vice President, Strategy and Development—Member of the Management Board |
| 418,919 |
| 0.02488 | % |
Ruslan S. Ibragimov, Vice President, Government Relations and PR—Member of the Management Board |
| 412,568 |
| 0.02450 | % |
Alexey V. Barsegian, Vice President, Corporate & Legal Affairs |
| 412,568 |
| 0.02450 | % |
Igor A. Egorov, Vice President, Infrastructure Development - Member of the Management Board | | 406,092 | | 0.02411 | % |
Farid S. Kamalov, Retail Development, CEO of MTS Retail (RTC) | | 348,079 | | 0.02067 | % |
Victor L. Belov, Vice President, Tech - Member of the Management Board | | 348,079 | | 0.02067 | % |
Igor N. Mishin, Vice President, Media—Member of the Management Board |
| 85,496 |
| 0.00508 | % |
Total |
| 8,829,372 |
| 0.52430 | % |
(1) | Percentage of ordinary shares in the form of share options granted to each named director and executive officer is based on 1,684,037,318 ordinary shares outstanding as of March 24, 2022. |
Item 7. Major Shareholders and Related Party Transactions
A. | Major Shareholders |
The following table sets forth, as of March 24, 2022, 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 |
| ||
| | March 24, 2022 | | ||
Name |
| Number |
| Percentage |
|
Sistema(1) | | 620,552,329 | | 36.85 | % |
STA(2) |
| 220,467,234 |
| 13.09 | % |
ADS holders(3) |
| 508,907,572 |
| 30.22 | % |
Other Public Float (including our directors and executive officers)(4) |
| 334,110,183 |
| 19.84 | % |
Total(5) |
| 1,684,037,318 |
| 100.00 | % |
(1) | Vladimir P. Evtushenkov has a controlling interest in Sistema, and is considered under U.S. securities laws as the beneficial owner of 42,085% of our shares held by Sistema and Sistema Telecom Activy (“STA”). |
(2) | STA is a limited liability company formed under the laws of Russia. Sistema owns 100% of STA, holds 11,03% of our shares. |
(3) | As of March 24, 2022, the total number of ADSs outstanding was 254,453,786, representing underlying ownership of 508,907,572 shares, or approximately 30.22% of our outstanding common stock. The shares underlying the ADSs are deposited with JPMorgan Chase Bank, formerly known as Morgan Guaranty Trust Company of New York and the local custodian is CB “J.P. Morgan Bank International” (LLC). |
(4) | We believe that our directors and executive officers as a group own more than 1% but less than 2% of our shares. |
(5) | Excludes treasury shares, as described below. |
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Our subsidiary MGTS owned 5,452,327 of our ordinary shares as of March 24, 2022.
As a result of series of buy backs since 2016 Stream Digital LLC owned 87,245,832 of our shares as of March 24, 2022.
As a result of series of buy backs since 2018 our subsidiary Bastion LLC owned 107,254,000 of our shares and 75,676,260 in the form of ADSs as of March 24, 2022.
As March 24, 2022, MTS PJSC held a total of 38,715,838 of our ordinary shares, which were redeemed by MTS PJSC during 2017 - 2021 within procedure of buy-backs in connection with decisions on reorganization of MTS PJSC made by General shareholders’ meeting.
As of March 24, 2022, we and our subsidiaries held a total of 314,344,257 shares, 75,676,260 of which were held in the form of ADSs. These shares are excluded from the total number of shares presented in the table above.
Sistema’s (including STA) current stake in the share capital of MTS is 42.085% while effective ownership in MTS is 49,94 % (as of March 24, 2022).
B. | Related Party Transactions |
Transactions with Sistema and its Affiliates
Sistema
In March 2019, we disposed of our 18.69% interest in the Group’s associate OZON to Sistema for RUB 7,902 million. As of December 31, 2021 Sistema has fully repaid its obligations. As of December 31, 2020 the balance of accounts receivable amounted to RUB 2,829 million.
Nvision Group
In October 2020, we disposed of 100% in Nvision Group to Sistema and since then Nvision Group is considered to be a related party rather than a subsidiary of the Group (see Note 11 to the consolidated financial statements).
We continue to purchase software, services and other intangible assets from Nvision Group. The amounts of software, services and other intangible assets purchased during the years ended December 31, 2021 and 2020, were RUB 7,181 million and RUB 6,261 million, respectively.
Business Nedvizhimost
In February 2015 and further in May 2015, we sold our 100% stake in Rent Nedvizhimost to Business Nedvizhimost for RUB 8,500 million, repaid mainly in 2015-2018. The remaining part of receivable was restructured in 2018 implying Central Bank key rate + 1.5% and maturing in December 31, 2021. As of December 31, 2021 receivables in the amount of RUB 3,372 were fully repaid.
In March 2019, in order to optimize the processes of real estate management, we sold a number of buildings with carrying value of RUB 1,479 million to Business Nedvizhimost for the consideration of RUB 7,247 million (including VAT). The consideration is payable by installments for 10 years at 9% per annum with the collateral in the form of disposed buildings granted by the buyer. At the same time, we entered into a number of agreements to lease spaces in the buildings sold for the period of up to 15 years (leaseback).
As a result of this transaction, we recorded right-of-use assets of RUB 3,123 million, lease obligation of RUB 5,197 million and recognized a gain in the amount of RUB 1,745 million as a part of “Other income” in consolidated statement of profit or loss in 2019.
In December 2021, we purchased 5-year 10.8% coupon notes of Business-Nedvizhimost, in the amount of RUB 2,100 million. The notes were accounted as financial assets at fair value through profit and loss and disclosed within subtotal “Assets in
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Sistema Capital trust management” (Note 28 to the consolidated financial statements). As of December 31, 2021, the investment amounted to RUB 2,105 million.
Objedinennye Russkie Kinostudii
In April 2019, we acquired a 100% interest in Joint Stock Company Objedinennye Russkie Kinostudii, a management company of “Kinopolis” movie studio with its own movies production complex from Business Nedvizhimost, a subsidiary of Sistema, for RUB 2,042 million. Please see Note 5 to our audited consolidated financial statements for details on this acquisition
Koncel
During the years ended December 31, 2019, 2020 and 2021, we received income from the scrap metal realizations minus the costs of dismantling services with Koncel, subsidiary of Sistema, for a total amount of RUB 3,328 million, RUB 2,134 million and RUB 2,398 million, respectively.
TelecomCapStroi
In 2019, 2020 and 2021 we entered into a series of agreements with TelecomCapStroi, a subsidiary of Sistema and a major constructor of MGTS fixed line network. As of December 31, 2020 and 2021 the total amount of advances paid to TelecomCapStroi, was RUB 2,396 million and RUB 1,148 million, respectively. During the year ended December 31, 2021 we purchased equipment for RUB 2,396 million.
Accounts receivable and accounts payable
We had total accounts receivable of RUB 16,659 million, RUB 14,189 million and RUB 7,287 million, from, and total accounts payable of RUB 558 million, RUB 3,146 million and RUB 4,107 million to, related parties as of December 31, 2019, 2020 and 2021, respectively. We had total Bank deposits and liabilities of RUB 41,351 million, RUB 52,372 million and RUB 68,212 million from related parties as of December 31, 2019, 2020 and 2021. 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 31 to our audited consolidated financial statements for details of our accounts payable and accounts receivable.
C. | Interests of Experts and Counsel |
Not applicable.
Item 8. Financial Information
A. | Consolidated Statements and Other Financial Information |
8.A.1-3. See Item 18.
8.A.4-6. Not applicable.
8.A.7. Litigation
Uzbekistan
In June 2012, the authorities of the Republic of Uzbekistan commenced audits of the financial and operating activities of MTS’ wholly-owned subsidiary Uzdunrobita. 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 December 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
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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.
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 was recorded in the consolidated statements of profit or loss for the year ended December 31, 2012. In 2013 these losses were assigned to discontinued operations.
In 2012, the Group filed a claim against the Republic of Uzbekistan in the International Centre for Settlement of Investment Disputes (“ ICSID”), part of the World Bank Group, in Washington, D.C.
On April 22, 2013, the Tashkent Economic Court declared Uzdunrobita bankrupt and initiated a liquidation process. Uzdunrobita was later liquidated. As a result the Group lost control over the subsidiary and deconsolidated Uzdunrobita.
In July 2014, the dispute between MTS and the Republic of Uzbekistan was resolved. The parties signed 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 ICSID. ICSID has discontinued international arbitration proceedings between us and the Republic of Uzbekistan following the submission of a joint application by both parties.
The 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 until 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 US Department of Justice (“DOJ”) relating to a currently conducted investigation of our former subsidiary in Uzbekistan.
In July 2015, activities related to our operations in Uzbekistan were referenced to 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.
In March 2019, we reached a resolution with the SEC and the DOJ relating to these investigations. We consented to the entry of an administrative cease-and-desist order (the “Order”)by the SEC. The United States District Court for the Southern District of New York approved the deferred prosecution agreement “DPA” entered by us and a plea agreement entered into our former subsidiary in Uzbekistan. Under the agreements with the DOJ and SEC, we agreed to pay a total of USD 850 million (RUB 59.1 billion as of December 31, 2018) to the United States, which was comprised of a criminal fine, criminal forfeiture and civil penalty. We provided a provision of USD 850 million (RUB 55.8 billion as of the date of accrual), which was recognized as a part of discontinued operations in our audited consolidated statement of profit or loss for the year ended December 31, 2018. In March 2019, the Group paid the total penalty of USD 850 million (RUB 55.6 billion as of the payment date).
Under the DPA and the Order, we agreed to appoint and in September 2019 appointed an independent compliance monitor for, among other things, reviewing, testing and perfecting our anti-corruption compliance code, policies, and procedures.
We have not received notice from the SEC, the DOJ or the monitor of any breach of the terms of the DPA or the Order. However, given a variety of factors, including the COVID-19 pandemic, we have agreed to a one-year extension of the DPA and the monitorship with the DOJ and the SEC to (i) provide us with adequate time to implement necessary enhancements to certain critical components of our anti-corruption compliance and ethics program and (ii) allow the monitor sufficient time to be able to complete its review of the remedial efforts, including our implementation of the monitor’s recommendations and an assessment of the sustainability of our remedial actions. The term of the monitorship will continue until September 2023.
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In connection with compliance monitorship, certain transactions were identified relating to our subsidiary in Armenia, and such transactions were disclosed to the DOJ and SEC. The DOJ and SEC have requested information regarding the transactions and we have initiated an investigation into the matter. It is currently impossible to predict the timing or outcome of the investigation.
In December 2020, we received a request for information from the DOJ concerning certain historical transactions with a supplier of telecommunication and information technology. Currently, we are cooperating to provide information to the DOJ and the SEC responsive to the request.
In March 2019, a proposed class action complaint on behalf of Shayan Salim and all other persons similarly situated has been filed in the United States District Court for the Eastern District of New York against MTS PJSC and certain of its managers. On March 1, 2021, US District Judge of Eastern District Court of New York granted MTS’s motion to dismiss with prejudice and dismissed the complaint in full. The plaintiff filed an appeal of the dismissal by the Eastern District Court of New York. On March 31, 2022, the United States Court of Appeals for the Second Circuit affirmed the dismissal by the Eastern District Court of New York and concluded the plaintiff’s claims are without merit.
For additional information please refer to Note 34 to our audited consolidated financial statements, “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 suspension of our services in Uzbekistan and “—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 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 have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA and the SEC Order” and “—We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation.”
Turkmenistan
In September 2017, our subsidiary in Turkmenistan, MTS Turkmenistan or MTS-TM, suspended the provision of telecommunication services to its subscribers, due to the termination by Turkmen state-owned companies and state authorities of line rental, frequency allocation, interconnect, and other agreements necessary to provide telecommunication services. The license for the provision of telecommunication services on the territory of Turkmenistan was valid until July 2018.
In July 2018, we filed a Request for Arbitration against the Sovereign State of Turkmenistan with the ICSID in order to protect our legal rights and investments in Turkmenistan. In April 2019, we filed a Memorial (statement of claim) in the dispute with the Sovereign State of Turkmenistan with the ICSID. As of December 31, 2021 the case was pending. See “Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable.”
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 our 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 34 to our audited consolidated financial statements.
In December 2018, the Russian tax authorities completed a secondary tax audit of MGTS for the year ended December 31, 2014. Based on the results of this audit, the Russian tax authorities argued the possibility of utilization by MGTS of tax assets in the amount of RUB 1,065.79 million. In September 2019 we filed an appeal with the Commercial Court of the City of Moscow. In June 2021 the Commercial Court of the City of Moscow issued a ruling to dismiss our claim, which was subsequently confirmed by the Appellate Commercial Court in October 2021. We filed an appeal with the Commercial Court of the Moscow Circuit, which was dismissed in February 2022. We intend to appeal this resolution.
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In December 2019, the Russian tax authorities initiated a tax audit of Stream LLC for the years ended December 31, 2016, 2017 and 2018. In November 2020, the tax audit was completed. Based on the results of this audit, the Russian tax authorities determined that RUB 348,98 million in additional taxes and penalties were payable by us, subsequently reduced to RUB 76,4 million. The additional taxes and penalties were fully paid in 2021.
In December 2020, the Russian tax authorities initiated a tax audit of MDTZK LLC for the years ended December 31, 2017, 2018 and 2019. In December 2021, based on the results of this audit, the Russian tax authorities determined that RUB 0.1 million in additional taxes and penalties were payable by us.
In December 2020, the Russian tax authorities initiated a tax audit of Cultural Service LLC for the years ended December 31, 2017, 2018 and 2019. In 2021, based on the results of this audit, the Russian tax authorities determined that RUB 1,6 million in additional taxes and penalties were payable by us.The additional taxes and penalties were fully paid in 2021.
Since 2016, we communicate with tax authorities within Tax Monitoring regime. Under this regime, we disclose information and documents related to calculation of our tax liabilities on line; the tax year is considered closed for disputes by October of the year following the reporting tax year. 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, 2021, tax declarations of our Russian subsidiaries were open for audit for the preceding three fiscal years.
Antimonopoly Proceedings
In August 2018, the Federal Antimonopoly Service (“FAS”) charged us and other federal operators with violation of antimonopoly laws in respect to establishing distinguished terms and conditions for bulk SMS pricing for the banks with state owned equity interest as compared to the terms and conditions for the other banks and establishing unreasonably high bulk SMS prices. In May 2019, FAS ruled on MTS breaching the provisions of antimonopoly laws in respect to establishing discriminatory terms and conditions for bulk SMS pricing and charging unreasonably high bulk SMS prices and prescribed MTS to cease violations. MTS contested the decision and prescription of FAS in the Commercial Court of the City of Moscow, which upheld the position of FAS in November 2019, followed by the Appellate Commercial Court in March 2020. MTS filed a cassation appeal to the Commercial Court of the Moscow Circuit, which also upheld the position of FAS Russia. In December 2020, MTS cassation appeal was rejected by the Judicial Chamber of the Supreme Court. In March 2021, Deputy Chairman of the Supreme Court of the Russian Federation upheld the rejection. In August 2021, we paid the fine imposed by FAS Russia in full amount of RUB 189 million.
In April, June and July 2021, JSC “Tinkoff Bank”, PJSC “Sovсombank” and JSC “Raiffeisenbank” initiated litigations against us, claiming reimbursement for losses incurred in connection with violation of antimonopoly laws in respect to establishing unreasonably high bulk SMS prices. Commercial Court of the City of Moscow has dismissed all three claims in full. It is currently impossible to predict the timing or outcome of the litigations on violation of antimonopoly laws in respect to establishing unreasonably high bulk SMS prices. We believe that as of December 31, 2021 we had adequately provided for claims related to SMS pricing.
8.A.8. Dividend Distribution Policy
The company’s dividend policy for the 2016 - 2018 period was approved by the MTS Board of Director on April 8, 2016 and set a target payout of RUB 25.0 - 26.0 per ordinary MTS share (RUB 50.0 - 52.0 per ADR) per calendar year, with a guaranteed minimum payout of RUB 20.0 per ordinary MTS share (RUB 40.0 per ADR) per calendar year. Payments were made on a semi-annual basis.
Annual and semi-annual dividend payments, if any, must be recommended by the Board of Directors and approved by a General Meeting of Shareholders (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 Russian 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.
On March 21, 2019, the MTS Board of Directors approved a new dividend policy covering the period 2019 - 2021 that set a minimum payout of RUB 28.0 per ordinary MTS share (RUB 56.0 per ADR) per calendar year. In determining actual dividend
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payouts, a number of factors were taken into consideration, including cash flow from operations, capital expenditures, and the company’s overall debt position. Payments continued to be made on a semi-annual basis.
B. | Significant Changes |
Acquisition of VisionLabs - In February 2022, we acquired a 100% ownership interest in VisionLabs B.V. ("VisionLabs"), a leading provider of computer vision and machine learning solutions. The acquisition is aimed at reinforcing of our artificial intelligence product portfolio in the computer vision space, and enhancing the potential of our digital ecosystem. See Note 5 to our consolidated financial statements.
Item 9. Offer and Listing Details
(Only Items 9.A.4 and 9.C are applicable.)
A. | Market Price Information |
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 Exchange) 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 Moscow Exchange.
| | | | | | | | | | |
| | | | | | | | Ordinary | | Ordinary |
|
| ADS High |
| ADS Low |
| Share High |
| Share Low | ||
Monthly High and Low | | | | | | | | | | |
March 2022(1) | | | N.A. | | | N.A. |
| 236.00 RUB |
| 171.50 RUB |
February 2022(2) | | $ | 8.10 | | $ | 5.34 |
| 294.90 RUB |
| 155.00 RUB |
January 2022 | | $ | 8.18 | | $ | 6.71 |
| 306.50 RUB |
| 263.30 RUB |
December 2021 | | $ | 8.30 | | $ | 7.47 |
| 300.60 RUB |
| 265.70 RUB |
November 2021 | | $ | 9.47 | | $ | 7.95 |
| 318.75 RUB |
| 291.00 RUB |
October 2021 | | $ | 9.88 | | $ | 9.11 |
| 330.45 RUB |
| 310.00 RUB |
Quarterly High and Low | |
|
| |
|
|
|
|
|
|
First Quarter 2022(3) | | $ | 8.18 | | $ | 5.34 |
| 306.50 RUB |
| 155.00 RUB |
Fourth Quarter 2021 | | $ | 9.47 | | $ | 6.71 |
| 330.45 RUB |
| 265.70 RUB |
Third Quarter 2021 | | $ | 10.07 | | $ | 8.49 |
| 350.95 RUB |
| 314.20 RUB |
Second Quarter 2021 | | $ | 9.70 | | $ | 8.40 |
| 346.35 RUB |
| 315.00 RUB |
First Quarter 2021 | | $ | 9.46 | | $ | 8.10 |
| 340.10 RUB |
| 311.80 RUB |
Fourth Quarter 2020 | | $ | 9.10 | | $ | 7.72 |
| 344.95 RUB |
| 308.20 RUB |
Third Quarter 2020 | | $ | 9.81 | | $ | 8.53 |
| 349.70 RUB |
| 312.50 RUB |
Second Quarter 2020 | | $ | 9.66 | | $ | 7.41 |
| 339.85 RUB |
| 293.50 RUB |
First Quarter 2020 | | $ | 11.00 | | $ | 6.20 |
| 353.05 RUB |
| 250.55 RUB |
Annual High and Low(4) | |
|
| |
|
|
|
|
|
|
2021 | | $ | 10.07 | | $ | 6.71 |
| 350.95 RUB |
| 265.70 RUB |
2020 | | $ | 11.00 | | $ | 6.20 |
| 353.05 RUB |
| 250.55 RUB |
2019 | | $ | 10.24 | | $ | 7.31 |
| 323.75 RUB |
| 299.60 RUB |
2018 | | $ | 12.80 | | $ | 6.64 |
| 321.00 RUB |
| 222.40 RUB |
2017 | | $ | 11.58 | | $ | 7.77 |
| 296.95 RUB |
| 223.05 RUB |
(1) | For the period from March 24, 2022 to March 30, 2022 with regard to the Company’s ordinary shares. On February 28, 2022, trading on the Moscow Exchange in all equity securities was suspended (including the Company's ordinary shares) and it resumed on March 24, 2022. On February 28, 2022, the NYSE halted trading in the Company's ADSs. Trading in the Company's ADSs on the NYSE has not yet resumed as of the date of this document. |
(2) | For the period from February 1, 2022 to February 25, 2022. |
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(3) | For the period from January 1, 2022 to February 25, 2022 with regard to the Company’s ADSs; for the period from January 1, 2022 to February 25, 2022 and from March 24, 2022 to March 31, 2022 with regard to the Company's ordinary shares. |
(4) | Effective May 3, 2010, the ratio of our ADSs changed from 1 ADS per 5 common shares to 1 ADS per 2 common shares. The ADS prices set forth in the table above reflect the new share: ADS ratio for all periods. |
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 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 |
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.
Our Purpose
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.
General Matters
Pursuant to our charter, we have the right to issue registered common stock, preferred stock and other securities provided for by legal acts of the Russian Federation with respect to securities. Our capital stock currently consists of 1,998,381,575 common shares, each with a par value of 0.10 rubles, all of which are issued and fully paid. Under Russian legislation, charter capital refers to the aggregate par value of the issued and outstanding shares. We are also authorized to issue an additional 100,000,000 common shares with a par 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.
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.
Until March 24, 2022, Sistema owned 42.085% of MTS’s ordinary shares directly and through Sistema Finance (“SF”) and Sistema Telecom Activy (“STA”). That stake was below 50% but it exceeded the total stake held by other unaffiliated shareholders (free-float) which was 41.185% before March 24, 2022. Until March 24, 2022, quasi-treasury shares (i.e., MTS’s ordinary shares owned by MTS’s subsidiaries) amounted to 14.79% of MTS’s share capital while treasury shares (i.e., MTS’ ordinary shares owned by MTS) amounted to 1.94% of MTS’s share capital.
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Treasury shares are non-voting shares pursuant to the Russian Federal Law on Joint-Stock Companies. Additionally, MTS, as a public company listed on the Moscow Exchange and NYSE, does not exercise voting rights with respect to its quasi-treasury shares according to the best practices and recommendations of the Corporate Governance Code by the Central Bank of Russia. Moreover, the right and discretion on how to vote with regard to the quasi-treasury shares owned by MTS’s subsidiaries are vested in the CEOs of these subsidiaries. Such CEOs are appointed by shareholder resolutions, following a proposal from the President of MTS or, in the case of MGTS, solely by the board of the subsidiary.
Sistema’s former 42.085% stake in MTS, compared to the 41.185% stake of other shareholders, gave Sistema the ability to elect the majority of the members of MTS’s Board of Directors and therefore appoint MTS’s executive bodies, thus exercising indirect control over MTS and its subsidiaries.
On March 24, 2022, the President and Chairman of the Management Board of MTS acquired 19,983,816 ordinary shares of the Company, which resulted in a decrease of Sistema’s effective ownership in MTS below 50% as the stake of other shareholders (free float) in MTS, equal to 42.185% as of March 24, 2022, became higher than Sistema’s stake in MTS, equal to 42.085% as of March 24, 2022.
As a result, Sistema, jointly with its subsidiaries, ceased to have an unconditional unilateral ability to elect the majority of the members of the Board of Directors and appoint the executive bodies of MTS.
As of December 31, 2019 MTS held 17,664 treasury shares. MTS held 405,347 and 38,715,838 treasury shares as of December 31, 2020 and 2021 respectively. As of March 24, 2022, MTS held a total of 38,715,838 of MTS shares.
Pursuant to our shareholders’ right to demand share repurchase under article 75 of the Joint Stock Companies Law, we repurchased in April, 2020 - 387,683, in May, 2021 - 9,805,921, in December, 2021 - 28,504,570 shares from our shareholders. As of December 31, 2019, our subsidiaries held a total of 225,529,758 of MTS shares. As of December 31, 2020, our subsidiaries held a total of 271,074,059 of MTS shares. As of December 31, 2021, our subsidiaries held a total of 297,041,619 of MTS shares. As of March 24, 2022, our subsidiaries held a total of 275,628,419 of MTS shares.
See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.” In our consolidated financial statements prepared in accordance with 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.
Rights Attaching to Shares
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 par 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:
● | freely transfer the shares without our consent and the consent of other shareholders; |
● | receive dividends; |
● | participate in shareholders’ meetings and vote on all matters within shareholders’ competence; |
● | transfer voting rights to a representative on the basis of a power of attorney; |
● | participate in the election and dismissal of members of the Board of Directors and Auditing Commission; |
● | exercise its pre-emptive right in certain circumstances, as determined by the Joint Stock Companies Law; |
● | if holding, alone or with other holders, 1% or more of the outstanding common shares, file a lawsuit against a member of the Board of Directors or member of any executive body of the company (including the company’s CEO and/or the company’s managing organization) to reimburse damages suffered by the company as the result of their fault (however, |
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until December 31, 2022 only shareholders holding alone or with other holders at least 5% of voting shares have the right to file such a claim, according to article 3 of the Federal Law No. 55-FZ dated March 14, 2022); |
● | if holding, alone or with other holders, 1% or more of the outstanding common shares, file a lawsuit with the claim for recognition of the invalid major transaction and interested party transaction made with violation of a procedure of receiving consent (however, until December 31, 2022 only shareholders holding alone or with other holders at least 5% of voting shares have the right to file such a claim, according to article 3 of the Federal Law No. 55-FZ dated March 14, 2022); |
● | if holding, alone or with other holders, more than 1% of the voting shares, demand from the holder of register of shareholders to provide information on shareholders of the company and shares held by such shareholders (however, until December 31, 2022 only shareholders holding alone or with other holders at least 5% of voting shares have the right to demand this information, according to article 3 of the Federal Law No. 55-FZ dated March 14, 2022); |
● | if holding, alone or with other holders, 2% or more of the voting stock, within 100 days after the end of our fiscal year, make proposals for the agenda of the annual shareholders’ meeting and nominate candidates (including by self-nomination) to the Board of Directors, the Counting Commission and the Auditing Commission; |
● | if holding, alone or with other holders, 10% or more of the voting stock, demand from the Board of Directors the calling of an extraordinary shareholders’ meeting or an unscheduled audit by the Auditing Commission or an independent auditor, and file a lawsuit against the company to convene an extraordinary shareholders’ meeting if the Board of Directors fails to take a decision to convene an extraordinary shareholders’ meeting or decides against convening such meeting; |
● | demand, under the following circumstances, the repurchase by us of all or some of the shares owned by it, as long as such holder voted against or did not participate in the voting on the decision approving the following: |
● | any reorganization; |
● | the conclusion of a major transaction, the value of which exceeds 50% of the balance sheet value of the assets calculated under Russian Accounting Standards (“RAS”); |
● | any amendment of our charter or approval of a restated version of our charter in a manner that restricts the holder’s rights; |
● | delisting of our shares from a stock exchange; and |
● | the amendment of the public company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares (i.e., transformation to a non-public company); |
● | upon liquidation, receive a proportionate amount of our property after our obligations are fulfilled; |
● | have free access to certain company documents, receive copies for a reasonable fee and, if holding alone or with other holders, 25% or more of the voting stock, have access to accounting documents and minutes of the management board meetings; |
● | if holding, alone or with other shareholders at least 1% of the voting shares, demand consent for an interested party transaction; and |
● | exercise other rights of a shareholder provided by our charter, Russian legislation and decisions of shareholders’ meeting approved in accordance with its competence. |
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Pre-emptive Rights
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 private 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 private 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 may not be less than 45 or, under certain circumstances, 20 or even eight business days. We cannot sell the shares or securities convertible into shares which are subject to the pre-emptive rights during this period.
Dividends
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 Board of Directors 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 Board of 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 charter capital of the company has been paid in full; |
● | the value of the company’s net assets on the date of the adoption of the decision to pay dividends is not less (and would not become less as a result of the proposed dividend payment) than the sum of the company’s charter capital, the company’s reserve fund and the difference between the liquidation value and the par value of the issued and outstanding preferred stock of the company; |
● | the company has repurchased all shares from shareholders having the right to demand repurchase; and |
● | the company is not, and would not become, insolvent as the result of the proposed dividend payment. |
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 to private shareholders registered in the share register of the company within 25 business days and to nominal holders and professional managers within 10 business 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 seven business days of receipt of funds by the depositary.
Pursuant to Instructions of the Bank of Russia No. 018-34-3/1202 dated February 28, 2022, professional participants of the securities market engaged in depository activities and maintenance of registers of security holders are instructed to suspend the transfer of payments on securities of Russian issuers to foreign individuals and entities. Among other things, this effectively means prohibiting foreigners from receiving dividends on shares. The Instructions will remain in force for six months unless revoked earlier.
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:
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● | by a three-quarters majority vote of a shareholders’ meeting; or |
● | by a court order. |
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:
● | individuals owed compensation for injuries or deaths; |
● | employees and authors of intellectual property; |
● | federal and local governmental entities claiming taxes and similar payments to the federal and local budgets and to non-budgetary funds; and |
● | other creditors in accordance with Russian legislation. |
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:
● | payments to repurchase shares from shareholders having the right to demand repurchase; |
● | payments of declared but unpaid dividends on preferred shares and the liquidation value of the preferred shares determined by the company’s charter, if any; and |
● | payments to holders of common and preferred shares. |
Liability of Shareholders
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:
● | this decision-making capability is provided for in the charter of the effective subsidiary or in a contract between such persons; and |
● | the effective parent gives binding instructions or consent for a transaction to the effective subsidiary (except for voting of the effective parent in a shareholders’ meeting of its effective subsidiary and approval by the effective parent’s governing body of a transaction if such approval is required under the charter of the effective parent or the effective subsidiary). |
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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 act 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 act 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.
Alteration of Capital
Charter Capital Increase
We may increase our charter capital by:
● | issuing new shares; or |
● | increasing the par value of previously issued shares. |
A decision on any issuance of shares or securities convertible into shares by private 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 par value of issued shares requires a majority vote of a shareholders’ meeting. In certain circumstances provided in our charter, a decision to increase the charter capital may be taken by our Board of Directors. In addition, the issuance of shares above the number provided in our charter necessitates a charter amendment, which requires a three-quarters affirmative vote of a shareholders’ meeting.
The 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 par 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 appraiser.
Russian securities regulations set out detailed procedures for the issuance and registration of shares of a joint stock company. These procedures require:
● | taking a decision on a share placement; |
● | approval of a resolution on a share issuance; |
● | prior registration of the share issuance with the CBR; |
● | placement of shares; |
● | filing with the CBR and registration of a report or a notice (as applicable) on results of the share issuance; and |
● | public disclosure of information relating to the issuance of shares. |
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 a 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 par 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
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charge of the state registration of legal entities on the decision taken and publish within the same three-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, not later than 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 Board of Directors to authorize the repurchase of up to 10% of our shares in exchange for cash. The repurchased shares pursuant to a board decision must be resold at the market price within one year of their repurchase or, failing that, the shareholders must decide to cancel such shares and decrease the charter capital. 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 charter capital is paid in full; |
● | we are not and would not become, as a result of the repurchase, insolvent; |
● | the value of our net assets at the time of repurchase of our shares is not less (and would not become less, as a result of the proposed repurchase) than the sum of our charter capital, the reserve fund and the difference between the liquidation value and par value of our issued and outstanding preferred shares; and |
● | we have repurchased all shares from shareholders having the right to demand repurchase of their shares in accordance with Russian law, as described immediately below. |
However, the Federal Law No. 46-FZ dated March 8, 2022 enforced a new simplified procedure for share buy-backs until August 31, 2022. According to the new rules we have a right to repurchase our shares if the following conditions are satisfied:
- | the repurchased shares are admitted to organized trading and are purchased at organized auctions on the basis of applications addressed to an unlimited number of bidders; |
-the repurchase of shares is carried out by a broker on behalf of a public joint stock company;
- | the decision on the repurchase of shares should be made by the board of directors. In this decision there is no need to specify information about the categories of shares to be repurchased, their number, and the period for which a company will repurchase them. |
However, these temporary rules are not applicable if we repurchase shares in order to reduce the overall number of shares.
Information about the repurchase may not be disclosed, if this is provided for by the decision on the Board of Directors. Moreover, the provisions of paragraphs 4, 5, 7, 8 of Article 72 of the Joint Stock Companies Law do not apply to the Company, including:
-on receipt of statements from shareholders on the sale of their shares to the Company;
-the Company does not need to notify shareholders about the repurchase;
-the Board of Directors should not approve the report on the results of the shareholders’ statements on the sale of their shares.
Our subsidiaries are not restricted from purchasing our shares, and our subsidiaries can vote these shares. However, our subsidiaries did not vote such shares in 2019, 2020 and 2021.
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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:
● | any reorganization; |
● | the conclusion of a major transaction, which involves assets having value of more than 50% of the balance sheet value of the assets calculated under RAS (including those which are simultaneously interested party transactions); or |
● | any amendment of our charter or approval of a restated version of our charter in a manner which restricts shareholders’ rights; and |
● | the amendment of the public company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares. |
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 it 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, which for a public joint stock company, shall be maintained by 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 JSC prior to October 6, 2015) and on February 4, 2019, Independent Registration Company JSC has been merged into JSC IRC—R.O.S.T. which now maintains our register of shareholders by way of universal succession.
On December 19, 2019, our Board of Directors adopted a decision to terminate the existing agreement with JSC IRC—R.O.S.T. and enter into relevant agreement with JSC REESTR and starting from April 10, 2020 our register is maintained by REESTR.
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
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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.
Pursuant to Instructions of the Bank of Russia No. 018-34-3/1202 dated February 28, 2022, professional participants of the securities market engaged in depository activities and maintenance of registers of security holders are instructed to withhold performance of all operations on the withdrawal of securities of Russian issuers from personal accounts and depot accounts opened to foreign legal entities and individuals (with a very limited number of exceptions). Among other things, this effectively means prohibiting foreigners from selling shares of Russian companies. The Instructions will remain in force for six months unless revoked earlier.
However, the Government of the Russian Federation adopted the Decree N 295, dated March 6, 2022, according to which the Government Commission for Monitoring the Implementation of Foreign Investments in the Russian Federation will issue permissions for implementation (execution) by residents of transactions (operations) with such foreign persons.
On March 1, 2022, the President of the Russian Federation signed Decree No. 81 “On additional temporary economic measures to ensure financial stability in Russia”, pursuant to which with effect from March 2, 2022, a special procedure is introduced for residents in order to make certain transactions with foreign persons associated with foreign states (including their controlled persons) that commit unfriendly acts in relation to Russian legal entities and individuals, including for instance, transactions creating the right of ownership of securities made with persons of foreign states committing unfriendly acts (including their controlled persons).
Reserve Fund
Russian legislation requires that each joint stock company establish a reserve fund to be used only to cover the company’s losses, redeem the company’s bonds and repurchase the company’s shares in cases when other funds are not available. Our charter provides for a reserve fund of 15% of our charter capital, funded through mandatory annual transfers of at least 5% of our net profits until the reserve fund has reached the 15% requirement.
Disclosure of Information
The Central Bank of Russia developed and adopted regulations “On the disclosure of information by issuers of securities” No. 714-P dated March 27, 2020 that arrange substantial changes to the system of disclosure of information. These regulations came into force on October 1, 2021. Regulations require us to make the following periodic disclosure and fillings:
● | disclosing issuer’s report every six and twelve months instead of posting quarterly reports. Pursuant to these new regulations, we do not have to disclose information about bank accounts, branches and representative offices, size and structure of our charter capital in the issuer’s report; |
● | publishing any information (including inside information) concerning material facts and changes in our financial and business activity, including our reorganization, certain changes in the amount of our assets, decisions on share issuances, certain corporate events, such as mandatory or voluntary tender offers, record dates, certain changes in ownership and shareholding, filing of 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; |
● | disclosing information on various stages of share placement, issuance and registration through publication of certain data as required by the securities regulations; |
● | disclosing our charter and internal corporate governance documents on our website; |
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● | disclosing our annual report and annual financial statements prepared in accordance with RAS, as well as annual and interim financial statements prepared in accordance with IFRS; |
● | posting on our website a list of our affiliated companies and individuals every six months instead of quarterly basis; |
● | posting on our website a list of inside information; and |
● | other information as required by applicable Russian securities legislation. |
Moreover, according to the new regulations, for the preparation of the issuer's report, we will use IFRS for calculation of financial performance, and the most important information, including operational and financial performance and data about key contractors, will be disclosed on a consolidated basis by group.
However, the Decree of the Government of the Russian Federation dated March 12, 2022 No. 351 allows us not to disclose or disclose in a limited manner certain information until December 31, 2022.
General Shareholders’ Meetings
Procedure
The powers of a shareholders’ meeting are set forth in the Joint Stock Companies Law and in our charter. In 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 our shareholders have the power to decide on are:
● | charter amendments; |
● | reorganization or liquidation; |
● | election and removal of members of the board of directors; |
● | determination of the amount of compensation for members of the board of directors; |
● | determination of the number, par value, class/type of authorized shares and the rights granted by such shares; |
● | changes in our charter capital in certain instances; |
● | appointment and removal of our independent auditor and of the members of our Auditing Commission and Counting Commission if it is obligatory for the company to have the Auditing Commission; |
● | participation in trade or industrial groups, or other associations of commercial entities; |
● | approval of certain internal documents and corporate records; |
● | distribution of profits and losses, including approval of dividends; |
● | redemption by the company of issued shares in cases provided by the Joint Stock Companies Law; and |
● | other matters, as provided for by the Joint Stock Companies Law and our charter. |
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
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majority vote of the voting shares present at a shareholders’ meeting. However, Russian law and our charter requires a three-quarters majority vote of the voting shares present at a shareholders’ meeting to approve the following:
● | charter amendments; |
● | reorganization or liquidation; |
● | consent or subsequent approval of major transactions involving assets in excess of 50% of the balance sheet value of the company’s assets calculated under RAS; |
● | the number, par value, and category (type) of authorized shares and the rights granted by such shares; |
● | repurchase by the company of its issued shares; |
● | any issuance of shares or securities convertible into shares of common stock by private subscription; |
● | issuance by open subscription of shares of common stock or securities convertible into common stock, in each case, constituting 25% or more of the number of issued and outstanding shares of common stock; |
● | issuance by private subscription securities convertible into common stock; |
● | increase of the charter capital through issuing additional shares by private subscription; |
● | decrease of the charter capital through reduction of the par value of shares; or |
● | filing of an application for delisting of our shares or securities convertible into shares. |
Moreover, a ninety-five majority vote of the voting shares present at a shareholders’ meeting is required to approve the amendment of the public company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares (i.e., transformation to a non-public company).
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:
● | election of the members of the board of directors; |
● | approval of the annual report and the annual financial statements, including the balance sheet and profit and loss statement; |
● | approval of distribution of profits, including approval of dividends, and losses, if any; |
● | appointment of an independent auditor; and |
● | appointment of the members of the auditing commission. |
A shareholder or group of shareholders owning in the aggregate at least 2% of the issued voting shares may introduce proposals for the agenda of the annual shareholders’ meeting and may nominate candidates for the board of directors, counting
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commission and auditing 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 auditing 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 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:
● | election of the members of the board of directors; |
● | election of the auditing commission; |
● | approval of a company’s independent auditor; and |
● | approval of the annual report, the annual financial statements. |
At the same time, the provision establishing these restrictions on holding a general meeting of shareholders in absentia was suspended until the end of 2021 due to the COVID-19 pandemic (Articles 2 and 3 of Federal Law No. 17-FZ dated February 24, 2021).
Moreover, in 2022, general meetings of shareholders, the agenda of which contains the above issues, could also be held in absentia (Article 2 of Federal Law No. 25-FZ dated February 25, 2022).
Notice and Participation
Pursuant 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 21 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, Article 17 of the Federal Law No. 46-FZ dated March 8, 2022 set new rules for the notice until December 31, 2022 - shareholders and persons 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 35 days prior to the date of the meeting.
Moreover, according to these new provisions, we have to determine the date by which proposals on putting issues on the agenda of the general shareholders’ meeting and proposals on nominating candidates to the Board of Directors and other bodies of the company will be accepted from shareholders, but not less than 27 days prior the date of the general shareholders’ 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 50 days prior to the date of the meeting. Only those items that were set out in the agenda to shareholders may be voted upon at a general shareholders’ meeting.
If a nominal holder of the shares registers in the register of shareholders, then a notification of the shareholders’ meeting shall be sent to the nominal holder. The nominal holder must notify its clients in accordance with Russian legislation or an agreement with the client. The list of persons entitled to participate in a general shareholders’ meeting is to be compiled on the basis of data in our
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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 25 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 55 days before the date of the meeting).
The right to participate in a general meeting of shareholders may be exercised by a shareholder as follows:
● | by personally participating in the discussion of agenda items and voting thereon; |
● | by sending an authorized representative to participate in the discussion of agenda items and to vote thereon; |
● | by submitting a written ballot reflecting the shareholders’ voting on the agenda items; |
● | by delegating the right to submit such written ballot to an authorized representative; or |
● | by sending information on their willingness to the nominee holder for further transfer to the registrar in accordance with the requirements of the Russian securities law. |
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.
Board of Directors
Our Board of Directors is elected through cumulative voting. Under cumulative voting, each shareholder may cast an aggregate number of votes equal to the number of shares held by such shareholder multiplied by the number of persons to be elected to our Board of Directors, and the shareholder may give all such votes to one candidate or spread them between two or more candidates. Before the expiration of their term, the directors may be removed as a group at any time without cause by a majority vote of a shareholders’ meeting.
The 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 Board of Directors consists of at least seven members, which number may be increased pursuant to a decision of the general meeting of shareholders. In 2021, our Board of Directors consisted of nine members. Currently, our Board of Directors consists of eight members4.
4 One of our directors resigned as a Member of the Board of Directors of MTS.
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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 Board of Directors has the power to perform the general management of the company, and to decide, among others, the following issues:
● | determination of our business priorities; |
● | approval of our annual plans, including financial plans; |
● | capital participation, change of share and termination of capital participation in the commercial organizations (except in certain circumstances specified in our charter when these issues fall within the competence of the General Shareholders' Meetings or the Management Board as described in the paragraph below); |
● | convening annual and extraordinary shareholders’ meetings, except in certain circumstances specified in the Joint Stock Companies Law; |
● | approval of the agenda for the shareholders’ meeting and determination of the record date for shareholders entitled to participate in a shareholders’ meeting; |
● | placement of our bonds and other securities in cases specified in the Joint Stock Companies Law; |
● | determination of the price of our property and of our securities to be placed or repurchased, as provided for by the Joint Stock Companies Law; |
● | repurchase of our shares, bonds and other securities in certain cases provided for by the Joint Stock Companies Law; |
● | appointment and removal of our President and determination of the number of the members of our Management Board and their election; |
● | formation of the Board of Directors committees; |
● | determination of principles and approaches to risk management, internal control and audit within the company; |
● | transfer of powers of the company’s CEO to a managing organization of an individual manager; |
● | recommendations on the amount of the dividend and the payment procedure thereof; |
● | recommendations on the amount of remuneration and compensation to be paid to the members of our Auditing Commission and on the fees payable for the services of an independent auditor; |
● | use of our reserve fund and other funds; |
● | approval of our internal documents, except for those documents whose approval falls within the competence of our shareholders or the president; |
● | consent or subsequent approval of major and interested party transactions in certain cases provided for by the Joint Stock Companies Law; |
● | increasing our charter capital by issuing additional shares within the limits of the authorized charter capital, except in certain circumstances specified in our charter; |
● | approval of our share registrar and the terms of the agreement with it; and |
● | other issues, as provided for by the Joint Stock Companies Law and our charter. |
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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.
According to our charter, an exception provides for the competence of the Board of Directors on the participation in the capital of commercial organizations: the decision on participation in "startups" can be made by the Management Board if: (i) the amount of the transaction is no more than U.S. dollars 2, 000, 000 (calculated at the exchange rate between the the ruble and the U.S. dollar quoted by the CBR for the date the decision is made), and (ii) the overall size of the acquired or sold share, taking into account the share that MTS already possess, is less than 50% of the charter capital of the “startup”. The criteria to determine whether the organization is a “startup” are defined by the decision of Board of Directors.
In the past, matters within the competence of our Board of Directors included all transactions on participation in the capital of companies, regardless of the size of the transaction or the size of the acquired or sold share. Since our digital transformation and development of a digital ecosystem actively involves innovative products created by external startups in the ecosystem, and recognizing that the speed of decision-making to invest in a startup is critical, the transfer of competence on investment and management of a portfolio of startups will allow to increase the speed of the decision-making by our level of management when working with startups, and will allow us to increase capitalization through minority investments in startups.
Our internal regulation “On the Board of Directors of Mobile TeleSystems Public Joint Stock Company” (the “Regulation”) was approved by the extraordinary shareholders’ meeting on September 30, 2021. In accordance with clause 2.2.2 of the Regulation, the members of the Board of Directors have the right to:
● | receive information regarding our operations; |
● | propose issues to be discussed by the Board of Directors; |
● | review the minutes of the Board of Directors meetings; |
● | request to include in the minutes of the meetings their personal opinion concerning issues on the agenda and decisions made with respect thereto; |
● | receive a remuneration and/or compensation of expenses related to the execution of their duties as members of the Board of Directors in accordance with decisions of the general shareholders’ meeting; and |
● | be present at the general shareholders’ meeting and answer questions regarding our operations. |
In accordance with clause 2.3.2 of the Regulation, the members of the Board of Directors must:
● | be loyal to the Company; |
● | execute their duties in a confident and scrupulous manner; |
● | act within their rights and duties in accordance with the goals and objectives of the Board of Directors; |
● | not distribute confidential information concerning us and protect such information from unlawful and improper use and publishing, and not use such confidential information in their own or third parties’ commercial purposes; |
● | participate in the work of the Board of Directors; |
● | participate in the voting process during the Board of Directors meetings; |
● | complete the tasks assigned by the Board of Directors; |
● | evaluate the risks and consequences of the decisions made; |
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● | inform us on a timely basis about their participation in the management of other companies and changes in such participation; |
● | restrain from voting on issues of personal interest; |
● | inform the Board of Directors about future deals in which they may have a personal interest; |
● | disclose information about the holding, disposal or acquisition of our shares and other securities; |
● | restrain from actions, which could lead to a conflict between their personal and our interests; and |
● | perform other responsibilities as provided by our charter and the Regulation. |
Interested Party Transactions
Under the Joint Stock Companies Law, certain transactions are defined as “interested party transactions.” Such transactions include transactions involving a member of the board of directors, the company’s CEO, a member of the company’s management board), any person controlling the company, or any person who is able to give 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 controlled entities, is/are:
● | a party to, or beneficiary of, a transaction with the company, whether directly or as a representative or intermediary; |
● | controlling persons of a legal entity that is a party to, or beneficiary of, a transaction with the company, whether directly or as a representative or intermediary; or |
● | a member of any governing body of a company that is a party to, or beneficiary of, a transaction with the company, whether directly or as a representative or intermediary, or a member of any governing body of a management organization of such a company. |
Pursuant to the Joint Stock Companies Law a “controlling person” is deemed to be a person (i) directly or indirectly controlling over 50% of the voting shares in another legal entity (on the basis of an instruction, a shareholders’ agreement or other agreements); or (ii) having the right to appoint the sole executive body or more 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 shareholders (if all members of the board of directors are deemed interested or a 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 (if requested by the sole director, a member of the management board, a member of the board of directors or a shareholder owning at least 1% of the company’s voting shares) by a majority of disinterested directors of the company which within one year prior to the decision:
(1) | did not act as persons performing functions of the sole executive body, including its executive manager, members of the company’s management board or members of the management bodies of the company’s managing organization; |
(2) | did not have spouses, parents, children, adoptive parents and adopted children, full and half brothers and sisters acting as members of the company’s management bodies, members of the management bodies of the company’s managing organization or of its executive manager; and |
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(3) | did not control the company or the company’s managing organization (including its executive manager) or were not entitled to issue instructions binding on the company (collectively, “independent directors”). |
Consent or subsequent approval by a majority of shareholders who are not interested in the transaction and are not controlled by interested persons shall be granted if:
● | the value of such transaction or a number of interrelated transactions is 10% or more of the balance sheet value of the company’s assets determined under RAS; |
● | the transaction or a number of interrelated transactions involves a sale of common shares, in an amount exceeding 2% of the company’s issued common stock, or preference shares, in an amount exceeding 2% of the company’s issued stock, unless the charter of a company provides for a lesser amount of shares; |
● | the number of directors who are not interested in the transaction is not sufficient to constitute a quorum; or |
● | the number of directors who are not interested in the transaction and meet the requirements established by clause 3, Article 83 of the Federal Law “On Joint Stock Companies” becomes less than two, unless the charter of a company provides for a higher quorum for a board of directors meeting on this issue. |
Consent or subsequent approval of interested party transactions is not required nor can be requested in the following instances:
● | the transactions are concluded in the ordinary course of business, provided that the company has concluded similar transactions with disinterested parties on substantially similar terms over a long time; |
● | the company has only one shareholder that simultaneously performs the functions of the company’s CEO; |
● | all shareholders owning voting shares of the company are deemed interested in such transactions and there are no other persons interested in such transactions; |
● | the transactions constitute the issuance of shares or securities convertible into shares, including by way of subscription; |
● | the transactions constitute the issuance of bonds by public subscription or repurchase of bonds; |
● | the transactions arise from the repurchase, whether mandatory or not, by the company of its issued shares; |
● | the transactions constitute transfer of assets within the framework of reorganization, in particular under merger and accession agreements; or |
● | the transactions are mandatory for the company pursuant to Russian law and must be concluded on the basis of fixed prices and tariffs adopted by a competent state body; |
● | the transactions are public agreements which terms are similar to other public agreements executed by the company; |
● | the transactions constitute the agreements set out by certain provisions of the Federal Law of the Russian Federation No. 35 “On Electricity Power” dated 26 March 2003; |
● | the transactions concluded on the same terms as preliminary contracts previously approved as interested party transactions; |
● | the transactions concluded in an open tender, if such tender terms were previously approved by the Board of Directors; |
● | the value of the transaction or the subject matter under the transaction does not exceed 0.1% of the company’s balance sheet assets calculated according to RAS and it also does not exceed the threshold set out by the CBR for these purposes. |
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Major Transactions
The Joint Stock Companies Law defines a “major transaction” as a transaction, or a number of interrelated transactions entered 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, as well as in other cases provided by the Joint Stock Company Law.
Consent or subsequent approval of major transactions is not required nor can be requested in the following instances:
● | the company has only one shareholder that simultaneously performs the functions of the company’s CEO; |
● | the transactions involving the placement of common stock, or securities convertible into common stock or transactions involving services provided in connection with such placements; |
● | the transactions constitute transfer of assets within the framework of reorganization, in particular under merger and accession agreements; |
● | the transactions to be executed by the company pursuant to the federal laws and/or other regulations of the Russian Federation and priced in accordance with the regulations of the Russian government or other federal bodies authorized by the Russian government; |
● | the transactions are public agreements which terms are similar to other public agreements executed by the company; |
● | the transactions arising from a mandatory tender offer to purchase company’s issued shares or securities convertible to shares; |
● | the transactions concluded on the same terms as the preliminary contracts previously approved as major transactions. |
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.
Change in Control
Anti-takeover Protection
Russian legislation requires the following:
● | A person intending to acquire more than 30% of a public joint stock company’s ordinary shares and voting preferred shares (including, for such purposes, shares already owned by such person and its affiliates), will be entitled to make a public tender offer to other holders of such shares or securities convertible into such shares (the “voluntary offer”). |
● | A person that has acquired more than 30% of a public joint stock company’s ordinary shares and voting preferred shares (including, for such purposes, shares already owned by such person and its affiliates) will, except in certain limited circumstances, be required to make, within 35 days of acquiring such shares, a public tender offer for other shares of the same class (the “mandatory offer”) and for securities convertible into such shares, at the price which is not less than the price determined based on a weighted average market price of the shares over the six month period before the filing of the offer with the CBR as described below, if the shares are publicly traded, or on a price supplied by an appraiser if the shares have no or insufficient (less than six months) trading history. The public tender offer price may not be less than the highest price at which the offeror or its affiliated persons purchased or undertook to purchase the relevant securities over the six month period before the offer was sent to the company. From the moment of acquisition of more than 30% |
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of the shares until the date the offer was sent to the company, the person making the offer and its affiliates will be able to 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. |
● | A person that as a result of an offer described in either of the preceding paragraphs becomes (individually or with its affiliates) the owner of more than 95% of the company’s ordinary shares and voting preferred shares, must buy out the remaining shares of the company as well as other securities convertible into such shares upon request of the holders of such shares or other 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 price of the preceding acquisition of the 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. |
● | An offer of the kind described in either of the preceding three paragraphs must be accompanied by a bank guarantee of payment. If the company is publicly traded, prior notice of the offer must be filed with the CBR; otherwise, notice must be filed with the CBR no later than the date of the offer. The CBR may order amendments to the terms of the offer (including price) in order to bring them into compliance with the rules. |
● | Once such an offer has been made, competing offers for the same securities can be made by third parties and, in certain circumstances, acceptance of the initial offer may be withdrawn by the security holders who choose to accept such competing offer. From the making of such an offer until 20 days after its expiry (which period may in certain cases exceed 100 days) the company’s shareholders’ meeting will have the sole power to make decisions on charter capital increase, issuance of securities, approval of interested party and certain major transactions, and on certain other significant matters. |
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.
Approval of the FAS
Pursuant to the Federal Law on Competition, until January 5, 2016, the FAS had 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 included 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%, 2/3 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 FAS may be entitled to regulate our subscriber tariffs and impose certain restrictions on our operations.”
Strategic Industries Law
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”) or acquisition of fixed production assets of a strategic 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, which was established by the Resolution of the Government of Russia dated July 6, 2008 as the body responsible for granting such consents, and the FAS, which is authorized to process applications for consent from foreign investors. For the purposes of the Strategic Foreign Investment Law “control” means an ability to determine, directly or
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indirectly, decisions taken by a strategic company, whether through voting at the general shareholders’ (participants’) meeting of the strategic company, participating in the board of directors or management bodies of the strategic company, or acting as the external management organization of the 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, or if through a 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.
Furthermore, if a foreign entity or group of entities holding securities of a strategic 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.
Moreover, the Russian prime minister, who acts as President of the Commission, is entitled to impose an obligation of prior approval in regard of any transaction involving a Russian enterprise, regardless of whether such enterprise operates within a “strategic” industry or not. The decision of the Commission President has to be sent to the investor by the FAS within three business days. Upon receipt the investor will need to file the necessary application with the FAS to obtain approval. Failure to comply will result in penalties set out by the legislation.
In addition, foreign investors are required to notify the FAS about any transactions undertaken by them resulting in the acquisition of 5% or more of the charter capital of a strategic company and other transactions or other actions preapproved in accordance with 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.”
Disclosure of Ownership
Under Russian law, a person acquiring, directly or indirectly, 5% or more of our voting 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 voting shares by such person.
A holder of more than 5% of our voting 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 voting shares by our subsidiaries.
Notification of Foreign Ownership
Legal entities and individual entrepreneurs who acquire shares in Russian joint stock companies are required to notify the Russian tax authorities (in case the share of direct participation exceeds 10%) within one month following such acquisition.
C. | Material Contracts |
As of December 31, 2021 we were not party to any contracts considered material to our financial results or operations except for loan agreement with MTS International Funding Limited relating to the issued loan participation notes and ruble bonds issued. For more information, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
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.
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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, Ruble-nominated transactions etc.). Pursuant to the February 28 Decree, Russian residents that participate in foreign economic activities shall sell 80% of foreign currency credited from January 1, 2022, to their accounts in Russian banks under foreign trade contracts with nonresidents not later than 3 business days from the effective date of the February 28 Decree.
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 entities is generally determined based on the place of management of this entity; 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. The following discussion is based on:
● | Russian tax legislation; and |
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● | the United States—Russia income tax treaty (and judicial and administrative interpretations thereof by the Russian authorities). |
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 depositary account with the shares underlying the ADSs acts 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 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 Russian 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. These reduced tax rates may apply if the information required by the Russian Tax Code, is presented to the tax agent fully and in time; otherwise, the tax agent is required to use the baseline tax rate established by the Russian Tax Code, or the tax rate set by the applicable tax treaty, not taking into account the percentage of share in Charter Capital, the amount of investment, or term of ownership, whichever is appropriate. See also “—United States—Russia Income Tax Treaty Procedures.”
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 15% from dividend payments made to the depositary, unless the information on the ADS holder (including the amount of ADSs and shares held and holder’s 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 described above under “Specific uncertainties associated with the tax treatment of ADS holders” 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 15% 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
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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.”
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 15% 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.
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 15% from dividend payments made to the depositary. Reduced tax rates may apply if the information required by the Russian Tax Code is presented to the tax agent fully and in time; otherwise, the tax agent is required to use the baseline tax rate established by the Russian Tax Code, or tax rate set by the applicable tax treaty, not taking into account the percentage of share in Charter Capital, the amount of investment, or term of ownership, whichever is appropriate. 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.
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 any portion of 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 15% effective tax rate (general tax rate for Russian tax non-residents) on their share of dividends.
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 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.
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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 the United States – Russia income tax treaty, 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. Starting from 2017, in order to benefit from the tax treaty the recipient of passive income has to provide a confirmation that it is the beneficial owner of this income.
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.
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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 and claim tax refund within three years 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 Russian 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 above requirements refer not only to ADS, but also to securities in general. In addition to the documents listed above, tax authorities may require more information and documents. Decision on refund is to be taken by the tax authorities within six months. 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.
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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 United States 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”), and the Convention Between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect To Taxes on Income and Capital, in force as of December 16, 1993 (the “United States—Russia income tax treaty”), 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 United States 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 an entity or arrangement treated as a partnership for United States federal income tax 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, entities or arrangements treated as partnerships for United States federal income tax purposes that hold ADSs and partners in such partnerships are urged to consult their tax advisors regarding the specific United States 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:
● | an insurance company; |
● | a tax-exempt organization; |
● | a financial institution; |
● | a person subject to the alternative minimum tax; |
● | a person who is a broker-dealer in securities or a trader subject to a mark-to-market election; |
● | a S corporation; |
● | a partnership, a pass-through entity or arrangement, a person holding ADSs through a partnership or other pass-through entity or arrangement; |
● | an expatriate subject to Section 877 of the Code; |
● | a holder that is not a U.S. Holder; |
● | an investor that has a functional currency other than the U.S. dollar; |
● | a regulated investment company; |
● | a real estate investment trust; |
● | an owner, directly, indirectly or by attribution, of ADSs (alone or together with shares) representing 10% or more of the outstanding shares of our stock (by vote or value); or |
● | an owner holding ADSs as part of a hedge, straddle, synthetic security or conversion transaction. |
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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 Medicare contribution tax on “net investment income” or of any United States state or local tax law or any non-U.S. tax law. This discussion also does not address any tax consequences relating to the direct ownership of common stock.
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 an 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 amount withheld in respect of Russian 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 are readily tradable on an established securities market in the United States (such as the New York Stock Exchange) 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” (as discussed below). We believe we are eligible for the benefits of the United States—Russia income tax treaty. Distributions with respect to ADSs in excess of our current and accumulated earnings and profits (computed in accordance with United States federal income tax principles) 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 in accordance with United States federal income tax principles 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 United States 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 U.S. dollar value of the refunded rubles differs from the U.S. dollar value of that amount of rubles on the date of receipt of the underlying distribution.
203
Russian withholding tax at the rate applicable to you (taking into account any entitlement to a reduced rate 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 United States 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, you may not be entitled to a foreign tax credit (or deduction) for the excess amount, even though the procedures for claiming refunds for such Russian taxes and the practical likelihood that refunds will be made available in a timely fashion are uncertain (as described above under “Certain Russian Tax Consequences”). 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.” 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 United States 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 imposed 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 total 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, 2020, or for the year ended December 31, 2021. However, our possible status as a PFIC must be determined annually and requires a factual determination that depends on, among other things, the nature and composition of our income, assets and activities for the entire taxable year. Moreover, the value of our total assets for PFIC purposes is generally determined based on the market price of our ADSs, which is subject to potentially significant fluctuation. 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 possible 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 other required certifications 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.
204
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your United States 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.
Foreign Financial Asset Reporting
Individual U.S. Holders that own “specified foreign financial assets” with an aggregate value in excess of U.S.$50,000 on the last day of the taxable year or U.S.$75,000 at any time during the taxable year are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on objective criteria. U.S. Holders who fail to report the required information could be subject to substantial penalties. In addition, the statute of limitations for assessment of tax would be suspended, in whole or part. Prospective investors are encouraged to consult with their own tax advisors regarding the possible application of these rules, including the application of the rules to their particular circumstances.
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 obtained from the SEC website at www.sec.gov. Our electronic filings are available at the SEC website www.sec.gov. Information about MTS is also available on the Internet at www.ir.mts.ru 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 primarily related to our variable interest rate debt and exposed to fair value risk related to our fixed rate notes. As of December 31, 2021, RUB 193,950 million, or 41.87% of our total indebtedness, excluding lease obligations, was variable interest rate debt, while RUB 269,307 million, or 58.13% of our total indebtedness, excluding lease obligations, was fixed interest rate debt.
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The table below presents principal cash flows and related weighted average interest rates for indebtedness by contractual maturity dates as of December 31, 2021.
Contractual Maturity Date as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Annual |
|
| | | | | | | | | | | | | | | | | | interest rate | |
| | | | | | | | | | | | | | | | | | (Actual | |
| | | | | | | | | | | | | | | | | | interest rate at | |
| | | | | | | | | | | | | | | | | | December 31, |
|
Indebtedness |
| Currency |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| Thereafter |
| Total |
| 2021) |
|
| | (amounts in millions of RUB) | | ||||||||||||||||
Variable debt | | | | | | | | | | | | | | | | | | | |
VTB | | RUB | | — | | — | | 25,000 | | 30,000 | | — | | — | | 55,000 | | 9.00 | % |
VTB | | RUB | | — | | — | | — | | 45,000 | | — | | — | | 45,000 | | 9.75 | % |
VTB | | RUB | | — | | — | | — | | 15,000 | | 15,000 | | — | | 30,000 | | 9.15 | % |
Sberbank | | RUB | | — | | — | | 30,000 | | — | | — | | — | | 30,000 | | 9.55 | % |
Sberbank | | RUB | | 10,000 | | 10,000 | | — | | — | | — | | — | | 20,000 | | 9.69 | % |
Sberbank | | RUB | | 10,000 | | — | | — | | — | | — | | — | | 10,000 | | 9.63 | % |
VEB | | RUB | | — | | — | | 754 | | 1,256 | | — | | — | | 2,010 | | 3.27 | % |
ZTV | | RUB | | 1,940 | | — | | — | | — | | — | | — | | 1,940 | | 8.50 | % |
Total variable debt |
| |
| 21,940 |
| 10,000 |
| 55,754 |
| 91,256 |
| 15,000 |
| — |
| 193,950 |
|
| |
Weighted average interest rate |
| | | 9.32 | % | 9.29 | % | 9.27 | % | 9.29 | % | 9.15 | % | — | | 7.72 | % |
| |
Fixed‑rate notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
MTS International Notes due 2023 |
| USD |
| — |
| 33,309 |
| — |
| — |
| — |
| — |
| 33,309 |
| 5.00 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 15,000 |
| — |
| — |
| — |
| — |
| — |
| 15,000 |
| 7.70 | % |
MTS PJSC Notes due 2025 |
| RUB |
| — |
| — |
| — |
| 15,000 |
| — |
| — |
| 15,000 |
| 8.00 | % |
MTS PJSC Notes due 2023 |
| RUB |
| — |
| 15,000 |
| — |
| — |
| — |
| — |
| 15,000 |
| 6.85 | % |
MTS PJSC Notes due 2027 |
| RUB |
| — |
| — |
| — |
| — |
| — |
| 15,000 |
| 15,000 |
| 6.60 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 10,000 |
| — |
| — |
| — |
| — |
| — |
| 10,000 |
| 9.00 | % |
MTS PJSC Notes due 2025 |
| RUB |
| — |
| — |
| — |
| 10,000 |
| — |
| — |
| 10,000 |
| 7.25 | % |
MTS PJSC Notes due 2024 |
| RUB |
| — |
| — |
| 10,000 |
| — |
| — |
| — |
| 10,000 |
| 8.70 | % |
MTS PJSC Notes due 2026 |
| RUB |
| — |
| — |
| — |
| — |
| 10,000 |
| — |
| 10,000 |
| 7.90 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 10,000 |
| — |
| — |
| — |
| — |
| — |
| 10,000 |
| 6.45 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 10,000 |
| — |
| — |
| — |
| — |
| — |
| 10,000 |
| 5.50 | % |
MTS PJSC Notes due 2023 |
| RUB |
| — |
| 9,930 |
| — |
| — |
| — |
| — |
| 9,930 |
| 6.50 | % |
MTS PJSC Notes due 2024 |
| RUB |
| — |
| — |
| 7,500 |
| — |
| — |
| — |
| 7,500 |
| 8.60 | % |
MTS PJSC Notes due 2027 |
| RUB |
| — |
| — |
| — |
| — |
| — |
| 7,000 |
| 7,000 |
| 6.60 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 5,000 |
| — |
| — |
| — |
| — |
| — |
| 5,000 |
| 8.40 | % |
MTS PJSC Notes due 2026 |
| RUB |
| — |
| — |
| — |
| — |
| 5,000 |
| — |
| 5,000 |
| 6.60 | % |
MTS PJSC Notes due 2024 |
| RUB |
| — |
| — |
| 4,350 |
| — |
| — |
| — |
| 4,350 |
| 6.50 | % |
MTS PJSC Notes due 2031 |
| RUB |
| — |
| — |
| — |
| — |
| 78 |
| — |
| 78 |
| 6.25 | % |
MTS PJSC Notes due 2022 (V series) |
| RUB |
| 12 |
| — |
| — |
| — |
| — |
| — |
| 12 |
| 0.25 | % |
Fixed‑rate bank loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sberbank |
| RUB |
| 39,000 |
| 31,000 |
| 5,000 |
| — |
| — |
| — |
| 75,000 |
| 5.99 | % |
Ekvant |
| RUB |
| 37 |
| 36 |
| 28 |
| — |
| — |
| — |
| 101 |
| 0.00 | % |
Maind Kraft |
| RUB |
| 59 |
| — |
| — |
| — |
| — |
| — |
| 59 |
| 5.10 | % |
NVision Group |
| RUB |
| 18 |
| 6 |
| 4 |
| — |
| — |
| — |
| 28 |
| 8.70 | % |
Naksay AO | | RUB | | 10 | | 5 | | — | | — | | — | | — | | 15 | | 8.86 | % |
Cisco |
| RUB |
| 152 |
| 80 |
| — |
| — |
| — |
| — |
| 232 |
| 6.38 | % |
Cisco |
| RUB |
| 291 |
| 307 |
| — |
| — |
| — |
| — |
| 598 |
| 5.38 | % |
Cisco |
| RUB |
| 48 |
| 51 |
| 26 |
| — |
| — |
| — |
| 125 |
| 5.75 | % |
Cisco |
| RUB |
| 84 |
| 91 |
| 97 |
| — |
| — |
| — |
| 272 |
| 7.05 | % |
Cisco |
| RUB |
| 102 |
| 110 |
| 119 |
| — |
| — |
| — |
| 331 |
| 7.70 | % |
Cisco |
| RUB |
| 169 |
| 184 |
| — |
| — |
| — |
| — |
| 353 |
| 8.75 | % |
Vinnikom Tech | | RUB | | 6 | | 6 | | — | | — | | — | | — | | 12 | | 8.25 | % |
Total fixed debt1 |
| |
| 89,988 |
| 90,116 |
| 27,125 |
| 25,000 |
| 15,078 |
| 22,000 |
| 269,307 |
|
| |
Weighted average interest rate |
| | | 6.66 | % | 6.62 | % | 7.42 | % | 7.25 | % | 6.95 | % | 6.60 | % | 6.92 | % |
| |
(1)Totals may add up differently due to rounding
We would have experienced an additional interest expense of approximately RUB 1,523 million on an annual basis as a result of a hypothetical increase in variable rates by 1% over the current rate as of December 31, 2021. Since a linear dependence is applicable, a hypothetical increase in variable rate by each additional 1% would have caused a same additional interest expense of approximately RUB 1,523 million on an annual basis. The rates of EUR and USD as of December 31, 2021 were used in these calculations. We would have experienced an additional interest expense of approximately RUB 1,166 million on an annual basis as a
206
result of a hypothetical increase in variable rates by 1% over the current rate as of December 31, 2020. The rates of EUR and USD as of December 31, 2020 were used in calculations. The increase in an additional interest expense on an annual basis as a result of a hypothetical increase in variable rates by 1% as of December 31, 2021 as compared to December 31, 2020 is mainly related to the increase in total variable debt.
The fair value of our publicly traded fixed-rate notes as of December 31, 2021, ranged from 91.80% to 103.89% of the notional amount. As of December 31, 2021, the difference between the carrying value and the fair value of other fixed rate debt, including lease obligations, was immaterial. For details of our fixed-rate debt, refer to Note 24 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 several cross-currency interest rate swap agreements. Most of these contracts assume periodical exchanges of interest payments or both principal and interest payments from ruble-denominated amounts to U.S. dollar-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 variable U.S. dollar-denominated interest rate to a fixed ruble-denominated interest rate. All of our cross-currency interest rate swaps agreements mature in 2023 and 2024.
The table below presents a summary of our cross-currency interest rate swap agreements:
| | | | | | |
| | | | | | Mark to |
| | | | | | Market Value |
| | | | Notional | | as of |
| | | | amount (at | | December 31, |
Type of derivative |
| Maturity |
| inception) |
| 2021 |
| | | | (amounts in millions of Rubles) | ||
Cross‑currency Interest Rate Swap Agreements | |
| |
| |
|
Swap agreements with Sberbank to pay a fixed rates of 8.29% to 8.3125% and receive a variable interest rate of 6m LIBOR | | June 2024 | | 4,410 | | 424 |
Swap agreements with Rosbank to pay a fixed rates of 7.924% to 8.2965% and receive a variable interest rate of 6m LIBOR | | June 2024 | | 8,499 | | 912 |
Swap agreements with VTB bank to pay a variable Central Bank key rate (not less than 7%) + (−0.02%)−0.575% and receive a fixed interest rate of 5% | | May 2023 | | 20,841 | | 3,291 |
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 | ||||||
Years ended December 31, |
| High |
| Low |
| Average(1) |
| Period End |
2017 |
| 60.75 |
| 55.85 |
| 58.10 |
| 57.60 |
2018 |
| 69.97 |
| 55.67 |
| 62.71 |
| 69.47 |
2019 |
| 69.47 |
| 61.72 |
| 64.74 |
| 61.91 |
2020 |
| 80.88 |
| 60.95 |
| 72.15 |
| 73.88 |
2021 |
| 77.77 |
| 69.55 |
| 73.65 |
| 74.29 |
(1) | The average of the exchange rates on the last business day of each full month during the relevant period. |
207
| | | | |
| | Rubles per | ||
| | U.S. dollar | ||
|
| High |
| Low |
July 2021 | | 75.20 | | 72.72 |
August 2021 |
| 74.36 |
| 72.79 |
September 2021 |
| 73.44 |
| 72.43 |
October 2021 |
| 72.92 |
| 69.55 |
November 2021 |
| 75.59 |
| 70.52 |
December 2021 |
| 74.89 |
| 73.19 |
January 2022 |
| 78.95 |
| 74.29 |
February 2022 |
| 86.93 |
| 74.72 |
March 2022(1) |
| 120.38 |
| 84.09 |
Source: CBR.
(1) | For the period from March 1, 2022 to March 31, 2022. |
The exchange rate between the ruble and the U.S. dollar quoted by the CBR for March 31, 2022 was 84.09 rubles per U.S. dollar.
We have exposure to fluctuations in the value of the U.S. dollar relative to the Russian ruble 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.
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 or dram 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 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 or dram against the euro because settlements denominated in euros are not significant.
We would experience a currency exchange loss of RUB 1,713 million on our U.S. dollar denominated net monetary assets as a result of a hypothetical 30.0% increase in the ruble/manat/dram/sum to U.S. dollar exchange rate at December 31, 2021. We would experience a currency exchange loss of RUB 2,024 million in the fair value of our euro denominated net monetary assets as a result of a hypothetical 30.0% increase in the ruble/manat/dram to euro exchange rate at December 31, 2021. Since a linear dependence is applicable, an additional hypothetical 30.0% increase in the ruble/manat/dram/sum to U.S. dollar or euro exchange rate at December 31, 2021 would have caused additional currency exchange loss as stated above. We are unable to estimate future loss of earnings as a result of such changes. The change of a currency exchange gain on our U.S. dollar denominated net monetary assets as a result of a hypothetical 30.0% increase in the ruble/manat/dram/sum to U.S. dollar exchange rate at December 31, 2020 into a loss at December 31, 2021 mainly relates to a change in our net monetary assets.
Item 12. Description of Securities Other Than Equity Securities
(Only Items 12.D.3-4 are applicable.)
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D. | American Depositary Shares |
3. | Fees and charges that a holder of American Depositary Receipts may have to pay, either directly or indirectly. |
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 |
(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; | | |
| | · 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.
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PART II
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
(a) | Disclosure 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, 2021, 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.
(b) | Management’s annual report on internal control over financial reporting. |
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 conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Internal control over financial reporting refers to 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 conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and includes those policies and procedures that:
● | Pertain to the maintenance of records that in reasonable details accurately and fairly reflect the transactions and dispositions of our assets; |
● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our Board of Directors; |
● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework (2013).
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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, 2021 was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited and assessed as effective by independent registered public accounting firm 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 ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
(c) | Attestation Report of Independent Registered Public Accounting Firm. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Mobile TeleSystems PJSC
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Mobile TeleSystems PJSC and its subsidiaries (the “Group”) as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Group and our report dated March 1, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
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 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with 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 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ AO Deloitte & Touche CIS
Moscow, Russia
March 1, 2022
(d) | Changes in internal control over financial reporting. |
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 and Nadia Shouraboura are “audit committee financial experts” 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 and Mrs Nadia Shouraboura’s experience, please see “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Key Biographies.”
Item 16B. Code of Business Conduct and Ethics
MTS strives to comply with applicable legal requirements and leading international practices, and therefore periodically updates its compliance policies and procedures. As one of fundamental documents of the Company, the Code of Business Conduct and Ethics (hereinafter referred to as the Code) was updated in 2021 and has undergone significant changes.
The provisions of the Code apply to all employees and directors of MTS (regardless of position, duties, length of service and place of work), including all subsidiaries, affiliates and joint ventures. The Company also strives to ensure compliance with the Code by affiliated companies, in respect of which MTS does not exercise control, as well as by partners and counterparties.
The content of the Code covers the following main topics relevant to all groups of MTS stakeholders:
1. | MTS Values and Principles (introduction on behalf of the Management Board of MTS). |
MTS business strategy is based, among other things, on building stable value relationships with customers and other stakeholders, in connection with which the Code formulates the principles and values that guide the Company in achieving its goals.
2. | Consultations. |
The Code contains ways to get advice if there are questions about the topics covered in the Code, doubts about whether a situation is regulated by the Code or whether it is a violation thereof.
212
3. | Responsible business practice (ethics of making business decisions in MTS). |
The Code cannot describe all kinds of situations regulated by the Code, however, the Code offers a kind of universal algorithm for making business decisions by persons to whom the Code applies.
4. | Compliance with laws (anti-corruption legislation, internal labor regulations, information security and data protection, insider, intellectual property protection, asset protection and reliable reporting). |
The Code is a unified regulatory and ethical standard of regulation within the MTS Group and includes various regulatory requirements applicable to the Company's activities. In terms of compliance with legal requirements, the Company's Code contains, at a minimum, references to policies and procedures governing certain business processes relevant to the entire MTS ecosystem.
5. | Principles of sustainable development (quality of life and service, innovation). |
The company adheres to the principles of sustainable development: it conducts business ethically, takes responsibility for the consequences of its decisions and its activities, as well as for the impact of these consequences on society.
6. | Reporting violations, prohibition of retalitation. |
In the new version of the Code, the Company has made changes in terms of feedback and the operation of a hotline: the number of channels for appeals has been increased; all appeals are registered by an external independent provider; the possibility of submitting anonymous messages is available. At the same time, the Company strongly supports the culture of open dialogue and guarantees protection from retalitation to persons in case of a conscientious report of a problem or violation.
In order to ensure the effectiveness of the Code, the Company uses a language that is simple and understandable to all stakeholders, an interactive format, provides easy access to the Code, other compliance policies and procedures of the Company on its open resources (internal and external), and also conducts periodic training in accordance with the requirements of the Code.
A copy of our Code of Business Conduct and Ethics is available on our website at http://ir.mts.ru/.
Item 16C. Principal Accountant Fees and Services
AO Deloitte & Touche CIS (PCAOB ID No. 1341) has served as our Independent Registered Public Accounting Firm for the fiscal years ended December 31, 2021 and 2020 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 AO Deloitte & Touche CIS and its affiliates in 2021 and 2020, respectively.
| | | | |
| | Year ended | ||
| | December 31, | ||
|
| 2021 |
| 2020 |
| | (in thousands of | ||
| | Russian rubles) | ||
Audit Fees | | 179,845 | | 155,895 |
Audit‑Related Fees |
| 1,500 |
| 2,450 |
Tax Fees |
| — |
| 840 |
All Other Fees |
| 3,300 |
| 3,490 |
Total |
| 184,645 |
| 162,675 |
Audit Fees
The Audit Fees for the years ended December 31, 2021 and 2020 were for the reviews and integrated audits of our consolidated financial statements prepared in accordance with IFRS, reviews and audits of the financial statements of our public subsidiaries prepared in accordance with IFRS, statutory audits.
Audit-Related Fees
The Audit-Related Fees for the years ended December 31, 2021 and 2020 primarily relate to agreed-upon procedures engagement.
213
Tax Fees
The Tax Fees for the year ended December 31, 2020 include the fees principally related to tax compliance services.
All Other Fees
All Other Fees for the year ended December 31, 2021 primarily relate to advisory and training services; for the year ended December 31, 2020 – to quality assessment services, due diligence services and agreed-upon procedures engagement on non-financial information.
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 AO 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 AO Deloitte & Touche CIS and its affiliates for all services performed for the fiscal year ended December 31, 2021. No services of any kind were approved pursuant to a waiver permitted pursuant to 17 CFR 210.2-01(c)(7)(C)(1).
Item 16D. Exemption from the Listing Standards for Audit Committees
Not Applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In December 2020, MTS completed the share repurchase plan announced on March 31, 2020. In total, the Company’s wholly-owned subsidiary Bastion LLC acquired 45,501,316 shares of Common Stock (including shares of Common Stock represented by ADSs) representing 2.28% of share capital issued by MTS. The following table represents the amount of MTS ordinary shares (including ordinary shares represented by ADSs) repurchased in 2020. No shares have been repurchased in January-March.
| | | | | | |
|
| | | | | Shares repurchased |
| | Total number of shares | | | | under publicly |
Month | | repurchased |
| Average Price |
| announced plans |
April |
| 2,773,903 | | 298.6 | | 777,500 |
May |
| 778,144 | | 308.5 | | 778,144 |
July |
| 2,585,030 | | 322.7 | | 2,585,030 |
August |
| 7,442,481 | | 333.3 | | 7,442,481 |
September |
| 9,444,600 | | 339.9 | | 9,444,600 |
October |
| 10,514,993 | | 334.9 | | 10,514,993 |
November |
| 10,736,018 | | 321.0 | | 10,736,018 |
December |
| 4,522,550 | | 320.0 | | 3,222,550 |
Total |
| 48,797,719 | | | | 45,501,316 |
In July, MTS completed the RUB 15 bn share repurchase plan announced on March 31, 2021. In total, the Company’s wholly-owned subsidiary Bastion LLC acquired 45,401,921 shares of Common Stock (including shares of Common Stock represented by ADSs) under the plan, representing 2.27% of share capital issued by MTS. The following table represents the amount of MTS
214
ordinary shares (including ordinary shares represented by ADSs) repurchased in 2021. No shares have been repurchased in January, February, and August-November.
| | | | | | |
|
| | | | | Shares repurchased |
| | Total number of shares | | | | under publicly |
Month | | repurchased |
| Average Price |
| announced plans |
March |
| 633,266 | | 316 | | — |
April |
| 6,096,878 | | 318 | | 6,096,878 |
May |
| 25,761,793 | | 325 | | 15,955,872 |
June | | 15,455,605 | | 334 | | 15,455,605 |
July | | 7,893,566 | | 342 | | 7,893,566 |
December | | 9,467,502 | | 327 | | — |
Total |
| 65,308,610 | | | | 45,401,921 |
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:
· | For U.S. companies, the NYSE standards require that a majority of directors be independent, as determined by the board. Russian law does not require that a majority of our directors be independent. Of our eight directors, five have been determined by the board to be independent in accordance with the independence standards set forth in SEC Rule 10A-3 and Section 303A.02 of the NYSE Listed Company Manual. In 2021, our Board of Directors consisted of nine members and six of them were independent. Currently, due to resignation of one of our directors, our Board of Directors consists of eight members and five of them are independent. |
· | For U.S. companies, the NYSE standards require that the audit committee have a minimum of three members. Russian law does not contain such a requirement. Our audit committee is comprised of four members. |
· | For U.S. companies, the NYSE standards require that non-management directors meet at regularly scheduled executive sessions without management. Russian law does not contain such a requirement. However, our audit committee and remuneration and nomination committee are comprised of independent directors, who meet on a regular basis in connection with their work on these committees. |
· | For U.S. companies, the NYSE standards require that listed companies have a nominating/corporate governance committee and a compensation committee, each composed entirely of 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 committee on corporate governance and environmental & social responsibility comprising of directors and members of management that is responsible for developing and implementing standards related to environmental, societal, and governance factors (ESG), including making recommendations to the Board of Directors on developing our strategy in the area of corporate governance. This committee is also responsible for conducting annual performance evaluations of the Board of Directors.
215
We also have a remuneration and nomination committee comprising of four 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 positions, 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 and management executives (including the CEO).
· | For U.S. companies, the NYSE standards require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions. Under Russian law, such approval from shareholders is is required only in relation to compensation of directors. As of today, we do not have an equity compensation plan for our Board of Directors. Our equity compensation plans for our officers and managers, and material revisions thereto are currently approved by the Board of Directors. |
· | For U.S. companies, the NYSE standards require the adoption and disclosure of corporate governance guidelines addressing certain subjects. Our corporate governance guidelines are consistent with what is required under Russian law and are set forth in our Charter, in the bylaw on our Board of Directors and in the bylaws of our various committees. |
We may in the future decide to use other foreign private issuer exemptions with respect to some or all of the other New York Stock listing rules. Following our home country governance practices may provide less protection than is accorded to investors under the New York Stock Exchange listing rules applicable to domestic issuers. 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://ir.mts.ru/).
216
PART III
Item 17. Financial Statements
See instead Item 18.
Item 18. Financial Statements
The following financial statements, together with the report of AO Deloitte & Touche CIS, are filed as part of this annual report on Form 20-F.
| ||
|
| Page |
| F-3 | |
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2021, 2020 AND FOR THE YEARS ENDED DECEMBER 31, 2021, 2020, AND 2019: | | |
Consolidated statements of financial position as of December 31, 2021 and 2020 | | F-7 – F-8 |
Consolidated statements of profit or loss for the years ended December 31, 2021, 2020, and 2019 | | F-9 |
| F-10 | |
| F-11 – F-12 | |
Consolidated statements of cash flows for the years ended December 31, 2021, 2020, and 2019 | | F-13 - F-14 |
| F-15- F-98 |
217
Item 19. Exhibits
| | |
| | |
Exhibits No. |
| Description |
| | |
1.1 | | Charter of Mobile TeleSystems PJSC, restated version No. 15, as approved by the General Meeting of Shareholders of Mobile TeleSystems PJSC held on June 23, 2021 (English translation): https://s22.q4cdn.com/722839827/files/doc_downloads/charter/MTS-Charter_2021-eng.pdf |
1.2 | | Amendments and Additions to the Charter of Mobile TeleSystems PJSC (Version No. 15), as approved by Extraordinary Meeting of Shareholders of Mobile TeleSystems PJSC held on February 15, 2021 (English translation): https://s22.q4cdn.com/722839827/files/doc_downloads/2021/02/Amendments-to-MTS-Charter-(81)_NPO-PROGTECH-eng.pdf |
1.3 | | Amendments and Additions to the Charter of Mobile TeleSystems PJSC (Version No. 15), as approved by Extraordinary Meeting of Shareholders of Mobile TeleSystems PJSC held on February 15, 2021 (English translation): https://s22.q4cdn.com/722839827/files/doc_downloads/2021/02/Amendments-to-MTS-Charter-(80)_MKS-Balashikha-eng.pdf |
1.4 | | Amendments and Additions to the Charter of Mobile TeleSystems PJSC (Version No. 15), as approved by Extraordinary Meeting of Shareholders of Mobile TeleSystems PJSC held on February 15, 2021 (English translation): https://s22.q4cdn.com/722839827/files/Charter-Amendments-Regarding-STV.pdf |
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 | | |
2.3 | | |
2.4 | | |
2.5 | | |
2.6 | | |
2.7 | | |
2.8 | | |
2.9 | | |
2.10 | | |
2.11 | | |
4.1 | | |
4.2 | |
218
4.3 | | |
4.4 | | |
4.5 | | |
4.6 | | |
4.7 | | |
4.8 | | |
4.9 | | |
4.10 | | |
4.11 | | |
4.12 | | |
4.13 | | |
4.14 | | |
4.15 | |
219
4.16 | | |
4.17 | | |
4.18 | | |
4.19 | | |
4.20 | | |
4.21 | | |
4.22 | | |
4.23 | | |
4.24 | | |
4.25 | | |
4.26 | | |
4.27 | | |
4.28 | |
220
4.29 | | |
4.30 | | |
4.31 | | |
4.32 | | |
4.33 | | |
4.34 | | |
4.35 | | |
4.36 | | |
4.37 | | |
4.38 | | |
4.39 | | |
4.40 | |
221
4.41 | | |
4.42 | | |
4.43 | | |
4.44 | | |
4.45 | | |
4.46 | | |
4.47 | | |
4.48 | | |
4.49 | | |
4.50 | | |
4.51 | | |
4.52 | | |
4.53 | |
222
4.54 | | |
4.55 | | |
4.56 | | |
4.57 | | |
4.58 | | |
4.59 | | |
4.60 | | |
4.61 | | |
4.62 | | |
4.63 | | |
4.64 | | |
4.65 | | |
4.66 | |
223
4.67 | | |
4.68 | | |
4.69 | | |
4.70 | | |
4.71 | | |
4.72 | | |
4.73 | | |
4.74 | | |
4.75 | | |
4.76 | | |
4.77 | |
224
4.78 | | |
4.79 | | |
4.80 | | |
4.81 | | |
4.82 | | |
4.83 | | |
4.84 | | |
4.85 | | |
4.86 | | |
4.87 | | |
4.88 | | |
4.89 | | |
4.90 | |
225
4.104 | | |
4.105 | | |
4.106 | | |
4.107 | | |
4.108 | | |
4.109 | | |
4.110 | | |
4.111 | | |
4.112 | | |
4.113 | | |
4.114 | | |
4.115 | | |
4.116 | |
227
4.117 | | |
4.118 | | |
4.119 | | |
4.120 | | |
4.121 | | |
4.122 | | |
4.123 | | |
4.124 | | |
4.125 | | |
4.126 | | |
4.127 | | |
4.128 | | |
4.129 | |
228
4.130 | | |
4.131 | | |
4.132 | | |
4.133 | | |
4.134 | | |
4.135 | | |
4.136 | | |
4.137 | | |
4.138 | | |
4.139 | | |
4.140 | | |
4.141 | | |
4.142 | |
229
4.143 | | |
4.144 | | |
4.145 | | |
4.146 | | |
4.147 | | |
4.148 | | |
4.149 | | |
4.150 | | |
4.151 | | |
4.152 | | |
4.153 | | |
4.154 | |
230
4.155 | | |
4.156 | | |
4.157 | | |
4.158 | | |
4.159 | | |
4.160 | | |
4.161 | | |
4.162 | | |
4.163 | | |
4.164 | | |
4.165 | | |
4.166 | | |
4.167 | |
231
4.168 | | |
4.169 | | |
4.170 | | |
4.171 | | |
4.172 | | |
4.173 | | |
4.174 | | |
4.175 | | |
4.176 | | |
4.177 | | |
4.178 | | |
4.179 | | |
4.180 | |
232
4.181 | | |
4.182 | | |
4.183 | | |
4.184 | | |
4.185 | | |
4.186 | | |
4.187 | | |
4.188 | | |
4.189 | | |
4.190 | | |
4.191 | | |
4.192 | | |
4.193 | |
233
4.194 | | |
4.195 | | |
4.196 | | |
4.197 | | |
4.198 | | |
4.199 | | |
4.200 | | |
4.201 | | |
4.202 | | |
4.203 | | |
4.204 | |
234
4.218 | | |
4.219 | | |
4.220 | | |
4.221 | | |
4.222 | | |
4.223 | | |
4.224 | | |
4.225 | | |
4.226 | | |
4.227 | | |
4.228 | | |
4.229 | | |
4.230 | |
236
4.231 | | |
4.232 | | |
4.233 | | |
4.234 | | |
4.235 | | |
4.236 | | |
4.237 | | |
4.238 | | |
4.239 | | |
4.240 | | |
4.241 | | |
4.242 | | |
4.243 | | |
4.244 | |
237
4.245 | | |
4.246 | | |
4.247 | | |
4.248 | | |
4.249 | | |
4.250 | | |
4.251 | | |
4.252 | | |
4.253 | | |
4.254 | | |
4.255 | | |
4.256 | | |
4.257 | | |
4.258 | |
238
4.259 | | |
4.260 | | |
4.261 | | |
4.262 | | |
4.263 | | |
4.264 | | |
4.265 | | |
4.266 | | |
4.267 | | |
4.268 | | |
4.269 | | |
4.270 | | |
4.271 | | |
4.272 | |
239
4.273 | | |
4.274 | | |
4.275 | | |
4.276 | | |
4.277 | | |
4.278 | | |
4.279 | | |
4.280 | | |
4.281 | | |
4.282 | | |
4.283 | | |
4.284 | | |
4.285 | | |
4.286 | |
240
4.287 | | |
4.288 | | |
4.289 | | |
4.290 | | |
4.291 | | |
4.292 | | |
4.293 | | |
4.294 | | |
4.295 | | |
4.296 | | |
4.297 | | |
4.298 | | |
4.299 | | |
4.300 | |
241
4.301 | | |
4.302 | | |
4.303 | | |
4.304 | | |
4.305 | | |
4.306 | | |
4.307 | | |
4.308 | | |
4.309 | | |
4.310 | | |
4.311 | | |
4.312 | | |
4.313 | | |
4.314 | |
242
4.325 | | |
4.326 | | |
4.327 | | |
4.328 | | |
4.329 | | |
4.330 | | |
4.331 | | |
4.332 | | |
4.333 | | |
4.334 | | |
4.335 | | |
4.336 | | |
4.337 | |
244
4.338 | | |
4.339 | | |
4.340 | | |
4.341 | | |
4.342 | | |
4.343 | | |
4.344 | | |
4.345 | | |
4.346 | | |
4.347 | | |
4.348 | | |
4.349 | |
245
4.350 | | |
4.351 | | |
4.352 | | |
4.353 | | |
4.354 | | |
4.355 | | |
4.356 | | |
4.357 | | |
4.358 | | |
4.359 | | |
4.360 | | |
4.361 | | |
4.362 | |
246
4.363 | | |
4.364 | | |
4.365 | | |
4.366 | | |
4.367 | | |
4.368 | | |
4.369 | | |
4.370 | | |
4.371 | | |
4.372 | | |
4.373 | | |
4.374 | | |
4.375 | |
247
4.376 | | |
4.377 | | |
4.378 | | |
4.379 | | |
4.380 | | |
4.381 | | |
4.382 | | |
4.383 | | |
4.384 | | |
4.385 | | |
4.386 | | |
4.387 | | |
4.388 | |
248
4.389 | | |
4.390 | | |
4.391 | | |
4.392 | | |
4.393 | | |
4.394 | | |
4.395 | | |
4.396 | | |
4.397 | | |
4.398 | | |
4.399 | | |
4.400 | | |
4.401 | | |
4.402 | |
249
4.403 | | |
4.404 | | |
4.405 | | |
4.406 | | |
4.407 | | |
4.408 | | |
4.409 | | |
4.410 | | |
4.411 | | |
4.412 | | |
4.413 | | |
4.414 | | |
4.415 | |
250
4.416 | | |
4.417 | | |
4.418 | | |
4.419 | | |
4.420 | | |
4.421 | | |
4.422 | | |
4.423 | | |
4.424 | | |
4.425 | | |
4.426 | | |
4.427 | | |
4.428 | |
251
4.429 | | |
4.430 | | |
4.431 | | |
4.432 | | |
4.433 | | |
4.434 | | |
4.435 | | |
4.436 | | |
4.437 | | |
4.438 | | |
4.439 | | |
4.440 | | |
4.441 | | |
4.442 | |
252
4.443 | | |
4.444 | | |
4.445 | | |
4.446 | | |
4.447 | | |
4.448 | | |
4.449 | | |
4.450 | | |
4.451 | | |
4.452 | |
253
4.453 | | |
4.454 | | |
4.455 | | |
4.456 | | |
4.457 | | |
4.458 | | |
4.459 | | |
4.460 | | |
4.461 | | |
4.462 | | |
4.463 | | |
4.464 | | |
4.465 | |
254
4.466 | | |
4.467 | | |
4.468 | | |
4.469 | | |
4.470 | | |
4.471 | | |
4.472 | | |
4.473 | | |
4.474 | | |
4.475 | | |
4.476 | | |
4.477 | |
255
4.478 | | |
4.479 | | |
4.480 | | |
8.1 | | List of Subsidiaries of Mobile TeleSystems Public Joint Stock Company. |
11.1 | | Code of Business Conduct and Ethics of Mobile TeleSystems PJSC approved by the Board of Directors of Mobile TeleSystems PJSC on July 29, 2021 (English translation): https://s22.q4cdn.com/722839827/files/doc_downloads/compliance/MTS-Code-of-Business-Conduct-and-Ethics.pdf |
12.1 | | |
12.2 | | |
13.1 | | |
13.2 | | |
101 | | The following financial information formatted in Extensive Business Reporting Language (XBRL): (i) Consolidated statements of financial position as of December 31, 2021 and 2020, (ii) Consolidated statements of profit or loss for the years ended December 31, 2021, 2020 and 2019, (iii) Consolidated statements of comprehensive income for the years ended December 31, 2021, 2020 and 2019, (iv) Consolidated statements of changes in shareholders’ equity for the years ended December 31, 2021, 2020 and 2019, (v) Consolidated statements of cash flows for the years ended December 31, 2021, 2020 and 2019, and (vi) Notes to the consolidated financial statements. |
104 | | Cover Page Interactive Data File formatted as Inline XBRL and contained in Exhibit 101. |
256
SIGNATURES
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 5, 2022 | MOBILE TELESYSTEMS PUBLIC JOINT STOCK COMPANY | ||
| By: | /s/ Vyacheslav K. Nikolaev | |
| | Name: | Vyacheslav K. Nikolaev |
| | Title: | Chief Executive Officer |
257
PJSC MOBILE
TELESYSTEMS
AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 2021, 2020 and
for the Years Ended December 31, 2021,
2020 and 2019
F-1
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
TABLE OF CONTENTS
| ||
|
| Page |
| F-3 | |
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2021, 2020 AND FOR THE YEARS ENDED DECEMBER 31, 2021, 2020, AND 2019: | | |
| F-7 – F-8 | |
| F-9 | |
| F-10 | |
| F-11 – F-12 | |
| F-13 - F-14 | |
| F-15- F-98 |
| | | |
| F-15 | ||
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS | | F-15 | |
| F-18 | ||
| F-19 | ||
| F-21 | ||
| F-26 | ||
| F-30 | ||
| F-33 | ||
| F-34 | ||
| F-34 | ||
| F-35 | ||
| F-38 | ||
| F-40 | ||
| F-41 | ||
| F-41 | ||
| F-42 | ||
| F-46 | ||
| F-47 | ||
| F-50 | ||
| F-52 | ||
| F-53 | ||
| F-54 | ||
| F-57 | ||
| F-59 | ||
| F-63 | ||
RECONCILIATION OF LIABILITIES ARISING FROM FINANCIAL ACTIVITIES | | F-66 | |
| F-66 | ||
| F-68 | ||
| F-72 | ||
| F-76 | ||
| F-87 | ||
| F-92 | ||
| F-94 | ||
| F-96 | ||
| F-98 |
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Mobile TeleSystems PJSC
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Mobile TeleSystems PJSC and subsidiaries (the “Group”) as of December 31, 2021 and 2020, the related consolidated statements of profit or loss, comprehensive income, changes in shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Group’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2022 expressed an unqualified opinion on the Group’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition — Refer to Note 7 to the consolidated financial statements
Critical Audit Matter Description
The Group's revenue from telecommunication services consists of a significant volume of low-value transactions, sourced from multiple systems, databases, and other tools, including billing systems. The processing and recording of revenue is highly automated and is based on established tariff plans.
We identified the revenue recognition for telecommunications services as a critical audit matter due to the complexity of information systems involved in the revenue recognition process and the risks associated with recognition and measurement of revenue, arising from the diversity and constant evolution of tariff plans, marketing offers and discounts provided to customers. The auditing of
F-3
revenue required an increased extent of audit effort, including the need for us to involve professionals with expertise in information technology (IT) to identify, test, and evaluate the Group’s systems, software applications, and automated controls.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Group’s revenue recognition for telecommunication services included the following, among others:
· | We evaluated the IT environment that secures proper functioning of billing and other IT systems related to accounting, including control procedures for monitoring changes and segregation of duties, as well as testing of these controls; |
· | We tested the design and operating effectiveness of internal controls over revenue recognition, including the recording and registration of phone calls, call duration, provision of data and value added services; authorization of changes in tariff plans and input of this information into the billing systems; and the accuracy of the application of incentive arrangements and discounts; |
· | We performed end-to-end testing of the reconciliation of data on the duration and volume of telecommunication services provided from their initial registration by switching equipment to billing and other IT systems and then to accounting records, including testing of certain manual adjustments recorded when transferring data from billing and other IT systems to the general ledger; |
· | We used test calls to test the accuracy of the details of connections, their duration and the tariff plans applied; |
· | We tested whether incentive arrangements and discounts were correctly accounted for in accordance with the relevant accounting policies of the Group; |
· | We agreed the information on active tariffs entered in the billing systems to the approved tariff orders and published tariff plans; |
· | We evaluated the Group's accounting policy with respect to the recognition of revenue from the provision of services to subscribers to determine if the existing policy continues to be appropriate; and |
· | We assessed the compliance of the disclosures in the consolidated financial statements with the requirements of IFRS 15, Revenue from Contracts with Customers. |
Compliance with anti-corruption laws and regulations and associated accounting and disclosure implications — Refer to Note 34 to the consolidated financial statements
Critical Audit Matter Description
In March 2019, the Group reached a resolution with the United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) relating to the investigation concerning the Group’s former subsidiary in Uzbekistan. The Group consented to the commencement of an administrative cease-and-desist order (the “Order”) by the SEC and entered into a deferred prosecution agreement (“DPA“). Under the DPA and the Order in September 2019 the Group appointed an independent compliance monitor (“Independent Monitor”) for, inter alia, review, testing and improving MTS’ anti-corruption compliance code, policies, and procedures for a period of three years. In 2021, the DOJ and SEC approved a one-year extension of the monitorship, which is permitted by the terms of the DPA and the Order.
Given the significant judgments required to be made by management in order to estimate contingencies related to any potential instance of non-compliance with anti-corruption laws and regulations, the audit procedures necessary to evaluate management’s judgments in this area as of December 31, 2021 required a high degree of auditor judgment in evaluating whether the audit evidence obtained supports management’s estimate.
F-4
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Group’s estimation of any contingencies related to any potential instance of non-compliance with anti-corruption laws and regulations included the following, among others:
· | We inspected the laws and regulations the Group has to comply with in order to obtain an understanding of the relevance and applicability to the Group and to assess any potential penalties that may arise for non-compliance; |
· | We read the procedures performed by the Independent Monitor and evaluated the implications of their findings, including discussing these with management of the Group as well as internal and external legal advisors; |
· | We inquired management regarding their follow up on the results of internal and external investigations and on the design and operational effectiveness of the Group’s compliance programs and internal controls relating to the prevention and detection of fraud and corruption; |
· | We tested the design and operating effectiveness of internal controls, including, amongst others, the control environment (including whistle-blower and internal fraud management cases) and the controls for the adherence of business partners to the anti-corruption codes; |
· | We read the minutes of the Board of Directors’ meetings; |
· | We evaluated management’s assessment of compliance with anti-corruption laws and regulations as well as an estimation of contingencies related to any potential instances of non-compliance; |
· | We obtained letters from external and internal legal counsel; and |
· | We evaluated the Group's accounting policy with respect to the accounting for provisions and disclosure of contingent liabilities to determine if the existing policy continues to be appropriate, and assessed the compliance of the disclosures in the consolidated financial statements against the requirements of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. |
Assessment and measurement of expected credit losses on loans to customers — Refer to Note 4 and Note 30 to the consolidated financial statements
Critical Audit Matter Description
The Group applies an ‘expected loss’ model to determine the impairment of loans to customers of MTS Bank. As described in Note 30, Bank financial assets and liabilities, the Group reported an allowance for expected credit losses of RUB 21,114 million as at December 31, 2021 in respect of loans to customers (2020: RUB 16,446 million), including allowance for expected credit losses in the amount of RUB 17,976 million as at December 31, 2021 in respect of loans to individuals (2020: RUB 12,692 million). Due to the underlying assumptions and estimations, in particular the evaluation of the probability of default for loans assessed on a collective basis, the determination of expected credit losses is one of the most significant management estimates.
We identified this area as a critical audit matter because models and techniques applied in calculating of expected credit losses requires the use of statistical data as well as the application of complex and subjective judgments by management. Therefore, a high degree of auditor judgment and an increased extent of audit effort was required in this area, including the need to involve our actuarial specialists and to perform focused audit procedures to evaluate management judgements made in estimating the allowance for expected credit loses to customers.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assessment and measurement of expected credit losses of loans to customers assessed on a collective basis included the following, among others:
· | We tested the design and the effectiveness of internal controls over key assumptions in the assessment of probability of default of customers; |
F-5
· | We evaluated compliance of the methodology, models and techniques used by the Group’s management to determine the expected credit losses with the requirements of IFRS 9, Financial Instruments; |
· | With the assistance of our actuarial specialists, we performed an analysis of the integrity and logic of the models and assessed the most critical underlying assumptions against historical data and recent trends of default ratios, and the retrospective testing of internally developed models performed by the Group; |
· | We tested the completeness and accuracy of statistical historical data used in the estimation of expected credit losses; and |
· | We evaluated the compliance of the disclosures in the consolidated financial statements with the requirements of IFRS 9, Financial Instruments. |
/s/ AO Deloitte & Touche CIS
Moscow, Russia
March 1, 2022
We have served as the Group’s auditor since 2002.
F-6
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 2021 AND 2020
(Amounts in millions of Russian Rubles)
| | | | | | |
| | | | December 31, | | December 31, |
|
| Notes |
| 2021 |
| 2020 |
ASSETS |
|
|
|
|
|
|
NON-CURRENT ASSETS: |
|
|
|
|
|
|
Property, plant and equipment |
| 20 |
| 311,250 |
| 284,804 |
Investment property |
|
|
| 2,498 |
| 1,889 |
Right-of-use assets | | 25 | | 132,343 | | 130,503 |
Goodwill |
| 21 |
| 42,819 |
| 38,041 |
Other intangible assets |
| 23 |
| 100,132 |
| 90,103 |
Investments in associates and joint ventures |
| 16 |
| 8,735 |
| 8,555 |
Other investments |
| 17 |
| 4,591 |
| 9,488 |
Deferred tax assets |
| 12 |
| 11,683 |
| 8,778 |
Accounts receivable, related parties |
| 31 |
| 5,000 |
| 5,209 |
Trade accounts receivable | | 18 | | 1,898 | | 2,163 |
Bank deposits and loans to customers | | 30 | | 118,342 | | 63,992 |
Other financial assets |
| 28 |
| 7,437 |
| 7,575 |
Other assets |
| |
| 5,790 |
| 5,749 |
Total non-current assets |
|
|
| 752,518 |
| 656,849 |
CURRENT ASSETS: |
|
|
| |
| |
Inventories |
| 19 |
| 18,981 |
| 15,204 |
Trade and other receivables |
| 18 |
| 37,897 |
| 32,868 |
Accounts receivable, related parties |
| 31 |
| 2,287 |
| 8,980 |
Bank deposits and loans to customers | | 30 | | 87,594 | | 52,676 |
Short-term investments |
| 15 |
| 28,972 |
| 23,434 |
Advances paid and prepaid expenses |
|
|
| 3,452 |
| 4,288 |
VAT receivable |
|
|
| 11,746 |
| 8,877 |
Income tax assets |
|
|
| 2,021 |
| 4,660 |
Assets held for sale |
|
|
| 549 |
| 667 |
Cash and cash equivalents |
| 14 |
| 40,590 |
| 85,405 |
Other financial assets |
| 28 |
| 27,349 |
| 23,975 |
Other assets | | | | 1,862 | | 1,320 |
Total current assets |
|
|
| 263,300 |
| 262,354 |
TOTAL ASSETS |
|
|
| 1,015,818 |
| 919,203 |
F-7
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 2021 AND 2020 (CONTINUED)
(Amounts in millions of Russian Rubles)
| | | | | | |
| | | | December 31, | | December 31, |
|
| Notes |
| 2021 |
| 2020 |
EQUITY AND LIABILITIES |
|
|
|
|
|
|
EQUITY: |
|
|
|
|
|
|
Common stock |
| 33 |
| 200 |
| 200 |
Treasury stock |
| 33 |
| (96,195) |
| (74,990) |
Additional paid-in capital |
|
|
| 619 |
| 89 |
Retained earnings |
|
|
| 94,935 |
| 94,391 |
Accumulated other comprehensive income |
| 33 |
| 10,207 |
| 9,010 |
Equity attributable to owners of the Company |
|
|
| 9,766 |
| 28,700 |
Non-controlling interests |
|
|
| 4,838 |
| 3,990 |
Total equity |
|
|
| 14,604 |
| 32,690 |
NON-CURRENT LIABILITIES: |
|
|
| |
| |
Borrowings |
| 24 |
| 350,300 |
| 395,143 |
Lease obligations | | 25 | | 135,800 | | 134,637 |
Bank deposits and liabilities | | 30 | | 14,313 | | 1,883 |
Deferred tax liabilities |
| 12 |
| 17,901 |
| 19,191 |
Provisions |
| 27 |
| 7,288 |
| 5,128 |
Contract liabilities | | 7 | | 977 | | 717 |
Other financial liabilities |
| 28 |
| 180 |
| 14 |
Other liabilities |
| |
| 1,035 |
| 1,186 |
Total non-current liabilities |
|
|
| 527,794 |
| 557,899 |
CURRENT LIABILITIES: |
|
|
| |
| |
Trade and other payables |
|
|
| 72,078 |
| 56,017 |
Accounts payable, related parties |
| 31 |
| 4,107 |
| 3,146 |
Contract liabilities |
| 7 |
| 22,621 |
| 21,125 |
Borrowings |
| 24 |
| 111,839 |
| 34,125 |
Lease obligations | | 25 | | 18,709 | | 16,177 |
Bank deposits and liabilities | | 30 | | 207,055 | | 165,794 |
Income tax liabilities |
|
|
| 768 |
| 753 |
Provisions |
| 27 |
| 17,479 |
| 13,460 |
Other financial liabilities |
| 28 |
| 202 |
| 1,109 |
Other liabilities |
| |
| 18,562 |
| 16,908 |
Total current liabilities |
|
|
| 473,420 |
| 328,614 |
TOTAL EQUITY AND LIABILITIES |
|
|
| 1,015,818 |
| 919,203 |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
President and CEO |
| Vice-president, Finance |
| | |
______________________________ Vyacheslav K. Nikolaev | | ___________________________ Andrey M. Kamensky |
| | |
March 1, 2022 | | |
F-8
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PROFIT OR LOSS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(Amounts in millions of Russian Rubles, except per share amounts)
| | | | | | | | |
|
| Notes |
| 2021 |
| 2020 |
| 2019 |
Service revenue | |
| | 457,677 | | 425,448 | | 406,478 |
Sales of goods |
|
|
| 76,726 |
| 69,478 |
| 64,127 |
Revenue |
| 6,7 |
| 534,403 |
| 494,926 |
| 470,605 |
Cost of services |
|
|
| 133,512 |
| 121,943 |
| 114,057 |
Cost of goods |
| 19 |
| 72,244 |
| 63,482 |
| 58,872 |
Selling, general and administrative expenses |
| 8 |
| 96,239 |
| 87,983 |
| 89,933 |
Depreciation and amortization |
| 6 |
| 111,088 |
| 100,234 |
| 96,195 |
Operating share of the profit of associates and joint ventures |
| 16 |
| (5,565) |
| (5,048) |
| (4,583) |
Impairment of non-current assets |
| 22 |
| (10) |
| 2,023 |
| (148) |
Impairment of financial assets |
| |
| 13,010 |
| 11,912 |
| 7,723 |
Other operating income,net |
|
|
| (4,394) |
| (496) |
| (7,021) |
Operating profit |
| 6 |
| 118,279 |
| 112,893 |
| 115,577 |
Finance income |
| 9 |
| (2,518) |
| (3,437) |
| (4,352) |
Finance costs |
| 9 |
| 41,352 |
| 42,084 |
| 47,366 |
Non-operating share of the profit of associates and joint ventures |
| 17 |
| (181) |
| (273) |
| (3,496) |
Other non-operating expenses/(income) |
| 10 |
| 424 |
| (3,064) |
| 7,821 |
Profit before tax |
|
|
| 79,202 |
| 77,583 |
| 68,238 |
Income tax expense |
| 12 |
| 15,403 |
| 16,126 |
| 15,667 |
Profit for the year from continuing operations |
|
|
| 63,799 |
| 61,457 |
| 52,571 |
Profit from discontinued operations |
| 11,34 |
| (470) |
| (616) |
| (2,528) |
Profit for the year |
|
|
| 64,269 |
| 62,073 |
| 55,099 |
Profit for the year attributable to: |
|
|
| |
| |
| |
Owners of the Company |
|
|
| 63,473 |
| 61,412 |
| 54,241 |
Non-controlling interests |
|
|
| 796 |
| 661 |
| 858 |
Earnings per share from continuing operations (basic and diluted), Russian Rubles: |
| 13 |
| 37.21 and 37.02 |
| 34.53 and 34.51 |
| 29.04 and 28.99 |
Earnings per share from discontinued operations (basic and diluted), Russian Rubles: | | 13 | | 0.28 and 0.28 | | 0.35 and 0.35 | | 1.42 and 1.42 |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
President and CEO |
| Vice-president, Finance |
| | |
________________________________ Vyacheslav K. Nikolaev | | __________________________ Andrey M. Kamensky |
March 1, 2022 | | |
F-9
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(Amounts in millions of Russian Rubles)
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Profit for the year |
| 64,269 |
| 62,073 |
| 55,099 |
Other comprehensive income |
| |
| |
| |
Items that may be reclassified subsequently to profit or loss: |
| |
| |
| |
Reclassification to profit and loss due to Disposal of VF Ukraine (Note 11) | | — | | — | | 7,947 |
Exchange differences on translating foreign operations |
| 1,102 |
| 1,840 |
| 1,134 |
Net fair value (loss) / gain on financial instruments |
| — |
| — |
| (237) |
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 |
| 95 |
| (196) |
| (413) |
Other comprehensive income for the year, net of income tax |
| 1,197 |
| 1,644 |
| 8,431 |
Total comprehensive income for the year |
| 65,466 |
| 63,717 |
| 63,530 |
Total comprehensive income for the year attributable to: |
| |
| |
| |
Owners of the Company |
| 64,670 |
| 63,056 |
| 62,672 |
Non-controlling interests |
| 796 |
| 661 |
| 858 |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
President and CEO |
| Vice-president, Finance |
| | |
_______________________________ Vyacheslav K. Nikolaev | | ____________________________ Andrey M. Kamensky |
March 1, 2022 | | |
F-10
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(Amounts in millions of Russian Rubles, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated other comprehensive income / (loss) | | | | | | | | | ||||
| | | | | | | | | | | | Financial | | Foreign | | Remeasure-ments | | | | Equity | | | | |
| | | | | | Additional | | instruments | | currency | | of the net | | | | attributable | | | | | ||||
| | Common stock | | Treasury stock | | paid-in | | revaluation | | translation | | defined benefit | | Retained | | to equity | | Non-controlling | | Total | ||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| reserve |
| reserve |
| liability |
| earnings |
| holders |
| interests |
| equity |
Balances at January 1, 2019 | | 1,998,381,575 | | 200 | | (167,638,899) | | (44,808) | | — | | 237 | | (1,971) | | 670 | | 110,946 | | 65,274 | | 12,291 | | 77,565 |
Profit for the year | | — | | — | | — | | — | | — | | — | | — | | — | | 54,241 | | 54,241 | | 858 | | 55,099 |
Disposal of VF Ukraine (Note 11) | | — | | — | | — | | — | | — | | — | | 7,947 | | — | | — | | 7,947 | | — | | 7,947 |
Currency translation adjustment | | — | | — | | — | | — | | — | | — | | 721 | | — | | — | | 721 | | — | | 721 |
Net fair value (loss) / gain on financial instruments | | — | | — | | — | | — | | — | | (237) | | — | | — | | — | | (237) | | — | | (237) |
Total comprehensive (loss) / income for the year | | — | | — | | — | | — | | — | | (237) | | 8,668 | | — | | 54,241 | | 62,672 | | 858 | | 63,530 |
Issuance of stock options | | — | | — | | — | | — | | 872 | | — | | — | | — | | — | | 872 | | — | | 872 |
Exercise of stock options | | — | | — | | 3,610,561 | | 982 | | (1,060) | | — | | — | | — | | — | | (78) | | — | | (78) |
Dividends declared by MTS | | — | | — | | — | | — | | — | | — | | — | | — | | (74,302) | | (74,302) | | — | | (74,302) |
Dividends to non-controlling interests | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | (1,123) | | (1,123) |
Purchase of own stock (Note 32) | | — | | — | | (61,519,084) | | (15,922) | | — | | — | | — | | — | | — | | (15,922) | | — | | (15,922) |
Purchase of non-controlling interests | | — | | — | | — | | — | | (4,162) | | — | | — | | — | | — | | (4,162) | | (8,700) | | (12,862) |
Acquisitions under common control (Note 5) | | — | | — | | — | | — | | (1,286) | | — | | — | | — | | — | | (1,286) | | — | | (1,286) |
Reclass to retained earnings | | — | | — | | — | | — | | 5,636 | | — | | — | | — | | (5,636) | | — | | — | | — |
Balances at December 31, 2019 | | 1,998,381,575 | | 200 | | (225,547,422) | | (59,748) | | — | | — | | 6,697 | | 670 | | 85,249 | | 33,068 | | 3,326 | | 36,394 |
Profit for the year | | — | | — | | — | | — | | — | | — | | — | | — | | 61,412 | | 61,412 | | 661 | | 62,073 |
Currency translation adjustment | | — | | — | | — | | — | | — | | — | | 1,644 | | — | | — | | 1,644 | | — | | 1,644 |
Total comprehensive income for the year | | — | | — | | — | | — | | — | | — | | 1,644 | | — | | 61,412 | | 63,056 | | 661 | | 63,717 |
Issuance of stock options | | — | | — | | — | | — | | 560 | | — | | — | | — | | — | | 560 | | — | | 560 |
Exercise of stock options | | — | | — | | 2,865,735 | | 768 | | (767) | | — | | — | | — | | — | | — | | — | | — |
Dividends declared by MTS | | — | | — | | — | | — | | — | | — | | — | | — | | (52,012) | | (52,012) | | — | | (52,012) |
Dividends to non-controlling interests | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | 52 | | 52 |
Purchase of own stock (Note 32) | | — | | — | | (48,797,719) | | (16,010) | | — | | — | | — | | — | | — | | (16,010) | | — | | (16,010) |
Reclass to retained earnings and other | | — | | — | | — | | — | | 296 | | — | | — | | — | | (258) | | 38 | | (49) | | (11) |
Balances at December 31, 2020 | | 1,998,381,575 | | 200 | | (271,479,406) | | (74,990) | | 89 | | — | | 8,341 | | 670 | | 94,391 | | 28,700 | | 3,990 | | 32,690 |
F-11
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 (CONTINUED)
(Amounts in millions of Russian Rubles, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated other comprehensive | | | | | | | | | ||
| | | | | | | | | | | | income / (loss) | | | | | | | | | ||
| | | | | | | | | | | | Foreign | | Remeasurements | | | | Equity | | | | |
| | | | | | Additional | | currency | | of the net | | | | attributable | | | | | ||||
| | Common stock | | Treasury stock | | paid-in | | translation | | defined benefit | | Retained | | to equity | | Non-controlling | | Total | ||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| reserve |
| liability |
| earnings |
| holders |
| interests |
| equity |
Balances at December 31, 2020 | | 1,998,381,575 | | 200 | | (271,479,406) | | (74,990) | | 89 | | 8,341 | | 670 | | 94,391 | | 28,700 | | 3,990 | | 32,690 |
Profit for the year | | — | | — | | — | | — | | — | | — | | — | | 63,473 | | 63,473 | | 796 | | 64,269 |
Currency translation adjustment | | — | | — | | — | | — | | — | | 1,197 | | — | | — | | 1,197 | | — | | 1,197 |
Total comprehensive income for the year | | — | | — | | — | | — | | — | | 1,197 | | — | | 63,473 | | 64,670 | | 796 | | 65,466 |
Issuance of stock options | | — | | — | | — | | — | | 2,796 | | — | | — | | — | | 2,796 | | — | | 2,796 |
Exercise of stock options | | — | | — | | 1,030,559 | | 279 | | (263) | | — | | — | | — | | 16 | | — | | 16 |
Dividends declared by MTS | | — | | — | | — | | — | | — | | — | | — | | (61,967) | | (61,967) | | — | | (61,967) |
Dividends to non-controlling interests | | — | | — | | — | | — | | — | | — | | — | | — | | — | | 52 | | 52 |
Purchase of own stock (Note 32) | | — | | — | | (65,308,610) | | (21,484) | | — | | — | | — | | — | | (21,484) | | — | | (21,484) |
Purchase of non-controlling interests | | — | | — | | — | | — | | (143) | | — | | — | | — | | (143) | | — | | (143) |
Acquisitions under common control (Note 5) | | — | | — | | — | | — | | (2,794) | | — | | — | | — | | (2,794) | | — | | (2,794) |
Reclass to retained earnings and other | | — | | — | | — | | — | | 934 | | — | | — | | (962) | | (28) | | — | | (28) |
Balances at December 31, 2021 | | 1,998,381,575 | | 200 | | (335,757,457) | | (96,195) | | 619 | | 9,537 | | 670 | | 94,935 | | 9,766 | | 4,838 | | 14,604 |
The accompanying notes are an integral part of these consolidated financial statements.
F-12
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(Amounts in millions of Russian Rubles)
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Profit for the year |
| 64,269 |
| 62,073 |
| 55,099 |
Adjustments for: |
| |
| |
| |
Depreciation and amortization |
| 111,088 |
| 100,205 |
| 106,948 |
(Reversal of) / Impairment of non-current assets |
| (10) |
| 2,023 |
| (148) |
Impairment of financial assets |
| 12,983 |
| 11,936 |
| 7,761 |
Loss/(gain) from sale of Ukraine operations (Note 11) | | 54 | | (2,101) | | 5,499 |
Finance income |
| (2,518) |
| (3,439) |
| (4,805) |
Finance costs |
| 41,352 |
| 42,085 |
| 48,711 |
Income tax expense |
| 15,403 |
| 17,191 |
| 17,671 |
Share of profit of associates and joint ventures |
| (5,746) |
| (5,321) |
| (8,079) |
Net foreign exchange loss/ (gain) and change in fair value of financial instruments |
| 186 |
| (4,330) |
| 1,784 |
Inventory obsolescence expense |
| 1,456 |
| 891 |
| 2,207 |
Change in provisions |
| 3,620 |
| 1,492 |
| 305 |
Other non-cash items |
| (4,360) |
| (4,393) |
| (6,882) |
Movements in operating assets and liabilities: |
| |
| |
| |
(Increase)/Decrease in trade and other receivables and contract assets |
| (2,608) |
| 1,904 |
| (3,808) |
Increase in bank deposits and loans to customers |
| (101,897) |
| (33,570) |
| (34,452) |
(Increase) / decrease in inventory |
| (5,206) |
| (630) |
| 3 |
(Increase) / decrease in advances paid and prepaid expenses |
| (2,526) |
| (6,507) |
| 3,478 |
(Increase) / Decrease in VAT receivable | | (2,821) | | 482 | | (2,522) |
Increase / (Decrease) in trade and other payables, contract liabilities and other current liabilities |
| 16,544 |
| (1,104) |
| 6,825 |
Increase in bank deposits and liabilities | | 53,765 | | 27,172 | | 27,823 |
Fines and penalties related to investigation into former operations in Uzbekistan (Note 34) | | — | | — | | (55,607) |
Dividends received |
| 4,794 |
| 3,676 |
| 3,707 |
Income tax paid |
| (17,494) |
| (15,193) |
| (23,943) |
Interest received |
| 3,150 |
| 2,727 |
| 5,263 |
Interest paid, net of interest capitalized |
| (40,632) |
| (41,762) |
| (46,186) |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
| 142,846 |
| 155,507 |
| 106,652 |
CASH FLOWS FROM INVESTING ACTIVITIES: |
| |
| |
| |
Purchase of subsidiaries, net of cash acquired (Note 5) |
| (10,186) |
| (262) |
| (2,052) |
Purchases of property, plant and equipment (including capitalized interest in the amount of RUB 533 million, RUB 550 million and RUB 460 million, respectively) |
| (73,081) |
| (66,256) |
| (68,465) |
Purchases of other intangible assets |
| (38,602) |
| (31,153) |
| (23,016) |
Purchase of Avantage |
| — |
| (429) |
| — |
Purchase of 3G and 4G licenses in Armenia and Ukraine |
| — |
| — |
| (255) |
Cost to obtain and fulfill contracts, paid |
| (4,218) |
| (5,442) |
| (4,651) |
Proceeds from sale of property, plant and equipment and assets held for sale |
| 5,082 |
| 6,678 |
| 6,536 |
Purchases of short-term and other investments |
| (13,765) |
| (10,054) |
| (22,714) |
Proceeds from sale of short-term and other investments |
| 13,085 |
| 16,012 |
| 47,139 |
Investments in associates and joint ventures (Note 16) |
| (1,087) |
| (1,460) |
| (75) |
Cash (payments) and proceeds related to swap contracts | | (657) | | 5,322 | | (2,459) |
Proceeds from sale of subsidiaries, net of cash disposed (Notes 11 and 31) | | 3,891 | | 3,461 | | 37,386 |
Proceeds from sale/liquidation of associates (Note 16) | | 3,014 | | 2,450 | | 3,067 |
Other investing activities | | 92 | | — | | 5 |
| | | | | | |
NET CASH USED IN INVESTING ACTIVITIES | | (116,432) | | (81,133) | | (29,554) |
F-13
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 (CONTINUED)
(Amounts in millions of Russian Rubles)
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
Repayment of notes |
| (20,813) |
| (28,167) |
| (189) |
Proceeds from issuance of notes |
| 4,350 |
| 46,757 |
| 72,500 |
Notes and debt issuance cost paid |
| (96) |
| (107) |
| (111) |
Lease obligation principal paid |
| (16,516) |
| (15,054) |
| (15,154) |
Dividends paid |
| (61,955) |
| (74,923) |
| (52,505) |
Acquisition of entities under common control, net of cash acquired (Note 5) |
| (3,474) |
| — |
| (15,312) |
Proceeds from loans |
| 64,311 |
| 194,645 |
| 62,415 |
Repayment of loans |
| (15,538) |
| (134,483) |
| (156,511) |
Repurchase of common stock |
| (21,483) |
| (16,028) |
| (15,922) |
Other financing activities |
| — |
| — |
| 341 |
NET CASH USED IN FINANCING ACTIVITIES |
| (71,214) |
| (27,360) |
| (120,448) |
Effect of exchange rate changes on cash and cash equivalents |
| (79) |
| 385 |
| (2,655) |
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |
| (44,879) |
| 47,399 |
| (46,005) |
CASH AND CASH EQUIVALENTS, beginning of the year |
| 85,469 |
| 38,070 |
| 84,075 |
CASH AND CASH EQUIVALENTS, end of the year |
| 40,590 |
| 85,469 |
| 38,070 |
Less cash and cash equivalents within held for sale | | — | | (64) | | — |
CASH AND CASH EQUIVALENTS, end of the year |
| 40,590 |
| 85,405 |
| 38,070 |
The accompanying notes are an integral part of these consolidated financial statements.
F-14
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
1. GENERAL INFORMATION AND DESCRIPTION OF BUSINESS
Mobile TeleSystems Public Joint-Stock Company (“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 December 31, 2021 and 2020, and for the years ended 31 December 2021, 2020 and 2019 were authorized for issue by the President of the Company on March 1, 2022.
Business of the Group – MTS 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 licence area in 1994, before expanding through Russia and the CIS. MTS PJSC’s majority shareholder is Sistema Public Joint-Stock Financial Corporation or “Sistema”, whose controlling shareholder is Vladimir P. Yevtushenkov.
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 PJSC have been traded on the Public Joint-Stock Company “Moscow Exchange MICEX-RTS” (the “Moscow Exchange”).
The Group provides a wide range of telecommunications and digital services including voice and data transmission, internet access, pay TV, various value added services (“VAS”) through wireless and fixed lines, fintech services, B2B Cloud and digital solutions as well as the sale of equipment, accessories and software. Upon disposal of its operations in Ukraine in December 2019 (Note 11), the Group primarily operates in Russia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
Basis of preparation – The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The consolidated financial statements have been prepared on a historical cost basis, unless disclosed otherwise. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
Amounts in the consolidated financial statements are stated in millions of Russian Rubles (“RUB million”), unless indicated otherwise.
The consolidated financial statements have been prepared on the assumption that the Group is a going concern and will continue in operation for the foreseeable future (Note 29).
Basis of consolidation – The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company. Control is achieved only where the Company has power over the entity, is exposed and has rights to variable returns, and is able to use the power to affect its amount of variable returns. The results of the controlled entities acquired or disposed of during the reporting period are included in the consolidated financial statements from the date the Group achieves control over the entity, or until the date 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.
F-15
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Effective ownership interests in the Group’s significant subsidiaries were the following:
| | | | | | | |
| | Accounting | | December 31, | | December 31, |
|
|
| method |
| 2021 |
| 2020 |
|
RTC |
| Consolidated |
| 100.0 | % | 100.0 | % |
MTS Bank |
| Consolidated |
| 99.9 | % | 99.9 | % |
MGTS Group |
| Consolidated |
| 94.7 | % | 94.7 | % |
Multiregional TransitTelecom (Note 5) | | Consolidated | | 100.0 | % | — | |
MTS Armenia |
| Consolidated |
| 100.0 | % | 100.0 | % |
Nvision Czech Republic |
| Consolidated |
| 100.0 | % | 100.0 | % |
MDTZK LLC (Ticketland) | | Consolidated | | 100.0 | % | 100.0 | % |
Kulturnaya Sluzhba (Ponominalu) |
| Consolidated |
| 100.0 | % | 100.0 | % |
Sputnikovoe TV |
| Consolidated |
| 100.0 | % | 100.0 | % |
IT Grad (Note 5) | | Consolidated | | 100.0 | % | 100.0 | % |
MTS Avto (former Stopol) (Note 5) | | Consolidated | | 100.0 | % | 100.0 | % |
"Zelenaya Tochka" Group – Achemar Holdings Ltd (Note 5)(1) | | Consolidated | | 100.0 | % | 51.0 | % |
Oblachny Retail LLC |
| Consolidated |
| 100.0 | % | 50.8 | % |
MTS Media | | Consolidated | | 100.0 | % | 100.0 | % |
Navigation Information Systems Group |
| Consolidated |
| 94.7 | % | 94.7 | % |
MTS Didgital (former MTS IT) | | Consolidated | | 100.0 | % | 100.0 | % |
Kinopolis (Note 5) | | Consolidated | | 100.0 | % | 100.0 | % |
Sistema Capital (Note 5)(1) | | Consolidated | | 100.0 | % | 30.0 | % |
Stream |
| Consolidated |
| 100.0 | % | 100.0 | % |
MTS Turkmenistan | | Consolidated | | 100.0 | % | 100.0 | % |
MTS Artificial Intelligence | | Consolidated | | 100.0 | % | 100.0 | % |
MWS | | Consolidated | | 100.0 | % | — | |
Energy Group (Note 5) | | Consolidated | | 100.0 | % | — | |
Dega |
| Consolidated |
| 100.0 | % | 100.0 | % |
Stream Digital |
| Consolidated |
| 100.0 | % | 100.0 | % |
Bastion | | Consolidated | | 100.0 | % | 100.0 | % |
MTS International Funding Limited (2) (“MTS International”) |
| Consolidated |
| SE | | SE | |
MTS Belarus (Note 16) |
| Equity |
| 49.0 | % | 49.0 | % |
(1) | Consolidated since 2021, accounted for as an equity investment in 2020 |
(2) | A company organized and existing as a private limited company under the laws of Ireland. The Group does not have any equity in MTS International. It 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 USD 750 million 8.625% notes due in 2020 (fully repaid in June 2020) and USD 500 million 5.0% notes due in 2023, respectively (Note 24). The notes are guaranteed by MTS PJSC in the event of default. 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. Accordingly, the Group 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 that the control over those entities is passed to the Group. The assets and liabilities acquired are recognized at the carrying values recorded previously in the counterparty’s financial statements, with the resulting gain or loss recognized directly in equity.
Joint operations – The Group has joint operations with Megafon and Vimpelcom, relating to the construction of LTE base stations. Joint operations are characterized by the fact that the operators that have joint control over the arrangement each have both a right to the assets, and obligations for the liabilities, according to the arrangement. Respectively, each operator accounts for its share of the joint assets and its agreed share of any liabilities, and recognizes its share of the output, revenues and expenses incurred under the arrangement. The result of joint operations does not influence the consolidated financial statements significantly.
F-16
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Non-current assets held for sale and discontinued operations - The Group classifies assets and disposal groups as held for sale 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 lower of carrying amount or fair value less cost to sell. Assets and liabilities classifies as held for sale are presented separately as current items in the statement of financial position.
A disposal group qualifies as discontinued operation if it is a component of the entity that either has been disposed of or is classified as held for sale, and:
● | Represents a separate major line of business or geographical area of operations; |
● | Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; |
● | Or is a subsidiary acquired exclusively with a view to resale. |
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the statement of profit or loss.
Group's statement of cash flows include both cash flows from continuing and discontinued operations, amounts related to discontinued operations by operating, investing and financing activities are presented in Note 11.
Vendor financing arrangemets – In December 2021 the Group concluded factoring arrangements under which banks made payments due to the identified suppliers on behalf of the Group for a fixed fee. The Group reimbursed the paid amounts to the banks within the next month. No additional collateral or guarantee was provided by the Group in respect of factored payables. Based on the Group’s assessment the liabilities under the factoring arrangement are closely related to its operating purchase activities and the financing arrangement does not lead to any significant change in the nature or function of the related liabilities. These liabilities were therefore classified as accounts payables. As of December 31, 2021 accounts payables under the factoring arrangements totaled to RUB 9,343 mln.
Functional currency translation methodology – As of December 31, 2021, the functional currencies of Group entities were as follows:
Foreign-currency transactions are translated into the functional currency at the exchange rates at the dates of the transactions. At the reporting date, monetary items denominated in foreign currencies are translated at the closing rate, whereas non-monetary items are stated at the exchange rate at the date of their recognition. Exchange rate differences are recognized in profit or loss.
F-17
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
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. Dollars (“USD”) 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 the cross-currency exchange rate via the U.S. Dollar as described above. Translation differences resulting from the use of these rates are reported as a component of other comprehensive income.
Standards, interpretations and amendments adopted in the financial year 2021
Amendments to IFRS9, IAS39, IFRS7, IFRS 4 and IFRS16 |
| Interest Rate Benchmark Reform (Phase 2) |
Amendments to IFRS16 | | Covid-19 Related Rent Concessions |
Amendments to IFRS 1 and IAS 12 | | Deferred Tax related to Assets and Liabilities arising from a Single Transaction (1) |
(1)Voluntary early adoption
None of these interpretations and amendments had material effect on the Group’s consolidated financial statements.
Standards, interpretations and amendments in issue but not yet effective
The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective:
| | |
Amendments to IAS 37 | | Onerous contracts – Cost of fulfilling a contract (1) |
Amendments to IAS 16 | | Property, Plant and Equipment: Proceeds before Intended Use (1) |
Amendments to IFRS 3 | | Reference to Conceptual Framework (1) |
Amendments to IFRS | | Annual Improvements to IFRSs (2018-2020 Cycle) (1) |
Amendments to IAS 1 | | Classification of Liabilities as Current or Non-Current (2) |
IFRS 17 and amendments to IFRS17 | | Insurance Contracts (2) |
Amendments to IAS 8 | | Definition of Accounting Estimate (2) |
Amendments to IAS 1 and IFRS Practice Statement 2 | | Disclosure of Accounting Policy (2) |
Amendments to IFRS 10 and IAS 28 | | Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (3) |
(1) | Effective for annual periods beginning on or after January 1, 2022, with earlier application permitted. |
(2) | Effective for annual periods beginning on or after January 1, 2023, with earlier application permitted. |
(3) | The effective date for these amendments was deferred indefinitely. Early adoption continues to be permitted. |
These IFRS pronouncements are not expected to have a material impact on the Group's consolidated financial statements.
3. IMPACTS OF COVID-19
The coronavirus pandemic has led to a global economic crisis. Due to higher demand for certain telecommunications services the impact of the crisis has been felt less severely by the telecommunication industry and the Group than by other industries. Business activities and thus the results of operations and financial position of the Group were impacted by the coronavirus pandemic in various business areas, affecting revenue and earnings, although not to any significant extent. The main negative effects on the Group results for the first half of the financial year 2020 were increased expected credit loss allowance recognized in respect to the Group’s financial assets as well as the impairment of the e-ticketing business. Notwithstanding the foregoing, during the second half of the financial year 2020 and in the financial year 2021 the Group experienced only minor customer payment defaults as a consequence of COVID-19, such that the expected credit loss has since returned to its normal level.
Generally, the global COVID-19 situation remains uncertain and subject to change and could further impact the economies and financial markets of many regions, including the countries in which the Group operates, which in turn could impact consumer and business spending patterns and the Group’s operating results.
F-18
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
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.
1. 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 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 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 licence 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 20 and 23 for further information.
2. Impairment of non-current assets
The Group has made significant investments including in property, plant and equipment, intangible assets, goodwill, right-of-use assets, acquiring and fulfilling of contracts.
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.
Recoverable amounts of assets and cash generating units ("CGUs") are based on 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). A change of assumptions, particularly in relation to the discount rate and growth rate used to estimate the recoverable amounts of assets, could significantly impact results of the Group’s impairment evaluation.
See Note 22 for further information.
F-19
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
3. 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 28 for further information.
4. Provisions and contingencies
The Group is subject to various legal proceedings, disputes and claims, including regulatory discussions related to the Group’s business, licences, tax positions and investments, where the outcomes are subject to significant uncertainty. In addition, significant uncertainty exists in relation to employee bonuses and other rewards, which depend on their individual performance and Group’s results. The 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 Notes 27 and Note 34 for further information.
5. Right-of-use assets and lease liabilities
The value of right-of-use assets and lease liabilities is based on management estimates of lease terms as well as an incremental borrowing rate used to discount lease payments. The lease term corresponds to the non-cancellable period of each contract except in cases where the Group is reasonably certain of exercising renewal options. When assessing the lease term the management considers all facts and circumstances that create the economic incentive for the Group to exercise the option to extend the lease, such as the useful life of the asset located on the leased site, statistics on sites replacement, sequence of technology change, profitability of the Group's retail stores as well as costs to terminate or enter into lease contracts. The incremental borrowing rate of the Group is determined based on the credit spreads of the Group's debt instruments in relation to zero-coupon yield curve for government securities. Changes in these factors could affect the estimated lease term and the reported value of right-of-use assets and lease liabilities.
See Note 25 for further information.
6. Impairment of financial assets
The Group uses management’s judgement to estimate allowance for expected credit losses (ECL) for financial assets at amortized costs. ECL are measured in a way that reflects the unbiased and probability-weighted amount, the time-value of money and reasonable and supportable information at the reporting date pertaining to past events, current conditions and forecasts of future economic conditions.
ECL are measured as probability-weighted present value of all cash shortfalls over the expected life of each financial asset. For receivables from financial services, ECL are mainly calculated using a statistical model based on three major risk parameters: probability of default, loss given default and exposure at default.
The estimation of these risk parameters incorporates all available relevant information, not only historical and current loss data, but also reasonable and supportable forward-looking information reflected by the future expectation factors. This information includes macroeconomic factors (unemployment rate, inflation rate) and forecasts of future economic conditions.
Significant changes in risk parameters could affect the estimated amount of ECL.
See Notes 18 and 30 for further information.
F-20
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
5. BUSINESS ACQUISITIONS
Unless stated otherwise, all business combinations disclosed were accounted for by applying the acquisition method. Goodwill recognized as a result of the acquisitions is not expected to be deductible for income tax purposes.
Acquisition after the reporting period
Acquisition of VisionLabs – In February 2022, the Group acquired a 100% ownership interest in VisionLabs B.V. (“VisionLabs”), leading provider of computer vision and machine learning solutions, for total consideration of RUB 6,523 million. The acquisition is aimed at reinforcement of the Group’s artificial intelligence product portfolio in the computer vision space, and enhancing the potential of the Group’s digital ecosystem. The purchase price constitutes a cash payment of RUB 5,243 million, transfer of the non-controlling stake in one of the Group’s subsidiaries for RUB 659 million and contingent consideration of RUB 621 million. Contingent consideration is based on certain performance criteria for the periods starting 2022 and ending 2024.
The preliminary purchase price allocation for VisionLabs was as follows:
| | | |
Goodwill |
| 3,800 | (1) |
Customer base |
| 1,726 | (2) |
Other intangible assets |
| 1,434 | |
Property, plant and equipment |
| 86 | |
Other non-current assets |
| 53 | |
Current assets |
| 266 | |
Cash and cash equivalents |
| 211 | |
Current liabilities |
| (447) | |
Non‑current liabilities |
| (606) | |
| | | |
Total consideration |
| 6,523 | |
Including: |
|
| |
Fair value of contingent consideration |
| 621 | |
Fair value of stake in Group’s subsidiary |
| 659 | |
Cash payable |
| 5,243 | |
Acquisitions in 2021
Acquisition of Zelenaya Tochka – In April 2021, the Group increased its stake in Achemar Holdings Limited, owner of the operational companies of “Zelenaya Tochka” Group, to 100% and obtained control over the entity to expand its regional footprint. Prior to the acquisition, the Group owned 51% in Achemar Holdings Limited and accounted for the investment as the investment in joint venture (Note 16). “Zelenaya Tochka” Group includesfixed-line operators in Stavropol and Tambov regions. The purchase price constituted a cash payment of RUB 1,512 million paid in April 2021 and deferred payment of RUB 7 million.
Acquisition of Credit Consulting – In April 2021, the Group acquired a 100% ownership interest in LLC “Credit Consulting”, a credit broker. The purchase price constituted a cash payment of RUB 10 thousand paid in May 2021 and contingent consideration at fair value of RUB 60 million, payable in 5-year period based on operating performance targets.
Acquisition of MTT – In June 2021, the Group acquired a 100% ownership interest in OJSC “Multiregional TransitTelecom” (“MTT”), a provider of intelligent connectivity solutions for businesses, to expand its connectivity services portfolio. The purchase price constituted a cash payment of RUB 3,680 million paid in June 2021, transfer of receivables from former owners offset against the purchase price for RUB 1,958 million and deferred payment of RUB 160 million.
F-21
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Acquisition of Energy Group – In June 2021, the Group acquired a 100% ownership interest in LLC “GDTs Energy Group” (“GreenBush”), the operator of the GreenBush data center in Tehnopolis special economic area, to use the facility’s additional capacity to offer colocation and cloud solutions to customers as well as to facilitate the Group’s own compute and storage needs. The purchase price constituted a cash payment of RUB 5,200 million paid in July 2021.
The preliminary purchase price allocations for acquired companies as at the dates of acquisitions were as follows:
| | | | | | | | | |
|
| |
| Zelenaya |
| |
| Credit |
|
| | MTT | | Tochka | | GreenBush | | Consulting | |
Goodwill | | 2,984 | (1) | 1,353 | (1) | - | | 46 | (2) |
Customer base |
| 827 | (3) | 320 | (4) | — | | — | |
Trademark |
| 530 | | 12 | | — | | — | |
Other intangible assets |
| 590 | | 24 | | 1 | | 4 | |
Property, plant and equipment |
| 588 | | 623 | | 5,171 | | — | |
Other non-current assets |
| 254 | | 43 | | 17 | | — | |
Current assets |
| 3,056 | | 1,417 | | 84 | | 18 | |
Cash and cash equivalents |
| 340 | | 152 | | 9 | | 3 | |
Current liabilities |
| (2,656) | | (725) | | (26) | | (11) | |
Non‑current liabilities |
| (715) | | (118) | | (56) | | — | |
| | | | | | | | | |
Total consideration |
| 5,798 | | 3,101 | | 5,200 | | 60 | |
Including: |
|
| |
| |
| |
| |
Fair value of contingent consideration |
| — | | — | | — | | 60 | |
Fair value of offset financial assets |
| 1,958 | | — | | — | | — | |
Fair value of previously held interest |
| — | | 1,582 | | — | | — | |
Deferred payment |
| 160 | | 7 | | — | | — | |
Cash paid or payable |
| 3,680 | | 1,512 | | 5,200 | | — | |
None of the provisional amounts of goodwill recognized is expected to be deductible for income tax purposes.
Acquisitions under common control, accounted for directly in equity
Acquisition of LLC Sistema Capital (“Sistema Capital”) – In September 2021, the Group acquired the remaining 70% stake in the investment services company Sistema Capital from subsidiaries of Sistema, for total consideration of RUB 3,500 million. Acquisition of Sistema Capital enables the Group to enhance its retail financial services portfolio, adding a comprehensive set of investment services.
The following table summarizes the details of acquisition of subsidiary under common control finalized in 2021:
| | | | | | | | |
| | Consideration | | | | | | |
| | paid | | | | | | |
| | net of cash | | | | Assets acquired | | Liabilities |
Acquired company |
| acquired* |
| Cash acquired |
| other than cash |
| assumed |
Sistema Capital | | 3,474 | | 26 | | 1,185 | | 90 |
* Included in consolidated statement of cash flows within cash flows from financing activities as transactions with entities under common control
F-22
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Disposal of STS-Ukraine
In February 2021, the Group sold its 100% stake in LLC “Sitronics Telecom Solutions Ukraine” (“STS-Ukraine”) for RUB 52 million.
As of the date of disposal, the carrying amounts of assets and liabilities pertaining to the disposal group and reconciliation of the loss on disposal were as follows:
| | |
Current assents |
| 282 |
Non-current assets |
| 51 |
Total assets |
| 333 |
Current liabilities |
| (275) |
Non-current liabilities |
| (36) |
Total liabilities |
| (311) |
Accumulated other comprehensive income |
| 83 |
| | |
Total consideration |
| (52) |
| | |
Loss on disposal |
| 53 |
Acquisitions in 2020
Acquisition of Stopol – In June 2020, the Group acquired a 100% ownership interest in LLC “Stopol Auto” and LLC “Koagent Rus” (jointly referred as “Stopol”), wholesalers of auto parts and multimedia devices. The purchase price constituted a cash payment of RUB 312 million paid in July 2020 and a contingent consideration. This acquisition allowed the Group to enter into the market of the smart multimedia systems for cars.
The purchase price allocation for Stopol as at the date of acquisition was presented as follows:
| | |
|
| Stopol |
| | |
Goodwill(1) |
| 282 |
Other non-current assets |
| 2 |
Current assets |
| 230 |
Cash and cash equivalents |
| 69 |
Current liabilities |
| (262) |
| | |
Total consideration |
| 321 |
| | |
Including: |
|
|
Fair value of contingent consideration |
| 9 |
Cash paid |
| 312 |
(1) | The goodwill is attributable to the expected synergies resulted from the acquisition and allocated to the “Stopol” operating segment within “Other” category in reportable segments. |
F-23
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Acquisitions in 2019
Acquisition of JSC RIKT - In June 2019, the Group acquired a 97.4% ownership interest in JSC RIKT ("RIKT"), a fixed-line operator in the Kemerovo region, for cash consideration of RUB 360 million. This acquisition allowed the Group to increase its market share in the region. In September 2019, the Group finalized the mandatory share repurchase from minority shareholders of RIKT and increased its share to 100%.
The fair values of the identifiable assets and liabilities of RIKT as at the date of acquisition were as follows:
| | |
Goodwill (1) |
| 105 |
Other intangible assets (2) |
| 172 |
Property, plant and equipment |
| 118 |
Trade and other receivables |
| 12 |
Cash and cash equivalents |
| 6 |
Other current assets |
| 9 |
Other non-current assets |
| 14 |
Current liabilities |
| (37) |
Non‑current liabilities |
| (39) |
| | |
Consideration transferred (in cash) |
| 360 |
(1) | The goodwill is attributable to the expected synergies resulted from the acquisition and allocated to the “Telecom” operating segment. |
(2) | Amortized over the average term of 12 years. |
Acquisitions under common control, accounted for directly in equity
Acquisition of JSC Objedinennye Russkie Kinostudii (“Кinopolis”) – In April 2019, the Group acquired Kinopolis from Business-Nedvizhimost, a subsidiary of Sistema, for total consideration of RUB 2,042 million. Kinopolis owns fully equipped movie complex in Saint-Petersburg. Acquisition of Kinopolis enabled the Group to develop its own entertainment content.
Acquisition of property complex at Narodnogo opolcheniya street (“Narodnoje”) - In August 2019, the Group acquired Narodnoje property complex from Sistema for total consideration of RUB 329 million. The property complex comprised office facilities leased by the Group and hostel premises leased by a third party and operated under management agreement with Business-Nedvizhimost, a subsidiary of Sistema. The acquisition enabled the Group to optimize its rental expenses and enhance its investment property portfolio.
The following table summarizes the details of acquisitions of subsidiaries under common control finalized in 2019:
| | | | | | | | |
|
| Consideration paid | | | | Assets acquired | | |
Acquired company |
| net of cash acquired* |
| Cash acquired |
| other than cash |
| Liabilities assumed |
Kinopolis |
| 2,030 |
| 12 |
| 1,017 |
| 58 |
Narodnoje |
| 329 |
| — |
| 102 |
| — |
| | | | | | | | |
Total effect of acquisitions under common control | | 2,359 | | 12 | | 1,119 | | 58 |
*Included in consolidated statement of cash flows within cash flows from financing activities as transactions with entities under common control
F-24
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
According to the terms of the purchase agreements, deferred payments and contingent consideration payable by the Group could be reduced by the amount of any losses incurred by the Group in respect of any tax or other claims relating to the pre-acquisition period. In case the amount of the losses incurred exceeds the amount of deferred payment, the seller has indemnified the Group for the amounts in excess. The following table summarizes the movement in deferred payment and contingent consideration liabilities and related indemnification assets for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | |
|
| Deferred |
| |
| |
| |
| |
| |
| | payments | | | | | | | | | | |
| | on | | | | | | Zelenaya | | Credit | | |
Indemnification asset/ | | acquisitions | | IT-Grad | | Stopol | | Tochka | | Consulting | | MTT |
(Liability on deferred payment/ | | prior to | | contingent | | contingent | | deferred | | contingent | | deferred |
contingent consideration) | | 2019 | | consideration | | consideration | | payment | | consideration | | payment |
| | | | | | | | | | | | |
January 1, 2019 |
| 118 |
| (907) |
| — |
| — |
| — |
| — |
| | | | | | | | | | | | |
Measurement period adjustment |
| — |
| 66 |
| — |
| — |
| — |
| — |
Reversal of indemnity |
| (259) |
| — |
| — |
| — |
| — |
| — |
Revaluation |
| (22) |
| (66) |
| — |
| — |
| — |
| — |
Payment |
| 163 |
| — |
| — |
| — |
| — |
| — |
| | | | | | | | | | | | |
December 31, 2019 |
| — |
| (907) |
| — |
| — |
| — |
| — |
| | | | | | | | | | | | |
Initial recognition of deferred payment/contingent consideration |
| — |
| — |
| (40) |
| — |
| — |
| — |
Less: Provision for tax liabilities related to pre-acquisition period |
| — |
| — |
| 26 |
| — |
| — |
| — |
Reversal of tax provision |
| — |
| — |
| (10) |
| — |
| — |
| — |
| | | | | | | | | | | | |
December 31, 2020 |
| — |
| (907) |
| (24) |
| — |
| — |
| — |
| | | | | | | | | | | | |
Initial recognition of deferred payment/contingent consideration |
| — |
| — |
| — |
| (7) |
| (60) |
| (160) |
Less: Provision for tax liabilities related to pre-acquisition period |
| — |
| — |
| 3 |
| — |
| — |
| — |
Revaluation |
| — |
| 542 |
| — |
| — |
| (1) |
| — |
Payment |
| — |
| 365 |
| — |
| 7 |
| — |
| — |
| | | | | | | | | | | | |
December 31, 2021 |
| — |
| — |
| (21) |
| — |
| (61) |
| (160) |
Pro forma results of operations – The following pro forma financial data for the years ended December 31, 2021, 2020 and 2019 give effect to the business combinations as they had been completed at the beginning of the year.
| | | | | | |
| | 2021 | | | | |
| | MTT, Zelenaya | | | | |
| | Tochka, | | | | |
| | GreenBush, | | | | |
| | Credit | | 2020 | | 2019 |
| | Consulting, | | | | RIKT, Kinopolis, |
Pro forma: |
| Sistema Capital |
| STOPOL |
| Narodnoje |
| | | | | | |
Net revenue |
| 537,867 |
| 495,273 | | 476,257 |
Net profit fot the year |
| 64,399 |
| 62,079 | | 55,101 |
F-25
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
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, 2019, 2020 or 2021, 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 and are presented as follows:
| | | | | | |
| | 2021 | | | | |
| | MTT, Zelenaya | | | | |
| | Tochka, | | | | |
| | GreenBush, | | | | |
| | Credit | | 2020 | | 2019 |
| | Consulting, | | | | RIKT, Kinopolis, |
|
| Sistema Capital |
| STOPOL |
| Narodnoje |
| | | | | | |
Net revenue |
| 5,341 |
| 355 |
| 238 |
Net profit/(loss) for the year |
| 25 |
| 25 |
| (15) |
6. SEGMENT INFORMATION
Management (chief operating decision maker) analyzes and reviews results of the Group’s operating segments separately based on the nature of products and services, regulatory environments and geographic areas. Management of the Group evaluates the performance of each segment based on revenue and operating profit, excluding depreciation and amortization and impairment of non-current assets measured on the basis consistent with IFRS consolidated financial statements (the relevant financial indicator called OIBDA). Management does not analyze assets or liabilities by reportable segments.
The Group identified the following reportable segments:
Telecom: represents the results of mobile and fixed line operations, which encompasses services rendered to customers across the regions of Russia, including voice and data services, transmission, broadband, pay-TV and various value-added services and retail operations.
Fintech: represents the results of banking services, investment management and services of credit broker, rendered to customers across regions of Russia.
Ukraine: was ceased to be presented as a separate operating segment due to its disposal in December 2019 (Note 11).
In 2021 management of the Group has changed the composition of operating segments, by dividing operations of the Group’s subsidiary MGTS (previously constituted Moscow Fixed Line reportable segment) into 2 operating segments. Operations of the established “MGTS service” operating segment comprised primarily maintenance and development of fixed-line network infrastructure. The segment generates revenues mainly from granting own network infrastructure in rent. Operations of the established component “MGTS commercial” include client relationships and related fixed-line services, generating revenue from existing subscribers. The operating and financial results of “MGTS commercial” are reviewed jointly with “Russia convergent” segment, in line with focus on convergent products development, while the results of “MGTS service” are monitored separately. Consequently, “MGTS service” represents a separate operating segment. “MGTS commercial” and “Russia convergent” are presented as one operating segment – “Telecom”.
Financial results of operating segment “MTS-Bank” were supplemented with operations of investment management and credit broker services in connection with acquisition of LLC Sistema Capital and acquisition of Credit Consulting. New operating segment was called “Fintech”.
F-26
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
At the end of 2020 the management’s change of approach for reviewing of Group’s operational results led to separation of two new segments – Cloud and WASD. Cloud represents operational results of Group MTS business aimed at cloud services. WASD is the MTS streaming platform. Cloud and WASD were moved from “Telecom” operating segment to the “Other” category.
Management change assessment of expenses amount allocated to HQ in relation with sale of MTS Ukraine in 2019.
On October 30, 2020, the Group entered into a sale agreement with Sistema to dispose of 100% share in JSC “Nvision Group”, which provided integration services, as well as the sales of software, and constituted “System Integrator” operating segment included in “Other” reportable segment.
In order to reflect changes in segments’ composition, segment disclosures for 2019 and 2020 were retrospectively restated.
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, MGTS Service, Cloud, Artificial Intelligence and others.
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, 2021:
| | | | | | | | | | | | |
| | | | | | Total of | | | | | | |
|
| |
| |
| reportable |
| |
| HQ and |
| |
| | Telecom | | Fintech | | segments | | Other | | elimination | | Consolidated |
Revenue |
|
|
| |
|
|
| | |
|
|
|
External customers |
| 444,175 |
| 46,836 | | 491,011 | | 43,296 | | 96 | | 534,403 |
Intersegment |
| 4,138 |
| 2,771 | | 6,909 | | 19,527 | | (26,436) | | — |
Total revenue |
| 448,313 |
| 49,607 | | 497,920 | | 62,823 | | (26,340) |
| 534,403 |
| | | | | | | | | | | | |
OIBDA | | 204,194 | | 8,834 | | 213,028 | | 24,700 | | (8,371) | | 229,357 |
| | | | | | | | | | | | |
Depreciation and amortization |
| |
| | | | | | | | | (111,088) |
Impairment of non-current assets |
| |
| | | | | | | | | 10 |
Operating profit |
| |
| | | | | | | | | 118,279 |
Year ended December 31, 2020:
| | | | | | | | | | | | |
| | | | | | Total of | | | | | | |
|
| |
| |
| reportable |
| |
| HQ and |
| |
| | Telecom | | Fintech | | segments | | Other | | elimination | | Consolidated |
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
External customers |
| 425,059 |
| 33,773 | | 458,832 | | 36,002 | | 92 | | 494,926 |
Intersegment |
| 4,260 |
| 2,449 | | 6,709 | | 13,130 | | (19,839) | | — |
Total revenue |
| 429,319 |
| 36,222 | | 465,541 | | 49,132 | | (19,747) | | 494,926 |
| | | | | | | | | | | | |
OIBDA |
| 200,911 |
| 3,862 | | 204,773 | | 18,026 | | (7,649) | | 215,150 |
| | | | | | | | | | | | |
Depreciation and amortization |
| |
| | | | | | | | | (100,234) |
Impairment of non-current assets |
| |
| | | | | | | | | (2,023) |
Operating profit |
| |
| | | | | | | | | 112,893 |
F-27
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Year ended December 31, 2019:
| | | | | | | | | | | | |
| | | | | | Total of | | | | | | |
| | |
| |
| reportable |
| |
| HQ and |
| |
|
| Telecom | | Fintech | | segments | | Other | | elimination | | Consolidated |
Revenue |
|
|
|
|
|
| |
|
|
|
|
|
External customers |
| 381,697 |
| 29,304 | | 411,001 | | 59,510 | | 94 | | 470,605 |
Intersegment |
| 9,406 |
| 1,881 | | 11,287 | | 12,063 | | (23,350) | | — |
Total revenue |
| 391,103 |
| 31,185 | | 422,288 | | 71,573 | | (23,256) | | 470,605 |
| | | | | | | | | | | | |
OIBDA | | 174,010 | | 4,574 | | 178,584 | | 39,243 | | (6,203) | | 211,624 |
| | | | | | | | | | | | |
Depreciation and amortization |
| |
| | | | | | | | | (96,195) |
Impairment of non-current assets |
| |
| | | | | | | | | 148 |
Operating profit |
| |
| | | | | | | | | 115,577 |
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 area is presented below:
| | | | | | |
Revenue |
| 2021 |
| 2020 |
| 2019 |
| | | | | | |
Russia |
| 520,671 |
| 481,536 |
| 459,415 |
Other |
| 13,732 |
| 13,390 |
| 11,190 |
| | | | | | |
Total revenue |
| 534,403 |
| 494,926 |
| 470,605 |
| | | | |
| | December 31, | ||
Non-current assets(1) |
| 2021 |
| 2020 |
| | | | |
Russia |
| 442,655 |
| 401,743 |
Other |
| 11,546 |
| 11,205 |
| | | | |
Total non-current assets: |
| 454,201 |
| 412,948 |
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.
F-28
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Disaggregation of revenue:
| | | | | | | | | | | | |
|
| |
| |
| Total of |
| |
| HQ and |
| |
Year ended December 31, 2021: | | Telecom | | Fintech | | segments | | Other | | elimination | | Consolidated |
| | | | | | | | | | | | |
Revenue | |
| |
| |
| |
| |
| |
|
Connectivity services |
| 375,718 |
| — |
| 375,718 |
| 29,810 |
| 96 |
| 405,624 |
Sales of goods |
| 67,392 |
| — |
| 67,392 |
| 9,334 |
| — |
| 76,726 |
Fintech services | | — | | 46,836 | | 46,836 | | — | | — | | 46,836 |
Other services |
| 1,065 |
| — |
| 1,065 |
| 4,152 |
| — |
| 5,217 |
External Customers |
| 444,175 |
| 46,836 |
| 491,011 |
| 43,296 |
| 96 |
| 534,403 |
Intersegment |
| 4,138 |
| 2,771 |
| 6,909 |
| 19,527 |
| (26,436) |
| — |
Total revenue |
| 448,313 |
| 49,607 |
| 497,920 |
| 62,823 |
| (26,340) |
| 534,403 |
Thereof: |
| |
| |
| |
| |
| |
| |
Recognised over time |
| 376,783 |
| 27,516 |
| 404,299 |
| 33,962 |
| 96 |
| 438,357 |
Recognised at point of time |
| 67,392 |
| 19,320 |
| 86,712 |
| 9,334 |
| — |
| 96,046 |
| | 444,175 | | 46,836 | | 491,011 | | 43,296 | | 96 | | 534,403 |
| | | | | | | | | | | | |
|
| |
| |
| Total of |
| |
| HQ and |
| |
Year ended December 31, 2020: | | Telecom | | Fintech | | segments | | Other | | elimination | | Consolidated |
| | | | | | | | | | | | |
Revenue | | | | | | | | | | | | |
Connectivity services |
| 363,131 |
| — |
| 363,131 |
| 24,894 |
| 92 |
| 388,117 |
Sales of goods |
| 61,495 |
| — |
| 61,495 |
| 7,983 |
| — |
| 69,478 |
Fintech services |
| — |
| 33,773 |
| 33,773 |
| — |
| — |
| 33,773 |
Other services |
| 433 |
| — |
| 433 |
| 3,125 |
| — |
| 3,558 |
External Customers |
| 425,059 |
| 33,773 |
| 458,832 |
| 36,002 |
| 92 |
| 494,926 |
Intersegment |
| 4,260 |
| 2,449 |
| 6,709 |
| 13,130 |
| (19,839) |
| — |
Total revenue |
| 429,319 |
| 36,222 |
| 465,541 |
| 49,132 |
| (19,747) |
| 494,926 |
Thereof: |
| |
| |
| |
| |
| |
| |
Recognised over time |
| 363,564 |
| 24,367 |
| 387,931 |
| 28,019 |
| 92 |
| 416,042 |
Recognised at point of time |
| 61,495 |
| 9,406 |
| 70,901 |
| 7,983 |
| — |
| 78,884 |
| | 425,059 | | 33,773 | | 458,832 | | 36,002 | | 92 | | 494,926 |
| | | | | | | | | | | | |
|
| |
| |
| Total of |
| |
| HQ and |
| |
Year ended December 31, 2019: | | Telecom | | Fintech | | segments | | Other | | elimination | | Consolidated |
| | | | | | | | | | | | |
Revenue | | | | | | | | | | | | |
Connectivity services |
| 323,551 |
| — |
| 323,551 |
| 49,735 |
| 94 |
| 373,380 |
Sales of goods |
| 57,677 |
| — |
| 57,677 |
| 6,450 |
| — |
| 64,127 |
Fintech services |
| — |
| 29,304 |
| 29,304 |
| — |
| — |
| 29,304 |
Other services |
| 469 |
| — |
| 469 |
| 3,325 |
| — |
| 3,794 |
External Customers |
| 381,697 |
| 29,304 |
| 411,001 |
| 59,510 |
| 94 |
| 470,605 |
Intersegment |
| 9,406 |
| 1,881 |
| 11,287 |
| 12,063 |
| (23,350) |
| — |
Total revenue |
| 391,103 |
| 31,185 |
| 422,288 |
| 71,573 |
| (23,256) |
| 470,605 |
Thereof: |
| |
| |
| |
| |
| |
| |
Recognised over time |
| 324,020 |
| 21,996 |
| 346,016 |
| 53,060 |
| 94 |
| 399,170 |
Recognised at point of time |
| 57,677 |
| 7,308 |
| 64,985 |
| 6,450 |
| — |
| 71,435 |
| | 381,697 | | 29,304 | | 411,001 | | 59,510 | | 94 | | 470,605 |
F-29
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
7. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue is recognized to the extent that the Group has delivered goods or rendered services under an agreement, the amount of revenue can be reliably measured and it is probable that the economic benefits associated with the transaction will flow to the Group. Revenue is measured at the fair value of the consideration receivable, exclusive of value added taxes and discounts.
The Group obtains revenue from providing mobile and fixed telecommunication services (access charges, voice and video calls, messaging, interconnect fees, fixed and mobile broadband, tv and musical content and connection fees), financial services, integration services, cloud services, tickets distribution, as well as selling equipment, accessories and software. Products and services may be sold separately or in bundle packages. The most significant part of revenue relates to prepaid contracts.
Revenue for access charges, voice and video calls, rendering of cloud services, messaging, interconnect fees and fixed and mobile broadband is recognized as services are rendered. This is based upon either usage (minutes of traffic processed, volume of data transmitted) or passage of time (monthly subscription fees). Revenue from the sale of prepaid credit is deferred until such time as the customer consumes the services or the credit expires.
Revenue from the provision of TV and music content is recognized as the Group renders the service and is recorded either at the gross amount billed to the customers or in the amount of commission fee receivable by the Group.
Revenue from commission services for tickets distribution is recognized as services are rendered.
Revenue from sales of goods (mainly mobile handsets, other mobile devices, software licences) is recognized when the significant risks and rewards of ownership have been transferred to the customer.
For bundled packages, the Group accounts for individual products and services separately if they are distinct, which means that a product or service, as well as the customer benefit, is separately identifiable from other items in the bundled package and a customer can benefit from it. The arrangement consideration is allocated to each separate product and service, based on its relative fair value. The determined fair value of individual elements is generally based on prices at which the deliverable is regularly sold on a stand-alone basis after considering any appropriate volume discounts.
The Group provides retrospective volume discounts under roaming agreements with international and local mobile operators. To estimate the variable consideration in relation to these discounts, the Group uses original data traffic adjusted on a monthly basis to reflect newly-available information. The resulting liability for the expected future discounts is recognized as a reduction of revenue within trade and other payables in the accompanying consolidated statement of financial position.
For contracts that permit customers to return acquired mobile devices, the amount of recognized revenue is adjusted for expected product return or refunds, which are estimated based on the basis of historical data. The respective refund liability is recorded as provision in the accompanying consolidated statement of financial position.
Revenue from the provision of financial services mainly relates to interest bearing assets of MTS Bank. Such revenue is recognized on an accrual basis using the effective interest method. Loan origination fees are deferred together with the related direct costs and are recognised as an adjustment to the effective interest rate of the loan. Comission revenue which is also a significant part of MTS Bank revenue is either recognized at the moment the related operation occurs, or during the period of customer contract duration.
F-30
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Revenue from integration and construction services mainly relates to project type contracts and is determined by reference to the stage of completion of each respective projects. The stage of completion is calculated using the input method – based on the proportion of costs incurred for work performed to date to the estimated total contract costs. Revenue is recognized cumulatively as total revenue under the project multiplied by percentage of completion as at reporting date. When it is probable that total contract costs will exceed the total contract revenue, the expected loss is recognized as an expense immediately.
Contract balances
Contract balances include trade receivables related to the recognized revenue, contract assets and contract liabilities.
Trade receivables represent an unconditional right to receive consideration (primarily in cash).
Contract assets represent accrued revenues that have not yet been billed to customers due to certain contractual terms other than the passage of time. This is the case in a bundled offering which combines the sale of a mobile device and the provision of mobile services for a fixed-period, where the mobile device is invoiced at a reduced price leading to the reallocation of a portion of amounts invoiced for mobile communication services to the supply of the mobile phone. The excess of the amount allocated to the mobile phone over the price invoiced is recognized as a contract asset and is thus transferred to trade receivables as the service is invoiced. The other part of contract assets relates to the Group’s rights to consideration for work completed but not yet billed for integration services projects.
Contract liabilities represent amounts paid by customers to the Group before receiving the goods and/or services promised in the contract. This is the case for advances received from customers or amounts invoiced or amounts invoiced and paid for goods or services that are yet to be transferred.
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
| | | | |
| | December 31, | ||
|
| 2021 |
| 2020 |
Receivables |
| 32,361 |
| 31,452 |
Contract assets |
| 189 |
| 53 |
Total assets | | 32,550 | | 31,505 |
Less current portion | | (20,638) | | (29,342) |
Total non-current assets | | 11,912 | | 2,163 |
| | | | |
Contract liabilities: |
| |
| |
Mobile and fixed telecommunication services | | (22,064) | | (20,714) |
Other services | | (1,083) | | (694) |
Loyalty programme | | (451) | | (434) |
Total liabilities | | (23,598) | | (21,842) |
Less current portion | | 22,621 | | 21,125 |
Total non-current liabilities | | (977) | | (717) |
F-31
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Changes in the contract liabilities balances during the period are as follows:
| | | | |
|
| 2021 |
| 2020 |
| | | | |
Balance as of January 1 |
| (21,842) |
| (21,307) |
| | | | |
Revenue recognised that was included in the contract liability balance at the beginning of the period |
| 18,712 |
| 17,531 |
Increase due to cash received, excluding amount recognised as revenue during the period |
| (20,468) |
| (18,438) |
Disposal of Nvision Group | | — | | 372 |
| | | | |
Balance as of December 31 | | (23,598) | | (21,842) |
The Group expects to recognize revenue related to performance obligations that were unsatisfied (or partially unsatisfied) as of December 31, 2021 as follows:
| | | | | | | | |
|
| 2022 |
| 2023-2027 |
| 2028-2032 |
| Total |
| | | | | | | | |
Connectivity services |
| 21,087 |
| 901 |
| 76 |
| 22,064 |
Other services | | 1,083 | | — | | — | | 1,083 |
Loyalty programme |
| 451 |
| — |
| — |
| 451 |
The total transaction price assigned to unsatisfied performance obligations is presented below:
| | | | | | | | | | |
|
| 2022 |
| 2023-2027 |
| 2028-2032 |
| After 2032 |
| Total |
| | | | | | | | | | |
Connectivity services |
| 312 |
| 519 |
| 195 |
| 124 |
| 1,150 |
Integration services |
| 111 |
| 178 |
| 44 |
| — |
| 333 |
Cost to obtain and fulfill a contract
The Group capitalizes certain incremental costs incurred in acquiring or fullfilling a contract with a customer if the management expects these costs to be recoverable.
The Group uses a practical expedient from IFRS 15 which allows to expense contract costs as incurred when the expected contract duration is one year or less.
Costs of acquiring a contract include commissions paid to a third-party distributors as well as the associated remuneration of the Group’s commercial employees for obtaining a contract with a customer with the expected duration of more than twelve months. These costs are amortized on a straight-line basis over the average life of a long-lived subscriber.
Costs to fulfill a contract mainly relate to costs of equipment transferred to the subscribers required for the provision of services. These costs are amortized on a straight-line basis generally for the period of average subscriber life.
F-32
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
As of December 31, 2021 and 2020 the balances of cost to obtain and fulfill contracts capitalized by the Group amounted to:
| | | | |
|
| December 31, | ||
| | 2021 | | 2020 |
Cost to obtain contracts |
| |
| |
Gross book value | | 14,633 | | 14,268 |
Accumulated amortization | | (6,736) | | (6,600) |
| | | | |
Cost to fulfill contracts | | |
| |
Gross book value | | 5,240 | | 4,081 |
Accumulated amortization | | (2,279) | | (1,628) |
Amortization expense related to cost to obtain and fulfill contracts recognized for the years ended December 31, 2021, 2020 and 2019 amounted RUB 4,076 million, RUB 3,819 million and RUB 3,940 million, respectivly. There was 0 impairment loss relating to the costs capitalized.
8. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the years ended December 31, 2021, 2020 and 2019 comprised the following:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Salaries and social contributions |
| 54,285 | | 48,865 |
| 50,451 |
Advertising and marketing expenses |
| 12,539 |
| 10,652 |
| 10,930 |
General and administrative expenses |
| 8,085 |
| 7,526 |
| 7,653 |
Universal service fund |
| 3,813 |
| 3,670 |
| 3,587 |
Consulting expenses |
| 3,626 |
| 3,418 |
| 2,626 |
Cash collection commission |
| 3,533 |
| 3,645 |
| 3,504 |
Dealers commission |
| 3,434 |
| 3,385 |
| 3,081 |
Utilities and maintenance |
| 2,550 |
| 2,255 |
| 2,809 |
Taxes other than income tax |
| 1,062 |
| 1,845 |
| 2,486 |
Other personnel expenses |
| 1,857 |
| 1,546 |
| 1,664 |
Other |
| 1,455 |
| 1,176 |
| 1,142 |
Total |
| 96,239 |
| 87,983 |
| 89,933 |
F-33
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
9. FINANCE INCOME AND COSTS
Finance income and costs for the years ended December 31, 2021, 2020 and 2019 comprised the following:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Interest expense: |
|
|
|
|
|
|
– Loans and notes |
| 29,432 | | 28,174 | | 30,105 |
– Amortization of debt issuance costs |
| 109 | | 97 | | 489 |
– Lease obligations |
| 11,820 | | 12,277 | | 13,416 |
– Provisions: unwinding of discount |
| 165 | | 138 | | 113 |
Total interest expense |
| 41,526 | | 40,686 | | 44,123 |
Loss on financial instruments |
| — | | 373 | | 780 |
Other finance costs |
| 143 | | 85 | | 151 |
Total finance costs |
| 41,669 | | 41,144 | | 45,054 |
Less: amounts capitalized on qualifying assets (1) |
| (533) | | (426) | | (550) |
Debt modification/derecognition and other loss | | 216 | | 1,366 | | 2,862 |
Finance costs |
| 41,352 | | 42,084 | | 47,366 |
Finance income on loans and receivables: |
| |
| |
| |
– Interest income on bank deposits |
| 1,468 | | 2,282 | | 3,318 |
– Interest income on loans issued |
| 52 | | 17 | | 91 |
– Other finance income |
| 998 | | 1,138 | | 943 |
Finance income |
| 2,518 | | 3,437 | | 4,352 |
Net finance costs |
| 38,834 | | 38,647 | | 43,014 |
(1) | The annual weighted average capitalization rates of 6.8%, 6.9% and 8.1% were used to determine the amount of capitalized interest for the years ended December 31, 2021, 2020 and 2019, respectively. |
10. OTHER NON-OPERATING (INCOME)/EXPENSES
Other non-operating (income)/expenses for the years ended December 31, 2021, 2020 and 2019 comprised the following:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Net forex exchange (gain) / loss |
| 560 | | 10,380 | | (5,266) |
Loss/(gain) arising on derivatives |
| 345 | | (13,443) | | 8,297 |
Net gain/(loss) arising on financial assets measured at FVTPL |
| (139) | | (1,893) | | 528 |
Net gain/(loss) arising on financial liabilities measured at FVTPL | | — | | (53) | | 1,197 |
Impairment of investments and loans given |
| — | | 1,392 | | 616 |
Other |
| (342) | | 553 | | 2,449 |
| | | | | | |
Total |
| 424 |
| (3,064) |
| 7,821 |
F-34
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
11. DISCONTINUED OPERATIONS
UKRAINE
On November 22, 2019, the Group entered into a sale agreement to dispose of Preludium B.V., 100% owner of PJSC “Vodafone Ukraine”, “PTT Telecom Kyiv”, LLC “VF Retail” and LLC “IT SmartFlex”, which carried out the Group’s operations in Ukraine and constituted ‘Ukraine’ reporting segment. The disposal was effected in order to concentrate on development of the Group’s core Russian market. The disposal was completed on December 3, 2019, and the results of operations in Ukraine 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.
As of December 3, 2019, the carrying amounts of assets and liabilities pertaining to the discontinued operation and reconciliation of the loss on disposal were as follows:
| | |
Property, plant and equipment |
| 26,037 |
Right-of-use assets | | 8,175 |
Intangible assets |
| 18,124 |
Goodwill | | 114 |
Other non-current assets |
| 1,534 |
Other current assets |
| 10,760 |
Cash and cash equivalents |
| 4,181 |
Non-current liabilities |
| (9,009) |
Current liabilities |
| (17,979) |
Accumulated other comprehensive loss |
| 7,948 |
| | |
Total consideration |
| (44,386) |
In the form of: |
| |
Cash and cash equivalents (USD 645 million) |
| (41,567) |
Deferred consideration (USD 12 million) |
| (774) |
Fair value of contingent consideration (variable earn-out) as of December 3, 2019 (USD 32 million) |
| (2,045) |
| | |
Loss on disposal |
| 5,499 |
| | |
Net cash inflow arising on disposal: |
| 37,386 |
Cash consideration received |
| 41,567 |
Less: cash and cash equivalents disposed of |
| (4,181) |
Total consideration comprised of cash payment, deferred consideration and contingent consideration.
Cash payment of USD 645 million (RUB 41,567 million as of December 3, 2019) was received in December 2019.
In June 2020, the Group and the purchaser agreed on the amount of adjustment to the cash payment based on finalized financial statements results as of disposal date and the Group recognized additional income in amount of USD 28 million (RUB 2,101 million as of payment date in September, 2020) in discontinued operations in the consolidated statement of profit or loss.
The deferred consideration was settled in cash by the purchaser in September 2020 in RUB amount of RUB 897 million, representing equivalent of USD 12 million as of the date of payment.
In the event the financial results of discontinued operation achieve certain performance criteria for the periods starting 2019 and ending 2022 as specified in an ‘earn out’ clause of the sale agreement, additional contingent consideration will be receivable. As
F-35
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
of December 3, 2019 the Group recognized contingent consideration receivable as a financial asset at fair value through profit or loss in the amount of RUB 2,045 million. The fair value of the financial asset amounted to RUB 2,631 million as of December 31, 2020 and RUB 1,867 million as of December 31, 2021.
The results of the discontinued operation in Ukraine, which have been included in the profit for the year, were as follows:
| | | | | | |
|
| For the year ended December 31, | ||||
|
| 2021 |
| 2020 |
| 2019 |
Revenue |
| — |
| — |
| 36,675 |
Expenses |
| — |
| — |
| (28,564) |
Profit before tax |
| — |
| — |
| 8,111 |
Attributable tax expense |
| — |
| — |
| (2,018) |
Profit for the period |
| — |
| — |
| 6,093 |
Profit/(loss) on disposal |
| — |
| 2,101 |
| (5,499) |
Currency revaluation gain/(loss) on deferred consideration |
| — |
| 154 |
| (30) |
Earn-out revaluation - fair value measurement |
| 377 |
| 645 |
| 48 |
Earn-out revaluation - Currency revaluation gain/(loss) | | 93 | | (27) | | (80) |
Net income attributable to discontinued operations |
| 470 |
| 2,873 |
| 532 |
Cash flows from (used in) discontinued operation were presented as follows:
| | | | | | |
| | For the year ended December 31, | ||||
|
| 2021 |
| 2020 |
| 2019 |
| | | | | | |
Net cash provided by operating activities |
| — |
| — |
| 17,343 |
Net cash provided by/(used in) investing activities |
| 1,234 |
| 2,998 |
| (13,046) |
Net cash used in financing activities |
| — |
| — |
| (1,114) |
NVISION GROUP
On October 30, 2020, the Group entered into a sale agreement with Sistema to dispose of 100% share in JSC “Nvision Group”, which provided integration services, as well as the sales of software, and constituted “System Integrator” operating segment included in “Other” reportable segment. The disposal was completed on October 30, 2020, the results of operations of “System Integrator” operating segment 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.
F-36
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
As of October 30, 2020, the carrying amounts of discontinued operation net assets and reconciliation of the loss on disposal were as follows:
| | |
Property, plant and equipment |
| 95 |
Intangible assets |
| 245 |
Other non-current assets |
| 220 |
Other current assets |
| 2,912 |
Cash and cash equivalents |
| 285 |
Non-current liabilities |
| (98) |
Current liabilities |
| (3,281) |
Accumulated other comprehensive loss |
| 3 |
| | |
Total consideration |
| (369) |
Satisfied by: |
|
|
Cash and cash equivalents |
| (369) |
| | |
Loss on disposal* |
| 12 |
| | |
Net cash inflow arising on disposal: |
| 84 |
Cash consideration received |
| 369 |
Less: cash and cash equivalents disposed of |
| (285) |
* | Included in additional paid-in capital in consolidated statement of changes in shareholders’ equity, analogically to the purchase of JSC “Nvision Group” from Sistema in 2015. |
Cash consideration in amount of RUB 369 million was settled in October and December 2020.
The results of the discontinued operation of JSC “Nvision Group”, which have been included in the profit for the year, were as follows:
| | | | |
| | Year ended December 31, | ||
|
| 2020 |
| 2019 |
Revenue |
| 10,051 |
| 12,898 |
Expenses |
| (11,305) |
| (14,263) |
Loss before tax |
| (1,254) |
| (1,365) |
Attributable tax expense |
| (1,003) |
| (83) |
Loss for the period |
| (2,257) |
| (1,448) |
Net loss attributable to discontinued operations |
| (2,257) |
| (1,448) |
Cash flows from (used in) discontinued operation are presented as follows:
| | | | |
| | For the year ended December 31, | ||
|
| 2020 |
| 2019 |
Net cash used in by operating activities |
| (1,466) |
| (55) |
Net cash provided by investing activities |
| 664 |
| 347 |
Net cash provided by/(used in) financing activities |
| 748 |
| (372) |
The results of the discontinued operation of JSC “Nvision Group”, which have been included in the consolidated statement of profit or loss and consolidated statement of cash flows for the year ended December 31, 2021 equaled NaN.
F-37
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
12. INCOME TAX
Income taxes of the Group’s Russia-incorporated entities have been calculated in accordance with Russian legislation and are based on the taxable profit for the period. The corporate income tax rate in Russia is 20%. The withholding tax rate on dividends paid within Russia is 13%. The foreign subsidiaries of the Group pay withholding 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 or substantially enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Significant components of income tax expense were as follows;
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Current income tax charge |
| 20,057 |
| 15,170 |
| 20,757 |
Prior period tax adjustments |
| (133) |
| (509) |
| (90) |
Total current income tax |
| 19,924 |
| 14,661 |
| 20,667 |
Deferred tax |
| (4,521) |
| 1,465 |
| (5,000) |
Income tax expense on continuing operations |
| 15,403 |
| 16,126 |
| 15,667 |
Income tax expense on continuing operations excludes the amounts from the discontinued operations of NaN, RUB (1,003) million and RUB 1,935 million for the years ended December 31, 2021, 2020 and 2019, respectively, which have been included in profit / (loss) from discontinued operations in the accompanying consolidated statements of profit or loss (Note 11).
The statutory income tax rates in jurisdictions in which the Group operates for 2021 and 2020 were as follows: Russia – 20%, Armenia – 18%, Turkmenistan – 8%, Czech Republic – 19%, for 2019 were as follows: Russia and Armenia – 20%, Turkmenistan – 8%, Czech Republic – 19%. The Russian statutory income tax rate of 20% reconciled to the Group’s effective income tax rate for the years ended December 31, 2021, 2020 and 2019 as follows:
| | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
|
Statutory income tax rate for the year |
| 20.0 | % | 20.0 | % | 20.0 | % |
Adjustments: |
| |
| |
| | |
Expenses not deductible for tax purposes |
| 0.1 |
| 1.3 |
| 2.1 | |
Prior periods tax effects |
| (0.2) |
| (0.7) |
| (0.1) | |
Different tax rate of subsidiaries |
| (0.8) |
| (0.8) |
| (0.4) | |
Withholding tax on distributed and undistributed profits |
| 1.6 |
| 1.5 |
| 1.9 | |
Change in fair value of derivative financial instruments |
| — |
| — |
| 0.2 | |
Changes in recognized deferred tax assets | | (0.9) | | (0.1) | | (0.5) | |
Other |
| (0.4) |
| (0.4) |
| (0.2) | |
Effective income tax rate |
| 19.4 | % | 20.8 | % | 23.0 | % |
The Group reported the following deferred income tax assets and liabilities in the consolidated statement of financial position:
| | | | |
|
| 2021 |
| 2020 |
Deferred tax assets |
| 11,683 |
| 8,778 |
Deferred tax liabilities |
| (17,901) |
| (19,191) |
Net deferred tax liabilities |
| (6,218) |
| (10,413) |
F-38
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Movements in the deferred tax assets and liabilities for the year ended December 31, 2021 were as follows:
| | | | | | | | | | |
| | | | | | Recognised | | | |
|
| | | | | | in other | | | |
|
| | December 31, | | Recognised in | | compre-hensive | | Effect of | | December 31, |
|
| 2020 |
| profit / loss |
| income |
| disposals |
| 2021 |
Assets / (liabilities) arising from tax effect of: |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
| (18,250) |
| (1,352) |
| 32 |
| (110) |
| (19,680) |
Other intangible assets |
| (6,314) |
| 998 |
| — |
| (142) |
| (5,458) |
Potential distributions from/ to Group’s subsidiaries/ associates and joint ventures |
| (2,506) |
| 166 |
| (86) |
| — |
| (2,426) |
Licenses |
| (1,699) |
| 24 |
| — |
| — |
| (1,675) |
Customer base |
| (470) |
| 107 |
| — |
| (229) |
| (592) |
Capitalization of cost to obtain and fulfill contracts | | (1,668) | | (162) | | — | | — | | (1,830) |
Accrued expenses for services |
| 7,158 |
| 588 |
| (1) |
| 69 |
| 7,814 |
Write-down of inventories | | 413 | | (178) | | — | | 3 | | 238 |
Allowance for ECL | | 2,713 | | 533 | | 3 | | 5 | | 3,254 |
Lease obligations |
| 29,910 |
| 1,181 |
| (1) |
| 3 |
| 31,093 |
Right-of-use assets |
| (25,686) |
| (392) |
| 2 |
| — |
| (26,076) |
Loss carryforward |
| 3,961 |
| 1,801 |
| — |
| 95 |
| 5,857 |
Contract liabilities |
| 1,430 |
| 176 |
| — |
| — |
| 1,606 |
Debt modification | | (123) | | 50 | | — | | — | | (73) |
Hedge and other |
| 718 |
| 981 |
| 31 |
| — |
| 1,730 |
Net deferred tax liability |
| (10,413) | | 4,521 | | (20) | | (306) |
| (6,218) |
Movements in the deferred tax assets and liabilities for the year ended December 31, 2020 were as follows:
\ | | | | | | | | | | |
| | | | | | Recognised | | | |
|
| | | | | | in other | | | |
|
| | December 31, | | Recognised in | | compre-hensive | | Effect of | | December 31, |
|
| 2019 |
| profit / loss |
| income |
| acquisitions |
| 2020 |
Assets / (liabilities) arising from tax effect of: |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
| (17,954) |
| (318) |
| 19 |
| 3 |
| (18,250) |
Other intangible assets |
| (6,564) |
| 314 |
| — |
| (64) |
| (6,314) |
Potential distributions from/ to Group’s subsidiaries/ associates and joint ventures |
| (2,430) |
| (42) |
| (34) |
| — |
| (2,506) |
Licenses |
| (1,739) |
| 47 |
| (7) |
| — |
| (1,699) |
Customer base |
| (576) |
| 106 |
| — |
| — |
| (470) |
Capitalization of cost to obtain and fulfill contracts | | (1,448) | | (220) | | — | | — | | (1,668) |
Accrued expenses for services |
| 7,929 |
| (710) |
| 5 |
| (66) |
| 7,158 |
Write-down of inventories | | 681 | | (211) | | 10 | | (67) | | 413 |
Allowance for ECL | | 2,947 | | (112) | | 3 | | (125) | | 2,713 |
Lease obligations(1) | | 30,953 | | (1,052) | | 12 | | (3) | | 29,910 |
Right-of-use assets(1) |
| (27,433) |
| 1,761 |
| (14) |
| — |
| (25,686) |
Loss carryforward |
| 4,634 |
| 56 |
| — |
| (729) |
| 3,961 |
Contract liabilities |
| 1,230 |
| 203 |
| — |
| (3) |
| 1,430 |
Debt modification | | (433) | | 310 | | — | | — | | (123) |
Hedge and other |
| 2,312 |
| (1,594) |
| — |
| — |
| 718 |
Net deferred tax liability |
| (7,891) |
| (1,462) |
| (6) |
| (1,054) |
| (10,413) |
(1) | Previously, the deferred tax on a lease under IFRS 16 was accounted under the net approach, the changes do not affect the total amount of deferred tax. |
F-39
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The Group recognizes deferred income tax on future dividend distributions from subsidiaries/ associates and joint ventures which are based on the cumulative undistributed earnings of those 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 according to 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 cancelled the time limit of prior periods’ tax losses carryforward, which had been previously restricted to 10 years. Furthermore, the law specified that for the years 2017-2024 prior periods’ tax losses carried forward should not exceed 50% of the tax base.
Unused tax losses, for which deferred tax assets were not recognized in the consolidated statements of financial position as of December 31, 2021 and 2020 amounted to RUB 40,898 million and RUB 43,393 million, respectively.
The Group accrued RUB 160 million and RUB 595 million as of December 31, 2021 and 2020, respectively, as a component of income tax payable in relation to uncertain income tax positions.
A provision is recognised for those matters for which the tax determination is uncertain but it is considered probable that there will be a future outflow of funds to a tax authority. The provisions are measured at the best estimate of the amount expected to become payable.
The Group early adopted the IAS 12 amendments related to assets and liabilities arising from a single transaction and presented separately a deferred tax asset and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision for the years ended December 31, 2021 and 2020. Movements in the deferred tax assets and liabilities for the year ended December 31, 2020 were restated to reflect the effects of early adoption.
13. EARNINGS PER SHARE
The following table sets forth the computation of earnings per share for the years ended December 31:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Numerator: |
|
|
|
|
|
|
Profit for the year from continuing operations attributable to the owners of the company |
| 63,003 |
| 60,796 |
| 51,713 |
Profit for the year from discontinued operations attributable to the owners of the company |
| 470 |
| 616 |
| 2,528 |
Denominator, in thousands: |
| |
| |
| |
Weighted-average ordinary shares outstanding |
| 1,693,244 |
| 1,760,468 |
| 1,780,935 |
Employee stock options |
| 8,541 |
| 1,310 |
| 2,682 |
Weighted-average diluted shares outstanding |
| 1,701,785 |
| 1,761,778 |
| 1,783,617 |
| | | | | | |
Earnings per share – basic, Russian Rubles |
| 37.49 |
| 34.88 |
| 30.46 |
Basic EPS from continuing operations |
| 37.21 |
| 34.53 |
| 29.04 |
Basic EPS from discontinued operations |
| 0.28 |
| 0.35 |
| 1.42 |
Earnings per share – diluted, Russian Rubles |
| 37.30 |
| 34.86 |
| 30.41 |
Diluted EPS from continuing operations |
| 37.02 |
| 34.51 |
| 28.99 |
Diluted EPS from discontinued operations |
| 0.28 |
| 0.35 |
| 1.42 |
F-40
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
14. 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. Other short-term highly liquid investments are treated as cash equivalents only if they are held for the purpose of meeting short-term cash commitments, are readily convertible to known amounts of cash and are subject to insignificant risk of change in value.
Cash and cash equivalents comprised the following:
| | | | |
| | December 31, | ||
|
| 2021 |
| 2020 |
Cash and cash equivalents at banks and on hand in: |
|
|
|
|
Russian Rubles |
| 17,911 |
| 39,076 |
US Dollars | | 1,766 | | 10,597 |
Euro |
| 2,899 |
| 6,433 |
Turkmenian Manat |
| 367 |
| 431 |
| | | | |
Other |
| 816 |
| 959 |
| | | | |
Short-term deposits with an original maturity of less than 92 days: |
| |
| |
Russian Rubles |
| 16,594 |
| 27,857 |
| | | | |
Other |
| 237 |
| 52 |
| | | | |
Total cash and cash equivalents | | 40,590 | | 85,405 |
15. SHORT-TERM INVESTMENTS
Short-term investments represent investments in loans and time deposits, which have original maturities of longer than 92 days and are repayable in less than twelve months, as well as investment in debt and equity securities. Deposits, loans and debt securities are carried at amortized cost as they are held to collect contractual cash flows in the form of payments of principal and interest. Assets in Sistema Capital trust management as well as mutual funds are carried at fair value through profit and loss (“FVTPL”), as this portfolio of assets is neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.
Short-term investments are presented net of allowance for expected credit losses (“ECL”).
Loans to customers issued by MTS Bank are presented separately within Bank deposits and loans in the accompanying consolidated statements of financial position.
F-41
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The Group’s short-term investments comprised the following:
| | | | | | |
| | | | December 31, | ||
|
| Category |
| 2021 |
| 2020 |
Mutual funds (Notes 28) |
| At FVTPL |
| 10,719 |
| 10,699 |
Assets in Sistema-Capital trust management (Notes 28) |
| At FVTPL |
| 10,374 |
| 10,313 |
Notes / loans |
| At amortized cost |
| 6,383 |
| 1,007 |
Deposits |
| At amortized cost |
| 1,499 |
| 1,415 |
Short-term investments, gross | | | | 28,975 | | 23,434 |
Allowance for ECL | | | | (3) | | — |
Total short-term investments |
|
|
| 28,972 |
| 23,434 |
The main change in the amount of short-term investments occurred due to the reclassification of debt securities from other investments in line with the maturity date.
16. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
Associates are those entities where the Group exercises significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but does not equate to control or joint control over those policies.
Associates are accounted for using the equity method, with exception of associates held by the Group’s venture capital subsidiary, MTS Ventures Limited. The Group elected to measure venture investments in associates at fair value through profit or loss in accordance with IFRS 9.
Investments in associates are accounted for using the equity method are recognized at cost at the time of acquisition and adjusted 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 identifiable assets and liabilities.
Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement and have rights to the net assets of the arrangement. The Group recognizes its interest in a joint venture where it has joint control of the investment and accounts for that investment using the equity method.
The Group presents its share in profits or losses in associates and joint ventures accounted for using the equity method within operating profit if those interests are viewed as part of Group’s core operations. As of December 31, 2021, MTS Belarus, Zelenaya
F-42
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Tochka, Factorin and Monumental Vision were considered as part of the Group’s core operating activity. Shares in profits and losses of other Group’s associates and joint ventures were presented as non-operating items.
The Group’s investments in associates and joint ventures accounted for using the equity method in the consolidated statements of profit or loss comprised the following:
| | | | | | | | |
| | Country of | | | | December 31, | | December 31, |
|
| operations |
| Operating activity |
| 2021 |
| 2020 |
MTS Belarus |
| Belarus |
| telecommunications |
| 6,265 |
| 5,124 |
Zelenaya Tochka | | Russia | | telecommunications | | 141 | | 1,260 |
YouDo | | Russia | | classifieds | | 705 | | 724 |
Sistema-Rentnaya Nedvizhimost | | Russia | | property investments mutual fund | | — | | 636 |
Other unquoted companies |
| Russia |
| |
| 1,319 |
| 811 |
Total investments in associates accounted for using the equity method | | | | | | 8,430 | | 8,555 |
Other unquoted companies accounted for at fair value through profit or loss |
| Russia |
|
|
| 305 |
| — |
Total investments in associates |
|
|
|
|
| 8,735 |
| 8,555 |
Associates and joint ventures accounted for using the equity method and presented within operating profit in the consolidated statements of profit or loss
MTS Belarus
The reconciliation of summarized financial information of MTS Belarus to the carrying amount of the Group’s interest in associate is presented as follows:
| | | | | |
|
| December 31, | | December 31, |
|
| | 2021 |
| 2020 |
|
Assets |
|
|
|
| |
Non-current assets |
| 19,030 |
| 20,008 | |
Current assets |
| 15,386 |
| 12,705 | |
Liabilities |
| |
| | |
Non-current liabilities |
| (9,062) |
| (11,257) | |
Current liabilities |
| (12,568) |
| (10,999) | |
Total identifiable net assets |
| 12,786 |
| 10,457 | |
The Group’s share in associate |
| 49 | % | 49 | % |
The Group’s share of identifiable net assets |
| 6,265 |
| 5,124 | |
Carrying amount of the Group’s interest |
| 6,265 |
| 5,124 | |
F-43
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The composition of the Group’s share of income of MTS Belarus is as follows:
| | | | | | |
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 |
| 2019 |
Revenue |
| 39,383 |
| 36,121 |
| 32,593 |
Profit for the year |
| (10,379) |
| (10,267) |
| (9,354) |
The Group’s share of the profit of the associate for the year |
| (5,086) |
| (5,031) |
| (4,583) |
Other comprehensive income/(loss) for the year |
| (183) |
| 397 |
| 842 |
Total comprehensive income for the year |
| (10,562) |
| (9,870) |
| (8,512) |
The Group’s share of total comprehensive income of the associate for the year |
| (5,175) |
| (4,836) |
| (4,171) |
Dividends received |
| 4,034 |
| 4,212 |
| 3,821 |
Zelenaya Tochka
In February 2020, the Group purchased 51% stakes in Achemar Holdings Limited and Clarkia Holdings Limited, owners of the operational companies of “Zelenaya Tochka” Group, fixed-line operator in multiple regions of Russia. Purchase price comprised of cash payment in total amount of RUB 1,370 million. Purchase conditions included call and put options for the remaining stakes in Achemar Holdings Limited and Clarkia Holdings Limited, and share of purchase price in amount of RUB 166 million related to the fair value of call and put options acquired. The purchase of 51% stake was accounted as investment in joint venture based on the terms of the shareholders’ agreement.
In April 2021 the Group performed a step acquisition and obtained control over Achemar Holdings Limited, owner of Stavropol and Tambov subsidiaries of Zelenaya Tochka (Note 5).
As of the acquisition date the Group remeasured the previously held equity interest in Achemar Holdings Limited from RUB 1,166 million to fair value of RUB 1,582 million and recognized the resulting gain of RUB 416 million in the operating share of the profit of the associates and joint ventures in the accompanying consolidated statement of profit or loss.
The Group continued to account for its investment in other operational companies of Zelenaya Tochka, owned by Clarkia Holdings Limited, as investment in joint venture.
Fancy Show
In 2020 the Group formed a partnership with “LLC Fancy Show”, for the purposes of production, release and promotion of “Chess” musical in Russia. The Group received the right to 36% net profit of the partnership and accounted for investment as investment in joint venture. The joint venture was ceased in September 2021.
Factorin
In July 2021 the Group purchased 51% stake in Amaran Limited, 100% owner of LLC Factorin (“Factorin”), for RUB 867 million. Factorin is the developer and owner of blockchain-based platform for trade finance transactions with a focus on supply chain finance and invoice factoring. The purchase of 51% stake was accounted as investment in joint venture based on the terms of the shareholders’ agreement.
F-44
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The following table is the aggregate financial information of investments in individually insignificant joint ventures, held by the Group and presented within operating profit in the consolidated statements of profit or loss:
| | | | |
| | Year ended December 31, | ||
|
| 2021 |
| 2020 |
Loss for the year |
| 114 |
| 3 |
| | | | |
The Group’s share of the loss of the joint venture for the year |
| 32 |
| 17 |
| | | | |
Other comprehensive income for the year |
| — |
| — |
Total comprehensive income for the year |
| 114 |
| 3 |
| | | | |
Gain on remeasurement of previously held interest upon acquisition | | (415) | | — |
Compensation of losses | | (96) | | — |
| | | | |
The Group’s share of total comprehensive (income)/loss of the joint venture for the year |
| (479) |
| 17 |
Associates and joint ventures accounted for using the equity method and presented within non-operating items in the consolidated statements of profit or loss
YouDo
In September 2018, the Group acquired a 13.68% ownership interest in Youdo Web Technologies Limited (YouDo), a Russian online service provider matching freelance labor supply to demand for everyday and business tasks, for a cash contribution of RUB 824 million. Though the Group holds less than 20% of the equity interests in YouDo, nevertheless it has significant influence over the investee based on its ownership of equity shares, representation on the investee’s Board of Directors and certain additional rights related to the decision-making process on key issues.
Sistema-Rentnaya Nedvizhimost 1 mutual fund
In December 2018, MTS Bank sold 40.26% share in a property investments mutual fund “Sistema-Rentnaya Nedvizhimost” to Business Nedvizhimost, subsidiary of Sistema, for cash consideration of RUB 450 million. The Group classified the remaining investment in the mutual fund as investment in joint venture, based on the existence of a joint decision-making process and the rights to net assets of the mutual fund. The Group applied the equity method of accounting to its remaining share in the mutual fund. In 2021 the mutual fund was ceased by its owners.
SWIPGLOBAL
In December 2019, the Group acquired a 15.01% ownership interest in SWIPGLOBAL Limited (SWIPGLOBAL), a parent company of LLC “Smart wallet”, Russian provider of authorization and payment solutions, for a cash contribution of RUB 75 million. Though the Group holds less than 20% of the equity interests in SWIPGLOBAL, nevertheless it has significant influence over the investee based on its ownership of equity shares, representation on the investee’s Board of Directors and certain additional rights related to the decision-making process on key issues.
Ozon Holdings Limited
In March 2019, the Group disposed its previously held 18.69% interest in OZON to Sistema for RUB 7,902 million (of which RUB 3,000 million was paid by Sistema in 2019, RUB 2,450 million in 2020 and RUB 2,452 million in 2021).
F-45
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
As a result of the transaction the Group recognized a gain on disposal which was included in the non-operating share of the income of the associates and joint ventures in the accompanying consolidated statement of profit or loss:
| | |
|
| 2019 |
Proceeds from disposal | | 7,902 |
Less: carrying amount of investment on the date of disposal |
| (4,065) |
| | |
Gain recognized* |
| 3,837 |
* | A current tax expense of RUB 420 million is attributable to the aforementioned gain. |
The following table is the aggregate financial information of investments in individually insignificant associates and joint ventures, held by the Group and presented within non-operating items in the consolidated statements of profit or loss:
| | | | | | |
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 |
| 2019 |
(Profit)/loss for the year |
| (856) |
| (1,048) |
| 2,448 |
The Group’s share of the (profit)/loss of the associates and joint ventures for the year |
| (181) |
| (273) |
| 341 |
Other comprehensive income for the year |
| — |
| — |
| — |
Total comprehensive (income)/loss for the year |
| (856) |
| (1,048) |
| 2,448 |
The Group’s share of total comprehensive (income)/loss of the associate for the year |
| (181) |
| (273) |
| 341 |
Investments in venture capital associates
The following table is the aggregate financial information of investments in individually insignificant associates measured at fair value through profit or loss in accordance with IFRS 9:
| | | | | | | | |
|
| December 31, |
| Fair value |
| |
| December 31, |
| | 2021 | | adjustment | | Investment | | 2020 |
Total investments in associates measured at fair value through profit or loss |
| 305 |
| — |
| 305 |
| — |
17. OTHER INVESTMENTS
Other investments consist primarily of long-term deposits, which are repayable in more than a year, loans, debt securities and equity holdings in private companies. Deposits, loans and notes are carried at amortized cost as they are held to collect contractual cash flows in the form of payments of principal and interest.
Loans to customers issued by MTS Bank are presented separately within Bank deposits and loans to customers.
Other investments are presented net of allowance for expected credit losses (ECL).
F-46
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Other investments of the Group comprised the following:
| | | | | | |
|
| |
| December 31, | ||
| | Category | | 2021 | | 2020 |
Debt securities |
| At amortized cost |
| 2,810 |
| 8,764 |
Investments in equity |
| FVPL |
| 1,228 |
| 400 |
Loans and unquoted notes |
| At amortized cost |
| 555 |
| 328 |
Other investments (Gross) |
|
|
| 4,593 |
| 9,492 |
Allowance for ECL |
| |
| (2) |
| (4) |
Total other investments |
| |
| 4,591 |
| 9,488 |
The main change in the amount of other investments occurred due to the reclassification of debt securities to short-term investments in line with the maturity date.
18. TRADE AND OTHER RECEIVABLES
Trade and other receivables are carried at transaction price. The carrying value of all trade receivables is reduced by appropriate allowances for ECL.
For trade receivables the Group applies a simplified approach and calculates ECL based on lifetime expected credit losses. For receivables from subscribers and dealers and partially for other trade receivables the allowance for ECL is computed using the provision matrix. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns. The calculation reflects the probability-weighted outcome and all reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Generally, receivables from subscribers are written-off if past due for more than 180 days on average based on category of subscriber. Receivables other than from subscribers are written-off upon the expiration of the limitation period or before based on results of internal investigations.
MTS Group accounts for Receivables from handset sales financing as a part of current trade and other receivables and non-current other non-financial assets. These receivables are measured based on fair value basis using effective rate approach. Receivables from handset sales financing are written off against the allowance when deemed uncollectible, including by means of foreclosure on the provision. Write off of receivables takes place when the Group has no reasonable expectations of recovering the financial asset either entirely or a portion of it.
F-47
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Trade and other receivables current and non-current comprised the following:
| | | | |
|
| December 31, | ||
| | 2021 | | 2020 |
Subscribers |
| 15,240 |
| 12,704 |
Receivables from handset sales financing | | 12,161 | | 15,785 |
Other trade receivables |
| 6,213 |
| 4,954 |
Receivables from the sharing agreement |
| 2,164 | | 73 |
Interconnect | | 1,640 | | 1,794 |
Integration services | | 1,584 | | 1,512 |
Bonuses from suppliers |
| 892 |
| 342 |
Roaming |
| 800 |
| 1,072 |
Factoring | | 282 | | — |
Dealers |
| 161 |
| 158 |
Other receivables |
| 2,194 |
| 1,260 |
Allowance for ECL | | (3,536) | | (4,623) |
Trade and other receivables, total |
| 39,795 |
| 35,031 |
Less non-current portion | | (1,898) | | (2,163) |
Trade and other receivables, current | | 37,897 | | 32,868 |
The analysis of the age of trade and other accounts receivables and the respective allowance for ECL as of December 31, 2021:
| | | | | | | | |
|
| |
| |
| |
| |
Receivables from subscribers | | | | | | | | |
and dealers and other trade | | | | | | Loss allowance | | |
receivables assessed for | | Weighted- | | | | (based on | | |
impairement based on provision | | average | | Gross carrying | | provision | | |
matrix | | loss rate | | amount | | matrix) | | Credit-impaired |
Current | | 1 | % | 2,560 |
| (27) |
| No |
1 - 30 days past due | | 3 | % | 10,848 |
| (332) |
| No |
31 - 60 days past due | | 32 | % | 583 |
| (189) |
| No |
60 - 90 days past due | | 45 | % | 355 |
| (161) |
| No |
More than 90 days past due | | 78 | % | 1,055 |
| (818) |
| Yes |
Total |
| 10 | % | 15,401 |
| (1,527) |
| |
F-48
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
| | | | | | | | |
Receivables from the sharing | | | | | | | | |
agreement, interconnect, | | | | | | | | |
integration services and other | | Weighted- | | | | Loss allowance | | |
receivables based on individual | | average | | Gross carrying | | (individually | | |
approach |
| loss rate |
| amount |
| assessed) |
| Credit-impaired |
| | | | | | | | |
Current | | 2 | % | 9,407 |
| (193) |
| No |
| | | | | | | | |
1 - 30 days past due | | 1 | % | 2,219 |
| (8) |
| No |
31 - 60 days past due | | 1 | % | 1,119 |
| (16) |
| No |
60 - 90 days past due | | 5 | % | 624 |
| (31) |
| No |
More than 90 days past due | | 36 | % | 2,400 |
| (865) |
| Yes |
| | | | | | | | |
Total | | 7 | % | 15,769 |
| (1,113) |
|
|
| | | | | | | | |
|
| |
| |
| Loss allowance |
| |
| | Weighted- | | | | (based on | | |
Receivables from handset sales | | average | | Gross carrying | | provision | | |
financing | | loss rate | | amount | | matrix) | | Credit-impaired |
| | | | | | | | |
Current |
| 2 | % | 10,948 |
| (180) |
| No |
| | | | | | | | |
1 - 30 days past due |
| 12 | % | 289 |
| (34) |
| No |
31 - 60 days past due |
| 47 | % | 94 |
| (45) |
| No |
60 - 90 days past due |
| 58 | % | 74 |
| (43) |
| No |
More than 90 days past due |
| 78 | % | 756 |
| (594) |
| Yes |
| | | | | | | | |
Total |
| 7 | % | 12,161 |
| (896) |
|
|
The analysis of the age of trade and other accounts receivables and the respective allowance for ECL as of December 31, 2020:
| | | | | | | | |
Receivables from subscribers |
| |
| |
| |
| |
and dealers and other trade | | | | | | Loss allowance | | |
receivables assessed for | | Weighted- | | | | (based on | | |
impairment based on provision | | average | | Gross carrying | | provision | | |
matrix | | loss rate | | amount | | matrix) | | Credit-impaired |
| | | | | | | | |
Current |
| 3 | % | 2,087 |
| (62) |
| No |
| | | | | | | | |
1 - 30 days past due |
| 5 | % | 9,029 |
| (478) |
| No |
31 - 60 days past due |
| 41 | % | 466 |
| (190) |
| No |
60 - 90 days past due |
| 59 | % | 384 |
| (225) |
| No |
More than 90 days past due |
| 81 | % | 896 |
| (727) |
| Yes |
| | | | | | | | |
Total |
| 13 | % | 12,862 |
| (1,682) |
|
|
F-49
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
| | | | | | | | |
Receivables from the sharing |
| |
| |
| |
| |
agreement, interconnect, | | | | | | | | |
integration services and other | | Weighted- | | | | Loss allowance | | |
receivables based on individual | | average | | Gross carrying | | (individually | | |
approach | | loss rate | | amount | | assessed) | | Credit-impaired |
| | | | | | | | |
Current |
| 3 | % | 7,966 |
| (227) |
| No |
| | | | | | | | |
1 - 30 days past due |
| 1 | % | 825 |
| (11) |
| No |
31 - 60 days past due |
| 2 | % | 459 |
| (11) |
| No |
60 - 90 days past due |
| 10 | % | 227 |
| (23) |
| No |
More than 90 days past due |
| 69 | % | 1,530 |
| (1,069) |
| Yes |
| | | | | | | | |
Total |
| 12 | % | 11,007 |
| (1,341) |
|
|
| | | | | | | | |
|
| |
| |
| Loss allowance |
| |
| | Weighted- | | | | (based on | | |
Receivables from handset sales | | average | | Gross carrying | | provision | | |
financing | | loss rate | | amount | | matrix) | | Credit-impaired |
| | | | | | | | |
Current |
| 2 | % | 13,943 |
| (245) |
| No |
| | | | | | | | |
1 - 30 days past due |
| 15 | % | 331 |
| (50) |
| No |
31 - 60 days past due |
| 53 | % | 102 |
| (54) |
| No |
60 - 90 days past due |
| 65 | % | 65 |
| (43) |
| No |
More than 90 days past due |
| 90 | % | 1,344 |
| (1,208) |
| Yes |
| | | | | | | | |
Total |
| 10 | % | 15,785 |
| (1,600) |
|
|
The following table summarizes changes in the allowance for expected credit losses for the year ended December 31, 2021, 2020 and 2019:
| | | | | | |
| | | | | | |
|
| 2021 |
| 2020 | | 2019 |
| | | | | | |
Balance, beginning of the year |
| (4,623) | | (4,203) | | (4,318) |
| | | | | | |
Allowance for ECL |
| (1,135) | | (3,382) | | (4,290) |
Accounts receivable written off |
| 2,232 | | 2,719 | | 4,276 |
Disposal/(Acquisition) of subsidiaries |
| (10) | | 243 | | 129 |
| | | | | | |
Balance, end of the year |
| (3,536) | | (4,623) | | (4,203) |
19. INVENTORIES
Inventories are stated at the lower of cost or net 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.
F-50
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Inventory and spare parts comprised the following:
| | | | |
|
| December 31, | ||
| | 2021 | | 2020 |
Handsets and accessories |
| 15,201 |
| 12,827 |
Advertising and other materials | | 1,934 | | 964 |
Spare parts for telecommunication equipment |
| 180 |
| 110 |
SIM cards and prepaid phone cards |
| 853 |
| 726 |
TV equipment for resale |
| 449 |
| 425 |
Software and equipment for installation and resale |
| 364 |
| 152 |
| | | | |
Total inventories |
| 18,981 |
| 15,204 |
Other materials mainly consist of automobile and IT components, stationery, fuel and auxiliary materials.
Spare parts for telecommunication equipment included in the inventory are expected to be utilized within twelve months of the year end.
Expenses for writing inventory down to net realisable value were included in cost of goods in the consolidated statement of profit or loss.
For the years ended December 31, 2021, 2020 and 2019, cost of goods comprised the following expenses:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Amount of inventories recognized as an expense |
| 70,788 |
| 62,587 |
| 56,761 |
Inventory obsolescence provision |
| 1,817 |
| 1,465 |
| 2,564 |
Reversal of obsolescence provision |
| (361) |
| (570) |
| (453) |
| | | | | | |
Total cost of goods |
| 72,244 |
| 63,482 |
| 58,872 |
The reversal of the inventory obsolescence provision relates to handsets and accessories sold over the course of the Group’s promotion campaigns. Inventories were sold with a positive margin.
F-51
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
20. 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, as follows:
| | |
Network and base station equipment: |
|
|
Network infrastructure | | 3-50 years |
Other | | 3-20 years |
| | |
Land and buildings: | |
|
Buildings | | 7-99 years |
Leasehold improvements | | the term of the lease |
| | |
Office equipment, vehicles and other: | |
|
Office equipment | | 2-7 years |
Vehicles | | 2-10 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.
F-52
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Balances of cost, accumulated depreciation, net book value as of December 31, 2021, 2020 and 2019 and movements of property, plant and equipment for the year ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | |
| | | | | | | | Construction | | |
| | | | | | Office | | in progress | | |
| | Network and | | | | equipment, | | and | | |
| | base station | | Land and | | vehicles and | | equipment for | | |
| | equipment | | buildings | | other | | installation | | Total |
Cost |
|
|
|
|
|
|
|
|
|
|
January 1, 2019 | | 593,133 |
| 33,834 |
| 54,287 |
| 25,457 |
| 706,711 |
Additions |
| 4,162 |
| 39 |
| 1,117 |
| 64,398 |
| 69,716 |
Transferred into use |
| 51,130 |
| 1,803 |
| 12,919 |
| (65,852) |
| — |
Arising on business combinations |
| 194 |
| 27 |
| 73 |
| 4 |
| 298 |
Transfer to assets held for sale | | (1,573) | | 555 | | — | | — | | (1,018) |
Disposal |
| (26,870) |
| (428) |
| (3,091) |
| (186) |
| (30,575) |
Disposal of VF Ukraine (Note 11) | | (62,196) | | (2,128) | | (6,966) | | (2,060) | | (73,350) |
Other |
| 730 |
| 1,042 |
| (1,125) |
| 80 |
| 727 |
Foreign exchange differences |
| 1,889 |
| (188) |
| 55 |
| 55 |
| 1,811 |
December 31,2019 |
| 560,599 |
| 34,556 |
| 57,269 |
| 21,896 |
| 674,320 |
Additions |
| (173) |
| 434 |
| 729 |
| 74,032 |
| 75,022 |
Transferred into use |
| 53,005 |
| 1,317 |
| 12,286 |
| (66,608) |
| — |
Arising on business combinations |
| 578 |
| 4 |
| 6 |
| — |
| 588 |
Disposal of NVISION GROUP (Note 11) | | — | | — | | (314) | | (18) | | (332) |
Transfer to assets held for sale | | (2,890) | | (475) | | (34) | | (3) | | (3,402) |
Disposal |
| (38,293) |
| (447) |
| (4,405) |
| (255) |
| (43,400) |
Other |
| (4) |
| 675 |
| 30 |
| 35 |
| 736 |
Foreign exchange differences |
| 2,286 |
| 495 |
| 520 |
| 74 |
| 3,375 |
December 31,2020 |
| 575,108 |
| 36,559 |
| 66,087 |
| 29,153 |
| 706,907 |
Additions |
| 2,432 |
| 38 |
| 801 |
| 75,450 |
| 78,721 |
Transferred into use |
| 57,666 |
| 748 |
| 11,499 |
| (69,913) |
| — |
Arising on business combinations |
| 973 |
| 4,601 |
| 605 |
| 204 |
| 6,383 |
Transfer to assets held for sale | | (992) | | (1) | | (24) | | (27) | | (1,044) |
Disposal |
| (44,394) |
| (559) |
| (5,542) |
| 334 |
| (50,161) |
Other |
| (341) |
| 482 |
| 159 |
| (137) |
| 163 |
Foreign exchange differences |
| 1,306 |
| 10 |
| 170 |
| 12 |
| 1,498 |
December 31,2021 |
| 591,758 |
| 41,878 |
| 73,755 |
| 35,076 |
| 742,467 |
Accumulated depreciation and impairment January 1, 2019 | | (380,014) |
| (10,217) |
| (40,037) |
| — |
| (430,268) |
Charge for the year |
| (47,905) |
| (1,148) |
| (5,064) |
| — |
| (54,117) |
Transfer to assets held for sale | | 762 | | (76) | | (1) | | — | | 685 |
Disposal |
| 26,163 |
| 256 |
| 2,709 |
| — |
| 29,128 |
Disposal of VF Ukraine (Note 11) | | 40,717 | | 1,056 | | 5,540 | �� | — | | 47,313 |
Other |
| (962) |
| (616) |
| 628 |
| — |
| (950) |
Foreign exchange differences |
| (767) |
| 174 |
| (39) |
| — |
| (632) |
December 31, 2019 |
| (362,006) |
| (10,571) |
| (36,264) |
| — |
| (408,841) |
Charge for the year |
| (43,220) |
| (1,153) | | (5,696) |
| — |
| (50,069) |
Disposal of NVISION GROUP (Note 11) | | — | | — | | 236 | | — | | 236 |
Transfer to assets held for sale |
| 1,899 |
| 146 | | (7) |
| — |
| 2,038 |
Disposal |
| 33,058 |
| 343 | | 4,165 |
| — |
| 37,566 |
Other |
| (5) |
| (133) | | (34) |
| — |
| (172) |
Foreign exchange differences |
| (1,968) |
| (397) | | (496) |
| — |
| (2,861) |
December 31, 2020 |
| (372,242) |
| (11,765) | | (38,096) |
| — |
| (422,103) |
Charge for the year |
| (44,387) |
| (1,204) |
| (7,548) |
| — |
| (53,139) |
Transfer to assets held for sale |
| 1,247 |
| 1 |
| 15 |
| — |
| 1,263 |
Disposal |
| 38,225 |
| 435 |
| 5,062 |
| — |
| 43,722 |
Other |
| 277 |
| (99) |
| (4) |
| — |
| 174 |
Foreign exchange differences |
| (1,016) |
| (6) |
| (112) |
| — |
| (1,134) |
December 31, 2021 |
| (377,896) |
| (12,638) |
| (40,683) |
| — |
| (431,217) |
Net book value |
|
|
|
|
| |
|
|
|
|
December 31, 2020 |
| 202,866 |
| 24,794 |
| 27,991 | | 29,153 |
| 284,804 |
December 31, 2021 |
| 213,862 |
| 29,240 |
| 33,072 |
| 35,076 |
| 311,250 |
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, 2021, 2020 and 2019 totaled RUB 2,403 million, RUB 1,510 million and RUB 2,034 million, respectively. This was included in the accompanying consolidated statements of profit or loss as component of other operating income.
21. GOODWILL
Goodwill represents an excess of consideration transferred plus the fair value of any non-controlling interest (“NCI”) 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 (Note 22).
Presentation of goodwill by reportable segments for the year ended December 31, 2020 was changed to reflect changes in reportable segments disclosed in Note 6.
F-53
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The change in the net carrying amount of goodwill for the years ended December 31, 2021 and 2020 by reportable segments was as follows:
| | | | | | |
| | | | | | |
|
| Telecom |
| Other |
| Total |
Balance at January 1, 2020 |
| |
|
|
|
|
Gross amount of goodwill |
| 32,801 |
| 11,380 |
| 44,181 |
Accumulated impairment loss |
| (1,466) |
| (4,040) |
| (5,506) |
|
| 31,335 |
| 7,340 |
| 38,675 |
| | | | | | |
Acquisitions (Note 5) | | — | | 282 | | 282 |
Reclassification (Note 6) | | (1,877) | | 1,877 | | — |
Impairment (Note 22) | | — | | (1,281) | | (1,281) |
Currency translation adjustment |
| — |
| 365 |
| 365 |
| | | | | | |
Balance at December 31, 2020 |
| |
|
|
|
|
Gross amount of goodwill |
| 30,924 |
| 13,904 |
| 44,828 |
Accumulated impairment loss(1) |
| (1,466) |
| (5,321) |
| (6,787) |
|
| 29,458 |
| 8,583 |
| 38,041 |
| | | | | | |
Acquisitions (Note 5) | | 4,337 | | 46 | | 4,383 |
Reclassification (Note 6) | | 253 | | (253) | | — |
Impairment (Note 22) | | — | | — | | — |
Currency translation adjustment | | — | | 395 | | 395 |
| | | | | | |
Balance at December 31, 2021 |
| |
|
|
|
|
Gross amount of goodwill |
| 35,514 |
| 14,092 |
| 49,606 |
Accumulated impairment loss(1) |
| (1,466) |
| (5,321) |
| (6,787) |
| | | | | | |
|
| 34,048 |
| 8,771 |
| 42,819 |
(1) | Accumulated impairment loss of Other segments consists of impairment loss of CGU “Armenia” (RUB 3,516 million), impairment loss of CGU “Oblachnyi retail” (RUB 524 million) and impairment loss of CGU “Entertainment” (RUB 1,281 million). |
22. IMPAIRMENT REVIEW
Goodwill – The management of the Group performs impairment tests with respect to goodwill assigned to the cash-generating units at least annually, and also when there are any indications that the carrying amount of the cash generating unit (“CGU”) is impaired.
Investments in associates and joint ventures – The carrying amount of an investment accounted for under 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 value in use.
Tangible and intangible assets excluding goodwill – At the end of each reporting period, the management of the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets may be impaired. If such an indication exists, the recoverable amount of the assets is estimated in order to determine the amount of impairment loss.
In the process of identifying the impairment indicators management of the Group considers, among other factors, CGU market value and book value and changes in risk premiums in country of operations.
F-54
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
When the carrying amount of the CGU exceeds its recoverable amount, assets allocated to this CGU must be impaired.
For the purpose of the impairment test the recoverable amounts of the CGUs are considered to be equal to their value-in-use. While determining 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. 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.
Estimation of future cash flows requires assumptions to be made in respect to uncertain factors, including management expectations in relation to OIBDA margin, timing and amount of capital expenditures, terminal growth rates and appropriate discount rates to reflect the risks involved. Therefore, OIBDA margin and capital expenditures used for value in use calculation are primarily derived from internal sources, based on past experience and extended to include management expectations. For the purposes of impairment testing OIBDA calculated as operating profit less depreciation and amortization measured on the basis consistent with IFRS consolidated financial statements.
For the purposes of impairment testing the Group has assessed the effects of COVID-19 pandemic on Group's business and financial situation (as disclosed in Note 3) for impairment indicators. The Group has adjusted estimations of future cash flows to reflect its estimates of impact of the pandemic factors. The impairment charge recognized and discussed below is based on expected cash flows after applying these adjustments.
Moscow Fixed Line
In 2021 management of the Group has changed the composition of operating segments, by dividing operations of the Group’s subsidiary MGTS (previously constituted “Moscow Fixed Line” reportable segment) into two operating segments, as disclosed in Note 6. The described change in composition of operating segments led to separation of “Moscow fixed line” into two CGU – “MGTS commercial” and “MGTS service”.
Entertainment
Due to restrictive measures implemented by government in respect to mass events and gatherings ticket sales dropped significantly in 2020. Group management adjusted its expectations of Ticketland and Ponominalu operating performance to reflect significant reduction of business activities and time needed for recovery. The recoverable amount was in total equal to RUB 2,658 million as of June 30, 2020. As a result of impairment test the Group recognized impairment of goodwill related to Ticketland and Ponominalu in the aggregate amount of RUB 1,281 million for the year ended December 31, 2020.
Kinopolis
Kinopolis provides services of movie sites rental and movie production. The sites and related infrastructure for rent are presented in the statement of financial position as investment property.
Overall slowdown of movie production and pandemic restrictions lead to decrease in demand for movie site rental. Operating results of Kinopolis dropped below expectations.
As of December 31, 2020 the recoverable amount of Kinopolis’s assets was assessed as being lower than its carrying amount, and hence the impairment charge of RUB 807 million was recognized in respect to Kinopolis CGU.
MTS Turkmenistan
During the years ended December 31, 2021, 2020 and 2019 MTS Turkmenistan sold a number of long-lived assets impaired in prior periods, hence the reversal of the impairment in the amount of gain from disposal of RUB 10 million, RUB 66 million and RUB 148 million, respectively, was recognized in the accompanying consolidated statements of profit or loss.
F-55
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Impairment losses and reversal of the impairment charges recognized during the years ended December 31, 2021, 2020 and 2019 are attributable to operating segments, reported as a part of the “Other” category (Note 6).
The total amount of impairment loss and reversal of impairment charges for the year ended December 31, 2021, 2020 and 2019 was allocated to the long-lived assets carrying amounts as follows:
| | | | | | | | | | |
|
| 2021 | | 2020 | | 2019 | ||||
| | MTS | | | | | | MTS | | MTS |
|
| Turkmenistan | | Entertainment |
| Kinopolis |
| Turkmenistan |
| Turkmenistan |
Goodwill |
| | | 1,281 | | — | | — |
| — |
Property, plant and equipment |
| (10) | | — | | | | (66) |
| (114) |
Investment property | | | | — | | 807 | | — | | — |
Other intangible assets |
| | | — | | — | | — |
| (34) |
| | | | | | | | | | |
Total |
| (10) | | 1,281 | | 807 | | (66) |
| (148) |
Key assumptions used for value in use calculation:
The table below presents OIBDA margin applied for value in use calculation of related CGUs:
| | | | |
| | December 31, sick | ||
CGU |
| 2021 |
| 2020 |
| | | | |
Russia Convergent | | 41.3%-46.9% | | 43.2%-44.3% |
Armenia |
| 53.5%-60.3% | | 51.8%-54.0% |
MGTS Commercial | | 59.9%-63.0% | | Not available |
MGTS Service | | 42.5%-51.8% | | Not available |
Nvision Czech Republic | | 4.3%-5.0% | | 3.5%-5.2% |
Entertainment | | 4.8%-12% | | 8.8%-32% |
Cloud | | 37.7%-67.3% | | 41.3%-69.0% |
The table below presents capital expenditure as a percentage of revenue applied for value-in-use calculations of related CGUs:
| | | | | |
| | December 31, |
| ||
CGU |
| 2021 |
| 2020 | |
| | | | | |
Russia Convergent |
| 18 | % | 20.9 | % |
Armenia |
| 22 | % | 22.2 | % |
MGTS Commercial | | 16 | % | Not available | |
MGTS Service | | 16 | % | Not available | |
Nvision Czech Republic | | 1 | % | 1.2 | % |
Entertainment | | 3 | % | 0.0 | % |
Cloud | | 17 | % | 15.4 | % |
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.
F-56
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The table below presents terminal growth rates applied for value-in-use calculations of related CGUs:
| | | | | |
| | December 31, |
| ||
CGU |
| 2021 |
| 2020 | |
| | | | | |
Russia Convergent |
| 1 | % | 1 | % |
Armenia |
| NaN | | NaN | |
MGTS Commercial | | 1 | % | Not available | |
MGTS Service | | 1 | % | Not available | |
Nvision Czech Republic |
| 2 | % | 2 | % |
Entertainment | | 1.5 | % | 1.5 | % |
Cloud | | 1 | % | 1 | % |
The table below presents pre-tax rates for the discounting of cash flows in functional currencies of related CGUs:
| | | | | |
| | December 31, |
| ||
CGU |
| 2021 |
| 2020 |
|
| | | | | |
Russia Convergent |
| 10.1 | % | 11.4 | % |
Armenia |
| 11.2 | % | 13.3 | % |
MGTS Commercial | | 12.7 | % | Not available | |
MGTS Service | | 9.9 | % | Not available | |
Nvision Czech Republic |
| 6.0 | % | 6.1 | % |
Entertainment | | 13.1 | % | 13.6 | % |
Cloud | | 13.6 | % | 13.2 | % |
23. OTHER INTANGIBLE ASSETS
Other intangible assets primarily consist of billing, telecommunication, accounting and office software as well as numbering capacity, customer base and 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.
F-57
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Balances of historical cost, accumulated amortization, net book value as of December 31, 2021 and 2020 and movements of other intangible assets for the year ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | |
| | | | Right to use | | Billing and | | | | | | Cost to | | | | |
| | | | radio | | other | | | | Numbering | | obtain | | | | |
|
| Licenses |
| frequencies |
| software |
| Client base |
| capacity |
| contracts |
| Other |
| Total |
Useful life, years | | 1 to 20 | | 1 to 15 | | 1 to 25 | | 4 to 31 | | 2 to 15 | | 2 to 5 | | 1 to 10 | | |
Cost |
|
| |
| |
| |
| |
| | | |
|
|
|
January 1, 2019 | | 39,627 | | 6,648 | | 138,564 | | 8,790 | | 2,868 | | 23,360 | | 3,606 |
| 223,463 |
Additions | | 1,106 | | (38) | | 27,921 | | — | | (2) | | 10,290 | | 366 |
| 39,643 |
Arising on business combinations (Note 5) |
| — | | — | | 6 | | (37) | | 2 | | — | | 61 |
| 32 |
Disposal of VF Ukraine (Note 11) | | (19,149) | | — | | (15,770) | | — | | (136) | | (1,826) | | (692) | | (37,573) |
Impairment | | — | | (26) | | — | | — | | — | | — | | — | | (26) |
Disposal |
| (84) | | (865) | | (11,564) | | (2,823) | | (64) | | (18,281) | | (208) |
| (33,889) |
Other |
| 4 | | (1) | | 93 | | — | | — | | — | | (81) |
| 15 |
Foreign exchange differences |
| 201 | | (29) | | 718 | | — | | 9 | | 92 | | 44 |
| 1,035 |
December 31, 2019 |
| 21,705 | | 5,689 | | 139,968 | | 5,930 | | 2,677 | | 13,635 | | 3,096 |
| 192,700 |
Additions | | 1,466 | | (11) | | 35,277 | | — | | 15 | | 10,390 | | 1,941 |
| 49,078 |
Arising on business combinations (Note 5) |
| — | | — | | — | | — | | — | | — | | — |
| — |
Disposal of NVISION GROUP (Note 11) | | — | | — | | (311) | | — | | — | | — | | — | | (311) |
Reclassification into assets for sale | | — | | — | | (184) | | — | | — | | — | | — | | (184) |
Impairment | | — | | 43 | | (167) | | — | | — | | — | | (2) | | (126) |
Disposal |
| (108) | | (172) | | (28,035) | | (73) | | (24) | | (9,758) | | (1,033) |
| (39,203) |
Other |
| 25 | | 30 | | (83) | | — | | — | | — | | (1) |
| (29) |
Foreign exchange differences |
| 913 | | — | | 386 | | — | | — | | — | | 4 |
| 1,303 |
December 31, 2020 |
| 24,001 | | 5,579 | | 146,851 | | 5,857 | | 2,668 | | 14,267 | | 4,005 |
| 203,228 |
Additions | | 1,350 | | — | | 34,421 | | — | | 75 | | 3,653 | | 5,494 |
| 44,993 |
Arising on business combinations (Note 5) |
| — | | — | | 571 | | 1,147 | | 174 | | — | | 576 |
| 2,468 |
Reclassification into assets for sale | | — | | — | | (17) | | — | | — | | — | | — | | (17) |
Impairment | | (1) | | 21 | | — | | — | | — | | — | | — | | 20 |
Disposal |
| (39) | | (233) | | (14,783) | | (680) | | (251) | | (3,287) | | (1,064) |
| (20,337) |
Other |
| — | | 1 | | (97) | | — | | — | | — | | (9) |
| (105) |
Foreign exchange differences |
| 992 | | — | | 381 | | — | | — | | — | | (1) |
| 1,372 |
December 31, 2021 |
| 26,303 | | 5,368 | | 167,327 | | 6,324 | | 2,666 | | 14,633 | | 9,001 |
| 231,622 |
Accumulated amortisation and impairment |
|
| |
| |
| |
| |
| | | | |
|
|
January 1, 2019 | | (16,113) | | (4,586) | | (80,785) | | (5,258) | | (2,754) | | (16,343) | | (1,662) |
| (127,501) |
Charge for the year |
| (2,911) | | (372) | | (24,394) | | (603) | | (41) | | (6,887) | | (374) |
| (35,582) |
Disposal of VF Ukraine (Note 11) | | 5,155 | | — | | 12,657 | | — | | 129 | | 1,208 | | 301 | | 19,450 |
Effect on assets impairment | | — | | — | | — | | — | | — | | — | | — | | — |
Disposal |
| 25 | | 831 | | 11,065 | | 2,813 | | 64 | | 18,281 | | 196 |
| 33,275 |
Other |
| (2) | | — | | (24) | | — | | — | | (2,573) | | 17 |
| (2,582) |
Foreign exchange differences |
| 664 | | 29 | | (615) | | — | | (9) | | (80) | | (20) |
| (31) |
December 31, 2019 |
| (13,182) | | (4,098) | | (82,096) | | (3,048) | | (2,611) | | (6,394) | | (1,542) |
| (112,971) |
Charge for the year |
| (1,266) | | (367) | | (25,146) | | (431) | | (27) | | (9,964) | | (345) |
| (37,546) |
Disposal of NVISION GROUP (Note 11) | | — | | — | | 77 | | — | | — | | — | | — | | 77 |
Disposal |
| 71 | | 160 | | 27,953 | | 72 | | 24 | | 9,758 | | 402 |
| 38,440 |
Other |
| (10) | | (31) | | 81 | | — | | — | | — | | 2 |
| 42 |
Foreign exchange differences |
| (894) | | — | | (275) | | — | | — | | — | | 2 |
| (1,167) |
December 31, 2020 |
| (15,281) | | (4,336) | | (79,406) | | (3,407) | | (2,614) | | (6,600) | | (1,481) |
| (113,125) |
Charge for the year |
| (1,443) | | (349) | | (29,737) | | (631) | | (35) | | (3,424) | | (1,867) |
| (37,486) |
Disposal |
| 3 | | 228 | | 14,716 | | 679 | | 249 | | 3,288 | | 920 |
| 20,083 |
Other |
| — | | — | | 204 | | — | | — | | — | | 16 |
| 220 |
Foreign exchange differences |
| (971) | | — | | (211) | | — | | — | | — | | — |
| (1,182) |
December 31, 2021 |
| (17,692) | | (4,457) | | (94,434) | | (3,359) | | (2,400) | | (6,736) | | (2,412) |
| (131,490) |
Net book value |
|
| |
| |
| |
| |
| | | | |
|
|
December 31, 2020 |
| 8,720 | | 1,243 | | 67,445 | | 2,450 | | 54 | ��� | 7,667 | | 2,524 |
| 90,103 |
December 31, 2021 |
| 8,611 | | 911 | | 72,893 | | 2,965 | | 266 | | 7,897 | | 6,589 |
| 100,132 |
The Group was granted with GSM licenses by the Russian Ministry of Information Technologies and Communications to provide telecommunication services. In addition to the licenses received directly from the Russian Ministry of Information Technologies and Communications, the Group acquired access to telecommunication licenses through business combinations. In foreign subsidiaries, the licenses are granted by the local communication authorities.
Operating licenses contain conditions specified by legislation which generally include the required date of services provision, territorial coverage and expiration date. Management believes that the Group is in compliance with all material terms of its licenses.
F-58
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
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, 2021 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 two and half years.
The license for the provision of telecommunication services in Armenia is valid until 2034.
Contractual obligations to purchase intangible assets are disclosed in the Note 34.
24. BORROWINGS
Group’s borrowings represent interest bearing bank loans and bonds issued in the capital markets. Borrowings are initially recorded at fair value plus transaction costs that are directly attributable to the issue of the financial liability and subsequently measured at amortized cost, using the effective interest rate method.
The Group’s borrowings comprise the following:
| | | | |
| | December 31, | ||
|
| 2021 |
| 2020 |
Notes |
| 191,996 |
| 208,155 |
Bank and other loans |
| 270,143 |
| 221,113 |
Total borrowings |
| 462,139 |
| 429,268 |
Less: current portion |
| (111,839) |
| (34,125) |
Total borrowings, non-current |
| 350,300 |
| 395,143 |
F-59
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Notes – The Group’s notes consisted of the following:
| | | | | | | | |
| | | | Interest rate | | | | |
| | | | (actual at | | | | |
| | | | December 31, | | December 31, | | December 31, |
|
| Currency |
| 2021) |
| 2021 |
| 2020 |
MTS International Notes due 2023 |
| USD | | 5.00% | | 33,291 |
| 33,091 |
MTS PJSC Notes due 2022 | | RUB | | 7.70% | | 14,991 | | 14,980 |
MTS PJSC Notes due 2025 |
| RUB | | 8.00% | | 14,990 |
| 14,987 |
MTS PJSC Notes due 2023 |
| RUB | | 6.85% | | 14,982 |
| 14,971 |
MTS PJSC Notes due 2027 | | RUB | | 6.60% | | 14,975 | | 14,971 |
MTS PJSC Notes due 2022 | | RUB | | 9.00% | | 10,000 | | 9,998 |
MTS PJSC Notes due 2026 |
| RUB | | 7.90% | | 9,999 |
| 9,998 |
MTS PJSC Notes due 2022 |
| RUB | | 5.50% | | 9,995 |
| 9,984 |
MTS PJSC Notes due 2022 | | RUB | | 6.45% | | 9,994 | | 9,988 |
MTS PJSC Notes due 2025 | | RUB | | 7.25% | | 9,993 | | 9,990 |
MTS PJSC Notes due 2024 | | RUB | | 8.70% | | 9,991 | | 9,986 |
MTS PJSC Notes due 2023 | | RUB | | 6.50% | | 9,923 | | 9,860 |
MTS PJSC Notes due 2024 | | RUB | | 8.60% | | 7,491 | | 7,488 |
MTS PJSC Notes due 2027 | | RUB | | 6.60% | | 6,983 | | 6,980 |
MTS PJSC Notes due 2022 | | RUB | | 8.40% | | 4,997 | | 4,994 |
MTS PJSC Notes due 2026 | | RUB | | 6.60% | | 4,992 | | 4,990 |
MTS PJSC Notes due 2024 | | RUB | | 6.50% | | 4,319 | | — |
MTS PJSC Notes due 2031 | | RUB | | 7.50% | | 78 | | 891 |
MTS PJSC Notes due 2021 | | RUB | | 8.85% | | — | | 9,999 |
MTS PJSC Notes due 2021 | | RUB | | 7.10% | | — | | 9,997 |
Other |
| |
| | | 12 |
| 12 |
Total notes |
|
| |
|
| 191,996 |
| 208,155 |
Less: current portion |
|
| |
|
| (49,923) |
| (20,813) |
Total notes, non-current |
|
| |
|
| 142,073 |
| 187,342 |
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 date of the announcement for the particular note issue is as follows:
| |
MTS PJSC Notes due 2031 | February 2026 |
The Group discloses these notes as maturing in 2026 (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.
F-60
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Bank and other loans – The Group’s loans from banks and financial institutions consisted of the following:
| | | | | | | | |
| | | | Interest rate | | | | |
| | | | (actual at | | | | |
| | | | December 31, | | December 31, | | December 31, |
|
| Maturity |
| 2021) |
| 2021 |
| 2020 |
RUB-denominated: |
|
|
| | | |
| |
Sberbank | | 2022-2024 | | 5.99%-CBR1 key rate + 1.19% | | 135,000 | | 85,001 |
VTB | | 2024-2026 | | CBR1 key rate + 0.50% - CBR1 key rate + 1.25% | | 129,307 | | 129,091 |
Related party loans | | 2022-2024 | | 8.70% - CBR1 key rate | | 1,968 | | 1,803 |
Subsidized loans | | 2025 | | 0.1 CBR1 key rate + 2.42% | | 1,769 | | 1,845 |
Other |
| |
| | | 2,099 |
| 3,373 |
Total bank and other loans |
|
|
| | | 270,143 |
| 221,113 |
Less: current portion |
|
|
| | | (61,916) |
| (13,312) |
Total bank and other loans, non-current |
|
|
| | | 208,227 |
| 207,801 |
1CBR – Central Bank of Russia
Subsidized loans – In the end of 2020 the Group signed a credit line with VEB.RF at a preferential interest rate provided for under a special program aimed at stimulating local IT development overseen by the Russian Ministry of Digital Development, Communications, and Mass Media. The credit program subsidizes creditors in issuing loans at annual interest rates of between 1% and 5% for projects that involve the purchasing or licensing of locally-developed software and hardware, as well as spending on local IT labor and training. Also on June 30, 2020 the Group entered into a subsidized credit facility agreement with VTB. The facility was a revolving credit line, which allowed the Group to borrow up to RUB 1,702 million. The principal and interest accumulated under this credit facility have been fully utilised as part of government support related to COVID-19 and accounted for as deduction of related expenses in the consolidated statement of profit or loss for 2021.
Compliance with covenants – Bank loans and notes of the Group are subject to certain covenants limiting the Group’s ability to create liens on properties, dispose assets, including cellular licenses in core Russian regions, issue guarantees and grant loans to the third parties, delay payments for the borrowings, merge or consolidate MTS PJSC with a third party or be a subject to unsatisfied judgments (excluding the total penalty under the agreements with the DOJ). The Group is required to comply with certain financial ratios.
The noteholders of 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 demand accelerated principal repayment.
The Group was in compliance with all existing notes and bank loans covenants as of December 31, 2021.
F-61
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Available credit facilities – As of December 31, 2021, the Group’s total available unused credit facilities amounted to RUB 207,323 million and related to the following credit lines:
| | | | | | | | | | |
| | | | | | | | | | |
|
| Currency |
| Maturity |
| Interest rate |
| Available till |
| Available amount |
| | | | | | | | | | |
Sberbank | | RUB | | 2025 | | To be agreed | | August 2025 | | 130,000 |
NDB | | USD | | 2028 | | LIBOR+ 1.75% | | July 2022 | | 22,288 |
Sberbank |
| RUB |
| 2024 |
| To be agreed | | August 2024 |
| 20,000 |
Sberbank | | RUB | | 2024 | | To be agreed | | May 2024 | | 15,000 |
Rosselhozbank | | RUB/USD/EUR | | 2022 | | To be agreed | | November 2022 | | 7,000 |
VTB |
| RUB |
| 2028 |
| To be agreed | | August 2028 |
| 5,000 |
SPB | | RUB | | 2024 | | To be agreed | | January 2024 | | 3,000 |
VEB | | RUB | | 2025 | | 0.1 CBR key rate1 + 2.42% | | November 2023 | | 2,490 |
ZTV | | RUB | | 2022 | | CBR key rate1 | | July 2022 | | 1,060 |
VEB | | RUB | | 2025 | | 0.1 CBR key rate1 + 2.47% | | November 2023 | | 970 |
Cisco | | RUB | | 2023 | | To be agreed | | July 2022 | | 515 |
| | | | | | | | | | |
Total |
|
|
|
|
| | |
|
| 207,323 |
1CBR – Central Bank of Russia
In addition, the Group has a credit facility made available by Citibank at an interest rate of MosPrime + 1.50%, with the available amount set up on request and to be repaid within 182 days.
The following table presents the aggregated scheduled maturities of principal and interests on notes and bank loans (gross of debt issuance costs) outstanding for the five years ending December 31, 2026 and thereafter:
| | | | |
| | December 31, 2021 | ||
| | | | Bank loans |
|
| Notes |
| and other debt |
Payments due in the year ending December 31, | |
| |
|
2022 |
| 62,772 |
| 83,862 |
2023 |
| 66,809 |
| 58,523 |
2024 |
| 27,346 |
| 72,799 |
2025 |
| 28,529 |
| 93,385 |
2026 |
| 17,448 |
| 15,136 |
Thereafter |
| 22,477 |
| — |
| | | | |
Contractual undiscounted cash flows |
| 225,381 |
| 323,705 |
| | | | |
Less: unamortized debt issuance costs |
| (184) |
| — |
Less: interest | | (33,201) | | (52,628) |
Less: debt modification | | — | | (693) |
Less: subsidized interest rate effect | | — | | (241) |
| | | | |
Total debt |
| 191,996 |
| 270,143 |
F-62
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
25. RIGHT-OF-USE ASSETS AND LEASE OBLIGATIONS
The Group’s lease contracts largely relate to leases of cellular sites (i.e. land, space in cell towers or rooftop surface areas), network infrastructure, and retail stores as well as buildings used for administrative or technical purposes.
The Group recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements (including sub-lease and lease of intangible assets), which conveys the right to control the use of identified assets for a period of time in exchange for consideration, except for short-term leases (with a lease term of 12 months or less). For these leases, the Group recognizes the lease payments as operating expenses over the term of the lease. When identifying the lease, the Group uses practical expedient of IFRS 16 permitting the lessee not to separate the non-lease components of the contract and, instead, to account for any lease and associated non-lease components as a single arrangements.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the incremental borrowing rate of the Group. The incremental borrowing rate of the Group is determined based on the credit spreads of the Group debt instruments in relation to the zero-coupon yield curve for government securities. The lease payments include fixed payments, variable payments that depend on index or rate, amounts expected to be paid under residual value guarantee, the exercise price under a purchase option the Group is reasonably certain to exercise as well as early termination fees unless the Group is reasonably certain not to terminate earlier. Variable payments that depend on external factors (such as sale volume of a particular retail store) are expensed as incurred.
Lease liability is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. A corresponding adjustment is made to the carrying amount of the right-of-use assets, or is recorded in profit or loss if the carrying amount of right-of-use asset had been reduced to zero.
Right-of-use assets are initially measured at cost, which is the initial amount of lease liability adjusted for any lease payments made at or before the commencement date, plus any direct costs incurred and an estimate of costs to dismantle, remove or restore the underlying asset less any lease incentives received.
Right-of-use assets are subsequently amortized on a straight-line basis over the expected lease term. The lease term corresponds to the non-cancellable period of each contract except in cases where the Group is reasonably certain of exercising renewal or termination options. When assessing the lease term, the Group considers all facts and circumstances that create an economic incentive for the Group to exercise the option to extend the lease, such as useful life of the asset located on the leased site, sites replacement statistics, sequence of technology change, profitability of our retail stores as well as costs to terminate or enter into lease contracts.
The table below summarises the estimated terms, over which the right-of-use assets are amortized:
| | |
Sites for placement of network equipment and base stations inside the buildings | | 10 years |
Sites for placement of network equipment and base stations on land |
| 20 years |
Retail stores |
| Up to 8 years |
Administrative offices, warehouses, parking garages |
| not less than 3 years |
Vehicles |
| 4 – 5 years |
F-63
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The following table presents a summary of net book value of right-of-use assets:
| | | | |
|
| December 31, | ||
|
| 2021 |
| 2020 |
Sites for placement of network and base station equipment |
| 91,566 |
| 93,948 |
Land and buildings |
| 40,572 |
| 36,468 |
Vehicles and other |
| 205 |
| 87 |
Right-of-use assets, net |
| 132,343 |
| 130,503 |
The following table presents a summary of depreciation charge of the right-of-use assets:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Sites for network and base station equipment |
| 11,448 |
| 6,903 | | 6,900 |
Land and buildings |
| 8,328 |
| 11,903 | | 11,968 |
Vehicles and other |
| 103 |
| 43 | | 404 |
Exclusive rights for trademarks |
| — |
| — | | 693 |
| | | | | | |
Depreciation charge, total |
| 19,879 |
| 18,849 | | 19,965 |
Depreciation of the right-of-use assets for the years ended December 31, 2021, 2020 and 2019 of RUB nill, RUB 3 million and RUB 1,644 million, respectively, was recognized as part of loss from discontinued operation in the accompanying consolidated statements of profit or loss.
Additions to the assets leased during the years ended December 31, 2021, 2020 and 2019 amounted to RUB 17,510, RUB 13,102 and RUB 20,436 million.
Interest expense accrued on lease obligations for the years ended December 31, 2021, 2020 and 2019 in the amount of RUB 11,820, RUB 12,277 and RUB 13,416 million, respectively, were included in finance costs, whereas RUB nill, RUB 1 and RUB 1,246 million, respectively were recognized as part of loss from discontinued operation in the accompanying consolidated statements of profit or loss.
For the years ended December 31, 2021, 2020 and 2019, expenses recognized in respect of variable lease payments not included on the measurement of lease liabilities and short-term leases amounted to:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Variable lease payments |
| 10,623 |
| 9,542 | | 8,522 |
Short-term leases |
| 310 |
| 195 | | 203 |
| | | | | | |
Total |
| 10,933 |
| 9,737 | | 8,725 |
F-64
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The following table presents future minimum lease payments under lease arrangements together with the present value of the net minimum lease payments as of December 31, 2021 and 2020:
| | | | |
|
| December 31, | ||
| | 2021 | | 2020 |
Minimum lease payments, including: |
|
|
|
|
Current portion (less than 1 year) |
| 29,758 |
| 27,094 |
More than 1 to 5 years |
| 101,965 |
| 98,737 |
Over 5 years |
| 91,031 |
| 93,520 |
| | | | |
Total minimum lease payments |
| 222,754 |
| 219,351 |
Less amount representing interest |
| (68,245) |
| (68,537) |
Present value of net minimum lease payments, including: |
|
|
|
|
Current portion (less than 1 year) |
| 18,709 |
| 16,177 |
More than 1 to 5 years |
| 70,818 |
| 66,784 |
Over 5 years |
| 64,982 |
| 67,853 |
| | | | |
Total present value of net minimum lease payments |
| 154,509 |
| 150,814 |
| | | | |
Less current portion of lease obligations |
| (18,709) |
| (16,177) |
| | | | |
Non-current portion of lease obligations |
| 135,800 |
| 134,637 |
Total cash outflows for leases for the years ended December 31, 2021, 2020 and 2019 totaled to RUB 38,996, RUB 36,963 and RUB 38,545 million, of which RUB 11,548, RUB 12,173 and RUB 14,666 million was included in interest paid.
A minor part of the Group’s lease contracts for retail stores include variable payments that depend on sales volume of the respective store.
The Group’s lease contracts include typical restrictions and covenants common for local business practice, such as the responsibility of the Group for regular maintenance and repair of the lease assets and their insurance, redesign and conduction of permanent improvements only with the consent of the lessor, and use of the leased asset in accordance with current legislation.
For the year ended December 31, 2020 the Group recognized gain related to termination of lease agreements and rent holidays for retail outlets in the amount of RUB 464 and RUB 286 million, respectively.
F-65
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
26. RECONCILIATION OF LIABILITIES ARISING FROM FINANCIAL ACTIVITIES
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Foreign | | Other | | | | Change in | | | | |
| | December 31, | | Financing | | Operating | | Acquisitions/ | | exchange | | comprehensive | | Change | | retained | | Other | | December 31, |
|
| 2020 |
| cash flows |
| cash flows |
| Disposals |
| movement |
| income |
| in fair value |
| earnings |
| changes(1) |
| 2021 |
Notes (Note 24) |
| 208,155 |
| (16,504) |
| — |
| — |
| 187 |
| — |
| — | | — |
| 158 |
| 191,996 |
Bank and other loans (Note 24) |
| 221,113 |
| 48,718 | | — |
| 1,735 |
| — | | (10) |
| — | | — |
| (1,413) |
| 270,143 |
Lease obligation (Note 0) |
| 150,814 |
| (16,516) |
| (11,548) |
| 146 |
| 45 |
| 72 |
| — | | — |
| 31,496 |
| 154,509 |
Payables related to repurchase of common stock (Note 32) |
| — |
| (21,483) |
| — |
| — |
| — |
| — |
| — | | — |
| 21,483 |
| — |
Dividends payable (Note 32) |
| 109 | | (61,955) |
| — |
| — |
| — |
| — |
| — | | 61,967 |
| (53) |
| 68 |
Payables related to transactions under common control |
| — |
| (3,474) |
| — |
| — |
| — |
| — |
| — | | — |
| 3,474 |
| — |
Liability under put option agreement |
| 62 |
| — |
| — |
| — |
| — |
| — |
| (62) | | — |
| — |
| — |
Derivative instruments | | (3,591) | | — | | — | | — | | (125) | | — | | — | | — | | 426 | | (3,290) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
Total liabilities arising from financial activities |
| 576,662 |
| (71,214) |
| (11,548) |
| 1,881 |
| 107 |
| 62 |
| (62) | | 61,967 |
| 55,571 |
| 613,426 |
(1) | Including accrual of liabilities related to repurchase of common stock, additions under lease agreements, dividends related to non-controlling interest, depreciation of debt issuance cost, modification gain and other changes. |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Foreign | | Other | | | | Change in | | | | |
| | December 31, | | Financing | | Operating | | Acquisitions/ | | exchange | | comprehensive | | Change | | retained | | Other | | December 31, |
| | 2019 | | cash flows | | cash flows | | Disposals | | movement | | income | | in fair value | | earnings | | changes(1) | | 2020 |
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Notes (Note 24) |
| 183,935 |
| 18,590 |
| — |
| — |
| 7,674 |
| — |
| — |
| — |
| (2,044) |
| 208,155 |
Bank and other loans (Note 24) |
| 159,384 |
| 60,055 |
| — |
| 26 |
| — |
| — |
| — |
| — |
| 1,648 |
| 221,113 |
Lease obligation (Note 0) |
| 155,308 |
| (15,054) |
| (12,173) |
| (145) |
| 1,405 |
| 150 |
| — |
| — |
| 21,323 |
| 150,814 |
Payables related to repurchase of common stock (Note 32) |
| — |
| (16,028) |
| — |
| — |
| — |
| — |
| — |
| — |
| 16,028 |
| — |
Dividends payable (Note 32) |
| 23,080 |
| (74,923) |
| — |
| — |
| — |
| — |
| — |
| 52,012 |
| (60) |
| 109 |
Payables related to transactions under common control |
| 22 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (22) |
| — |
Liability under put option agreement |
| 73 |
| — |
| — |
| — |
| — |
| — |
| (53) |
| — |
| 42 |
| 62 |
Derivative instruments |
| 955 |
| — |
| (449) |
| — |
| (3,582) |
| — |
| — |
| — |
| (515) |
| (3,591) |
Total liabilities arising from financial activities |
| 522,757 |
| (27,360) |
| (12,622) |
| (119) |
| 5,497 |
| 150 |
| (53) |
| 52,012 |
| 36,400 |
| 576,662 |
(1) | Including accrual of liabilities related to repurchase of common stock, additions under lease agreements, dividends related to non-controlling interest, depreciation of debt issuance cost, modification gain and other changes. |
27. PROVISIONS
Provisions – Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of past event, and 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 the 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 (including retirement benefits and cash-settled share-based payments), decommissioning and restoration obligation, tax provisions as well as legal claims.
Provision for decommissioning and restoration – The Group calculates a provision for decommissioning and restoration 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 records the present value of provision for decommissioning and restoration as non-current provisions in the consolidated statement of financial position.
F-66
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Employee bonuses and share-based settlement programs – For employee bonuses and 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.
The following table summarizes the movement in provisions for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | |
| | Tax | | Provision | | | | | | | | |
| | provisions | | for | | Employee | | | | Litigation | | |
| | other than | | decommissioning | | bonuses | | SEC | | and Other | | |
| | for income | | and | | and other | | provision | | provisions | | Total |
|
| tax |
| restoration |
| rewards |
| (Note 34) |
| (Note 34) |
| provisions |
January 1, 2019 |
| (252) |
| (3,109) |
| (10,378) |
| (59,050) | | (1,513) |
| (74,302) |
| | | | | | | | | | | | |
Arising during the year |
| (410) |
| (2,341) |
| (16,896) |
| — | | (208) |
| (19,855) |
Utilised |
| 19 |
| 19 |
| 16,055 |
| 55,607 | | 527 |
| 72,227 |
Discount rate adjustment and imputed interest (change in estimates) |
| — |
| 42 |
| (12) |
| — | | — |
| 30 |
Unused amounts reversed |
| 34 |
| — |
| 523 |
| — | | 155 |
| 712 |
Arising due to acquisitions of subsidiaries | | — | | — | | (9) | | — | | — | | (9) |
Disposal of VF Ukraine | | 50 | | 760 | | 672 | | — | | 126 | | 1,608 |
Other |
| (4) |
| (159) |
| 2 |
| 3,443 | | 20 |
| 3,302 |
December 31, 2019 |
| (563) |
| (4,788) |
| (10,043) |
| — | | (893) |
| (16,287) |
| | | | | | | | | | | | |
Current portion |
| (563) |
| (126) |
| (9,944) |
| — | | (893) |
| (11,526) |
Non-current portion |
| — |
| (4,662) |
| (99) |
| — | | — |
| (4,761) |
January 1, 2020 |
| (563) |
| (4,788) |
| (10,043) |
| — | | (893) |
| (16,287) |
| | | | | | | | | | | | |
Arising during the year |
| (211) |
| (914) |
| (14,770) |
| — | | (3,860) |
| (19,755) |
Utilised |
| 29 |
| 54 |
| 16,489 |
| — | | 137 |
| 16,709 |
Discount rate adjustment and imputed interest (change in estimates) |
| 1 |
| (138) |
| 67 |
| — | | — |
| (70) |
Unused amounts reversed |
| 8 |
| 513 |
| (125) |
| — | | 114 |
| 510 |
Arising due to acquisitions of subsidiaries | | — | | — | | — | | — | | — | | — |
Disposal of Nvision Group | | 115 | | — | | 245 | | — | | 9 | | 369 |
Other |
| — |
| — |
| (62) |
| — | | (2) |
| (64) |
December 31, 2020 |
| (621) |
| (5,273) |
| (8,199) |
| — | | (4,495) |
| (18,588) |
| | | | | | | | | | | | |
Current portion |
| (621) |
| (229) |
| (8,115) |
| — | | (4,495) |
| (13,460) |
Non-current portion | | — | | (5,044) | | (84) | | — | | — | | (5,128) |
January 1, 2021 | | (621) | | (5,273) | | (8,199) | | — | | (4,495) | | (18,588) |
| | | | | | | | | | | | |
Arising during the year | | (74) | | (2,329) | | (17,860) | | — | | (1,862) | | (22,125) |
Utilised | | 161 | | 31 | | 13,258 | | — | | 1,736 | | 15,186 |
Discount rate adjustment and imputed interest (change in estimates) | | — | | (145) | | 4 | | — | | — | | (141) |
Unused amounts reversed | | 488 | | 226 | | 580 | | — | | (2) | | 1,292 |
Arising due to acquisitions of subsidiaries | | (207) | | — | | (159) | | — | | (3) | | (369) |
Other | | (1) | | — | | (18) | | — | | (3) | | (22) |
December 31, 2021 | | (254) | | (7,490) | | (12,394) | | — | | (4,629) | | (24,767) |
| | | | | | | | | | | | |
Current portion | | (254) | | (284) | | (12,312) | | — | | (4,629) | | (17,479) |
Non-current portion |
| — |
| (7,206) |
| (82) |
| — | | — |
| (7,288) |
F-67
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
28. FAIR VALUE OF FINANCIAL 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, bank loans to customers, investments (mainly deposits with original maturity of more than three months, originated loans other than bank loans to customers 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, lease obligations and derivative financial liabilities. Financial instruments are recognized as soon as the Group becomes a party to the contractual provision of the 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 the classification of those assets and liabilities.
Financial assets can be classified as 1) financial assets at amortized cost; 2) financial assets at fair value through other comprehensive income; 3) financial assets at fair value through profit or loss. If the financial assets are held for collecting contractual cash flows in the form of principal and interest on the specified dates, it is classified as carried at amortized cost. If the financial assets are held not only for collecting contractual cash flows in the form of principal and interest on the specified dates, but also for potential sale, they are classified as measured at fair value through other comprehensive income. All other financial assets are classified as measured at fair value through profit or loss.
Financial liabilities can be classified as measured at fair value or at amortized costs. The Group measures its derivative instruments, contingent consideration recognized in business combination as well as liability under put option agreement at fair value. All other financial liabilities of the Group are measured at amortized cost.
Derivative instruments 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 financial 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.
Gains and losses from changes in the fair value of derivative instruments are recorded immediately in profit or loss.
Assets and liabilities related to multiple derivative contracts with one counterparty are not offset by the Group.
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 recognized as a 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.
Netting – The Group offsets its financial assets and financial liabilities only if it has a legally enforceable right to set off the recognized amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
Fair value of financial instruments – Fair value of 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:
Level 1 – Quoted prices in active markets for identical assets or liabilities;
F-68
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities;
Level 3 – No observable pricing inputs in the market.
Financial assets and financial liabilities are classified in the 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 which may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
1. Financial assets of the Group
| | | | |
| | December 31, | ||
|
| 2021 |
| 2020 |
Cash and cash equivalents (Note 14) | | 40,590 | | 85,405 |
| | | | |
Trade and other receivables (Note 18) |
| 39,795 |
| 35,031 |
| | | | |
Accounts receivable, related parties (Note 31) |
| 7,287 |
| 14,189 |
| | | | |
Other financial assets: |
| |
| |
| | | | |
Financial assets at amortized cost: | | | | |
Deposits and loans issued | | 208,018 | | 118,594 |
Notes | | 9,158 | | 9,583 |
Other | | 2,138 | | 2,196 |
Total financial assets at amortized cost | | 219,314 | | 130,373 |
| | | | |
Financial assets at fair value through profit or loss: |
| |
| |
Securities held by MTS Bank and Sistema Capital | | 25,687 | | 21,824 |
Mutual funds | | 10,719 | | 10,699 |
Assets in Sistema Capital trust management |
| 10,374 |
| 10,313 |
Cross-currency swaps not designated as hedges | | 4,627 | | 4,508 |
Contingent consideration (Note 11) | | 1,867 | | 2,631 |
Investments in equity | | 1,228 | | — |
Embedded derivatives in a lease agreement | | 434 | | 562 |
Assets under option agreements | | 112 | | 228 |
Currency forwards, swaps and options not designated as hedges | | 110 | | 2 |
Total financial assets at fair value through profit or loss |
| 55,158 |
| 50,767 |
| | | | |
Total other financial assets |
| 274,472 |
| 181,140 |
| | | | |
Total financial assets |
| 362,144 |
| 315,765 |
Less current portion |
| (224,862) |
| (227,338) |
| | | | |
Total financial assets, non-current |
| 137,282 |
| 88,427 |
F-69
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
2. Financial liabilities of the Group
| | | | |
| | December 31, | ||
|
| 2021 |
| 2020 |
Trade and other payables |
| 72,078 |
| 56,017 |
| | | | |
Accounts payable, related parties (Note 31) |
| 4,107 |
| 3,146 |
| | | | |
Other financial liabilities: | | | | |
| | | | |
Financial liabilities at amortized cost: |
| |
| |
Bank and other loans (Note 24) |
| 270,143 |
| 221,113 |
Notes (Note 24) |
| 191,996 |
| 208,155 |
Bank deposits and liabilities (Note 30) | | 221,368 | | 167,677 |
Lease obligations (Note 0) |
| 154,509 |
| 150,814 |
Total financial liabilities at amortized cost |
| 838,016 |
| 747,759 |
| | | | |
Financial liabilities at fair value through profit or loss: |
| |
| |
Contingent consideration and other liabilities | | 383 | | 1,068 |
Liabilities under option agreements | | — | | 55 |
Total financial liabilities at fair value through profit or loss |
| 383 |
| 1,123 |
| | | | |
Total other financial liabilities |
| 838,399 |
| 748,882 |
| | | | |
Total financial liabilities |
| 914,584 |
| 808,045 |
Less current portion |
| (413,990) |
| (276,368) |
| | | | |
Total financial liabilities, non-current |
| 500,594 |
| 531,677 |
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 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 investment in mutual investment funds is measured at fair value of the Group’s share in net assets of funds.
F-70
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The table below presents the fair value of financial instruments carried at fair value within the statement of financial position:
| | | | | | |
| | | | December 31, | ||
|
| Level of inputs |
| 2021 |
| 2020 |
Assets |
|
|
|
|
|
|
Securities held by MTS Bank and Sistema Capital | | Level 1 | | 25,687 | | 21,824 |
Derivative instruments |
| Level 2 |
| 4,736 |
| 4,510 |
Cross-currency swaps not designated as hedges | | | | 4,627 | | 4,508 |
Currency forwards, swaps and options | | | | 110 | | 2 |
Mutual investment funds, managed by Sistema Capital (Note 15) | | Level 2 | | 10,719 | | 10,699 |
Assets in Sistema Capital trust management (Note 15) |
| Level 2 |
| 10,374 |
| 10,313 |
Embedded derivatives in a lease agreement | | Level 2 | | 434 | | 562 |
Contingent consideration | | Level 3 | | 1,867 | | 2,631 |
Investments in equity | | Level 3 | | 1,228 | | — |
Assets under option agreements | | Level 3 | | 112 | | 228 |
| | | | | | |
Liabilities |
|
|
| |
| |
Contingent consideration |
| Level 3 |
| (188) |
| (944) |
Liabilities under option agreements |
| Level 3 |
| — |
| (55) |
Net realized gains and losses of Level 3 assets and liabilities resulting from fair value measurements were included in net foreign exchange (gain) / loss and change in fair value of financial instruments and profit from discontinued operations in the consolidated statements of profit or loss in the following amounts:
| | | | | | |
| | For the years ended December 31, | ||||
|
| 2021 |
| 2020 |
| 2019 |
Net realized gains of Level 3 assets |
| 2,263 |
| 846 |
| 2,013 |
Net realized losses of Level 3 liabilities |
| (420) |
| (39) |
| (1,813) |
| | | | | | |
|
| 1,843 |
| 807 |
| 200 |
Net unrealized gains and losses of Level 3 assets and liabilities resulting from fair value measurements were included in net foreign exchange (gain) / loss and change in fair value of financial instruments in the consolidated statements of profit or loss in the following amounts:
| | | | | | |
| | For the years ended December 31, | ||||
|
| 2021 |
| 2020 |
| 2019 |
Net unrealized gains of Level 3 assets |
| 385 |
| — |
| — |
Net unrealized gains/(losses) of Level 3 liabilities |
| 391 |
| — |
| — |
| | | | | | |
|
| 776 |
| — |
| — |
F-71
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Financial instruments at amortised cost
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, 2021 | | December 31, 2020 | ||||
| | Level of | | | | Carrying | | | | Carrying |
|
| inputs |
| Fair value |
| value |
| Fair value |
| value |
Notes |
| Level 1 |
| (173,903) |
| (174,984) |
| (200,198) |
| (191,142) |
Unquoted notes | | Level 3 | | (17,012) | | (17,012) | | (17,012) | | (17,012) |
Bank and other loans (Note 24) |
| Level 3 |
| (267,405) |
| (270,143) |
| (221,113) |
| (221,113) |
|
|
|
| (458,320) |
| (462,139) |
| (438,323) |
| (429,267) |
The carrying value of the Group’s bank and other loans approximates their fair value as of December 31, 2021 and 2020.
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 0 transfers between levels of inputs within the hierarchy during the years ended December 31, 2021, 2020 and 2019.
There were 0 transfers between the accounting categories of financial instruments during the years ended December 31, 2021 and 2019.
During the year ended December 31, 2019 several of the Group’s swap agreements in the amount of RUB 678 million were transferred from accounting category “financial assets at fair value through other comprehensive income” to category “financial assets at fair value through profit or loss” as a result of termination of hedging relationships due to the early redemption of hedged loans.
29. FINANCIAL RISK MANAGEMENT
As part of its business the Group is exposed to several types of financial risks: capital risk (mainly by MTS Bank), 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 – the Board of Directors and its Budget Committee.
Capital risk
MTS Bank, a subsidiary of the Group, is subject to regulations of the Central Bank of Russia which require that banks comply with minimum capital adequacy ratios calculated on the basis of statutory standalone financial statements as follows:
MTS Bank meets the requirements established by the CBR. As of December 31, 2021 and 2020, the capital adequacy ratio of MTS Bank in accordance with CBR requirements were:
F-72
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to 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, accounts payable and accounts receivables denominated in foreign currencies and derivative financial instruments. The sensitivity analyses in the following sections relate to the financial position as of December 31, 2021 and 2020.
Interest rate risks
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to 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.
Fixed interest rate risk
A part of the Group’s notes denominated US Dollars bear fixed interest rates. To eliminate the exposure of changes in the value of debt obligations, the Group enters into fixed-to-variable cross-currency and interest rate swap agreements. In aggregate, the Group entered into fixed-to-variable cross-currency and interest rate swap agreements designated to manage the exposure of changes in value of the debt related to 8.3% and 7.4% of the Group’s notes and bank loans with fixed rates outstanding as of December 31, 2021 and 2020.
The notional amounts of interest rate derivative instruments outstanding amounted to RUB 22,288 million and RUB 22,163 million as of December 31, 2021 and 2020, respectively.
Sensitivity analysis
A reasonably possible increase of 100 basis points in short term interest rates would have resulted in RUB 1,523 million, RUB 1,166 million and RUB 271 million future increases of interest expense for the years ended December 31, 2021, 2020 and 2019, respectively. The same decrease in short term interest rates would have resulted in RUB 1,523 million, RUB 1,166 million and RUB 271 million future decreases of interest expenses for the years ended December 31, 2021, 2020 and 2019, respectively. There will be no material impact on equity.
The interest rate sensitivity analysis was performed based on a constant level of fixed and floating rate debt.
Foreign currency risks
Foreign currency risk is the risk that the fair value of financial instruments will fluctuate because of changes in foreign exchange rates. The Group’s exposure to these changes in foreign exchange rates relates primarily to the Group’s financing activities. The Group manages its currency risk by operation derivatives and by using money market instruments.
The Group has entered into several cross-currency swap agreements. These contracts are mainly 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-denominated amounts at a specified exchange rate. The exchange rate was determined by the market spot rate upon issuance. Cross-currency interest rate swap contracts mature in 2023-2024.
In aggregate the Group entered into cross-currency interest rate swap agreements designated to manage the exposure of changes in currency exchange rate for 66.8% and 66.7% of its USD-denominated notes and bank loans outstanding as of December 31, 2021 and 2020 respectively.
F-73
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The notional amounts of currency derivative instruments outstanding amounted to RUB 22,288 million and RUB 22,163 million as of December 31, 2021 and 2020 respectively.
The Group has entered into currency forward and swaps agreements to minimize the foreign currency risk. The contracts assumed the purchase or sale of the agreed amount of currency at a specified exchange rate and on a specific date. The rate was determined by the market spot rate upon issuance. As the result of currency forward and swap agreements, unfulfilled as of December 31, 2021, 2020 and 2019, the Group recognized RUB 83 million loss, RUB 1,136 million gain and RUB 701 million gain the consolidated statement of profit and loss for the years ended December 31, 2021, 2020 and 2019, respectively.
The notional amounts of currency forward and swap instruments, outstanding as of December 31, 2021 and 2020, amounted to RUB 9,993 million and RUB 7,911 million, respectively.
The following tables demonstrate the sensitivity of profit before tax to a reasonably possible change in USD and EUR exchange rates, with all other variables held constant.
| | | | | | | |
| | | | USD - effect on | | | EUR - effect on |
| | Change | | profit before tax | | Change | profit before tax |
|
| in rate, USD |
| RUB mln |
| in rate, EUR | RUB mln |
2021 | | +15% | | (856) | | +15% | (1,012) |
| | -15% | | 856 | | -15% | 1,012 |
2020 |
| +10% | | 786 | | +10% | (682) |
|
| -10% | | (1,291) | | -10% | 682 |
2019 |
| +5% | | 2,516 |
| +1% | 120 |
|
| -5% | | (2,516) |
| -1% | (120) |
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.
MTS Bank credit limits committee determines stop-loss limits related to security portfolio and to foreign exchange transactions, as well as limits for net foreign exchange position. The limits for net foreign exchange position conform fully to CBR requirements. Monitoring of adherence to the limits restricting the amount of MTS Bank’s market risk is performed day-to-day.
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 determined it to be of low level.
The Group manages liquidity risk on long-term borrowings by maintaining a varied maturity profile and a required net debt position, therefore minimizing the refinancing risk. Long-term borrowings mature between one and 5 years.
Securities held by MTS Bank which are accounted for at fair value through profit and loss and investments at amortized cost are included in liquidity analysis on the basis of remaining maturity. Most of these securities are included in the CBR Lombard list and if required may be used to obtain Repurchase Agreement (REPO) financing from the CBR. MTS Bank’s demand for medium-term liquidity is fully satisfied by the availability of interbank loans and customer deposits (obtaining new and prolongating existing deposits), secured loans and conclusion of REPO agreements. Analysis of the liquidity and interest rate risks of MTS Bank is presented in Note 0.
F-74
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
As at December 31, 2021, the Group’s consolidated current liabilities exceeded current assets by RUB 210,120 million. The 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 207,323 million (Note 24).
Credit risk
Credit risk is the risk that the counterparty will not meet its obligations arising from entering into financial instrument, leading to a financial loss.
In accordance with IFRS 9 the Group records an allowance for expected credit losses (ECL) for all financial assets not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due under the contract and all cash flows that the Group expects to receive. The shortfall is discounted at an approximation to the asset’s original effective interest rate.
The expected credit-loss approach uses three stages for allocating impairment losses:
Stage 1: expected credit losses within the next twelve months
Stage 1 includes all contracts with no significant increase in credit risk since initial recognition and usually contains new contracts that are fewer than 31 days past due date. The portion of the lifetime expected credit losses resulting from default events possible within the next 12 months is recognized.
Stage 2: expected lifetime credit losses – not credit impaired
If a financial asset has a significant increase in credit risk since initial recognition but is not yet credit impaired, it is moved to stage 2 and measured at lifetime expected credit loss. This is defined as the expected credit loss that results from all possible default events over the expected life of the financial instrument.
In all cases, the Group considers that there has been a significant increase in credit risk when the contractual payment is more than 30 days past due.
Stage 3: expected lifetime credit losses – credit impaired
If a financial asset is defined as credit impaired or in default, it is transferred to stage 3 and measured at lifetime expected credit loss. Objective evidence for a credit-impaired financial asset includes 91 days past due date as well as other information indicating significant financial difficulties of the borrower. The Group considers a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realizing security (if any is held).
The determination of whether a financial asset has experienced a significant increase in credit risk is based on an assessment of the probability of default, which is made at least quarterly, incorporating external credit rating information as well as internal information on the credit quality of the financial asset. For debt instruments that are not receivables from financial services, a significant increase in credit risk is assessed mainly based on past-due information.
For contract assets, trade and other receivables, a simplified approach is applied whereby ECL are initially measured over the lifetime of the instrument.
F-75
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The Group considers its exposure to credit risk as of December 31, 2021, and 2020 to be as follows:
| | | | |
| | December 31, | ||
|
| 2021 |
| 2020 |
Deposits and loans issued | | 208,018 | | 118,594 |
Cash and cash equivalents |
| 40,590 |
| 85,405 |
Trade and other receivables |
| 39,795 |
| 35,031 |
Securities held by MTS Bank |
| 24,737 |
| 21,824 |
Mutual funds | | 10,719 | | 10,699 |
Assets in Sistema Capital trust management | | 10,374 | | 10,313 |
Notes |
| 9,158 |
| 9,583 |
Derivative financial instruments | | 5,171 | | 5,072 |
Contingent consideration | | 1,867 | | 2,631 |
Investments in equity | | 1,228 | | 400 |
Assets under option agreements | | 112 | | 228 |
Other |
| 3,088 |
| 1,796 |
Information on the Group’s exposure to credit risk on guarantees issued and commitments on loans of MTS Bank is presented in Note 30.
In accordance with the provisions of the internal Group regulations on allocate of free funds, the aggregate credit risk exposure the Group may have to one counterparty is limited. The Group maintains a mixture of cash and cash equivalents, investments, derivatives and certain other financial instruments within various financial institutions. Those are approved as required by internal procedure related to selection of financial institutions to allocate funds. Credit rating assigned by international rating agencies is a main criteria to consider in the process of financial institutions selection.
MTS Bank performs daily monitoring of future expected cash flows on the operations of both clients and banks, which is a part of the management process of assets and liabilities. The credit risk exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the MTS Bank’s risk management policy are not breached.
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.
30.MTS BANK FINANCIAL ASSETS AND LIABILITIES
MTS Bank operations in Russia are susceptible to risks as disclosed in Note 34.
The Group conducts stress testing to determine its exposure to significant types of risk, as well as to assess the risks of the threat of the global COVID-19 pandemic.
In July 2021, Fitch Ratings changed the outlook on the MTS Bank's rating from “Stable” to “Positive”, following the upward revision of outlook for MTS PJSC. The agency also noted the strengthening of the MTS Bank's synergy with the parent telecommunications company.
F-76
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Bank deposits and loans to customers
The table below represents the structure and amounts of current and non-current bank deposits and loans to customers as of December 31, 2021 and 2020.
| | | | |
|
| December 31, | ||
| | 2021 | | 2020 |
Loans to customers |
| 223,566 | | 130,164 |
Due from banks |
| 3,514 | | 2,950 |
Allowance for ECL |
| (21,144) | | (16,446) |
| | | | |
Total bank deposits and loans to customers, net |
| 205,936 | | 116,668 |
| | | | |
Less: current portion |
| (87,594) | | (52,676) |
| | | | |
Bank deposits and loans to customers, non-current |
| 118,342 | | 63,992 |
The structure and amounts of bank loans to customers as of December 31, 2021 and 2020 is presented in the table below:
| | | | |
|
| December 31, | ||
| | 2021 |
| 2020 |
Loans to legal entities |
|
| |
|
Corporate borrowers |
| 28,409 | | 26,602 |
Medium-sized enterprises and small businesses |
| 1,706 | | 1,736 |
| | | | |
Total loans to legal entities |
| 30,115 | | 28,338 |
| | | | |
Loans to individuals |
|
| |
|
Mortgage loans |
| 16,553 | | 14,384 |
Consumer loans |
| 139,766 | | 65,142 |
Credit cards | | 36,933 | | 21,874 |
Other |
| 200 | | 426 |
| | | | |
Total loans to individuals |
| 193,452 | | 101,826 |
| | | | |
Due from banks | | | | |
Time deposits with banks | | 1,781 | | 1,770 |
Obligatory reserves with the Central Bank of Russia | | 1,733 | | 1,180 |
| | | | |
Total due from banks | | 3,514 | | 2,950 |
| | | | |
Total bank deposits and loans to customers |
| 227,080 | | 133,114 |
| | | | |
Less: allowance for expected credit losses |
| (21,144) | | (16,446) |
| | | | |
Total bank deposits and loans to customers, net |
| 205,936 | | 116,668 |
F-77
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The table below summarizes carrying value of loans to customers aggregated by types of collateral obtained by the Group:
| | | | |
| | December 31, | ||
|
| 2021 |
| 2020 |
Guaranties |
| 22,380 | | 17,200 |
Pledge of real estate |
| 19,115 | | 18,733 |
Securities | | 284 | | 370 |
Pledge of equipment | | 1 | | 100 |
Rights of claim, pledge of inventories or own promissory notes and by other collateral |
| — | | 156 |
Unsecured loans |
| 181,787 | | 93,605 |
Allowance for expected credit losses |
| (21,114) | | (16,436) |
Total loans to customers, net |
| 202,453 | | 113,728 |
The balances above do not necessarily reflect the fair value of collateral received.
Movements in the allowance for impairment losses attributable to bank deposits and loans to customers for the year ended December 31, 2021 and 2020 are presented in the table below:
| | | | | | |
|
| Loans to |
| Due from |
| |
| | customers | | banks | | Total |
Balance as at January 1, 2021 |
| 16,436 |
| 10 |
| 16,446 |
Provision charge/release |
| 11,046 |
| 20 |
| 11,066 |
Recovery of previously written-off assets |
| 1,557 |
| — |
| 1,557 |
Bad debt written-off |
| (3,361) |
| — |
| (3,361) |
Sale of loans | | (4,324) | | — | | (4,324) |
Other movements |
| (240) |
| — |
| (240) |
Balance as at December 31, 2021 |
| 21,114 |
| 30 |
| 21,144 |
| | | | | | |
| | Loans to |
| Due from |
| |
|
| customers |
| banks |
| Total |
Balance as at January 1, 2020 | | 10,024 | | 7 | | 10,031 |
| | | | | | |
Provision charge/release |
| 8,271 |
| 3 |
| 8,274 |
Recovery of previously written-off assets |
| 565 |
| — |
| 565 |
Bad debt written-off |
| (2,145) |
| — |
| (2,145) |
Sale of loans | | (279) | | — | | (279) |
| | | | | | |
Balance as at December 31, 2020 |
| 16,436 |
| 10 |
| 16,446 |
F-78
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Movements in provision for expected credit losses on loans to legal entities for the year ended December 31, 2021 and 2020 were as follows:
| | | | | | | | |
|
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| | | | | | | | |
Balance as at January 1, 2021 |
| 899 |
| 141 |
| 2,704 |
| 3,744 |
| | | | | | | | |
- Transfer to stage 1 |
| 119 |
| (119) |
| — |
| — |
- Transfer to stage 2 |
| (46) |
| 49 |
| (3) |
| — |
- Transfer to stage 3 |
| (105) |
| (26) |
| 131 |
| — |
New financial assets originated or purchased |
| 317 |
| — |
| — |
| 317 |
Change due to change of credit risk |
| (126) |
| (20) |
| (1,433) |
| (1,579) |
Write-offs |
| — |
| — |
| (79) |
| (79) |
Recovery of previously written-off assets |
| — |
| — |
| 975 |
| 975 |
Other movements |
| (240) |
| — |
| — |
| (240) |
| | | | | | | | |
Balance as at December 31, 2021 |
| 818 |
| 25 |
| 2,295 |
| 3,138 |
| | | | | | | | |
|
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
Balance as at January 1, 2020 |
| 681 |
| 77 |
| 3,199 |
| 3,957 |
- Transfer to stage 1 |
| 1 |
| (1) |
| — |
| — |
- Transfer to stage 2 |
| (66) |
| 66 |
| — |
| — |
- Transfer to stage 3 |
| (30) |
| (47) |
| 77 |
| — |
New financial assets originated or purchased |
| 418 |
| — |
| — |
| 418 |
Change due to change of credit risk |
| (105) |
| 46 |
| 38 |
| (21) |
Sale of loans | | — | | — | | (279) | | (279) |
Write-offs |
| — |
| — |
| (515) |
| (515) |
Recovery of previously written-off assets |
| — |
| — |
| 184 |
| 184 |
Foreign exchange difference |
| — |
| — |
| — |
| — |
Balance as at December 31, 2020 |
| 899 |
| 141 |
| 2,704 |
| 3,744 |
Movements in provision for expected credit losses attributable to loans to individuals for the year ended December 31, 2021 and 2020 were as follows:
| | | | | | | | |
|
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| | | | | | | | |
Balance as at January 1, 2021 |
| 3,099 |
| 1,446 |
| 8,147 |
| 12,692 |
| | | | | | | | |
- Transfer to stage 1 |
| 1,809 |
| (1,633) |
| (176) |
| — |
- Transfer to stage 2 |
| (939) |
| 1,220 |
| (281) |
| — |
- Transfer to stage 3 |
| (278) |
| (4,691) |
| 4,969 |
| — |
New financial assets originated or purchased |
| 3,821 |
| — |
| — |
| 3,821 |
Change due to change of credit risk |
| (1,419) |
| 7,019 |
| 2,887 |
| 8,487 |
Write-offs |
| — |
| — |
| (3,282) |
| (3,282) |
Sales | | — | | — | | (4,324) | | (4,324) |
Recovery of previously written-off assets |
| — |
| — |
| 582 |
| 582 |
| | | | | | | | |
Balance as at December 31, 2021 |
| 6,093 |
| 3,361 |
| 8,522 |
| 17,976 |
F-79
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
| | | | | | | | |
|
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
Balance as at January 1, 2020 |
| 1,808 |
| 923 |
| 3,336 |
| 6,067 |
- Transfer to stage 1 |
| 1,396 |
| (1,172) |
| (224) |
| — |
- Transfer to stage 2 |
| (415) |
| 594 |
| (179) |
| — |
- Transfer to stage 3 |
| (2) |
| (3,848) |
| 3,850 |
| — |
New financial assets originated or purchased |
| 1,226 |
| — |
| — |
| 1,226 |
Change due to change of credit risk |
| (914) |
| 4,949 |
| 2,613 |
| 6,648 |
Write-offs |
| — |
| — |
| (1,631) |
| (1,631) |
Recovery of previously written-off assets |
| — |
| — |
| 382 |
| 382 |
Balance as at December 31, 2020 |
| 3,099 |
| 1,446 |
| 8,147 |
| 12,692 |
The following valuation categories represent the Group’s classification of credit quality of the loans:
The table below summarizes information regarding the quality of loans to individuals:
| | | | | | | | |
As of December 31, 2021 |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
|
|
|
|
|
|
|
|
|
Low to fair risk |
| 174,667 |
| 756 |
| — |
| 175,423 |
Monitoring |
| — |
| 7,125 |
| 832 |
| 7,957 |
Impaired |
| — |
| — |
| 10,072 |
| 10,072 |
Loss allowance |
| (6,093) |
| (3,361) |
| (8,522) |
| (17,976) |
|
|
|
|
|
|
|
|
|
Total |
| 168,574 |
| 4,520 |
| 2,382 |
| 175,476 |
| | | | | | | | |
As of December 31, 2020 |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
Low to fair risk |
| 88,058 |
| — |
| — |
| 88,058 |
Monitoring |
| — |
| 3,816 |
| 306 |
| 4,122 |
Impaired |
| — |
| — |
| 9,646 |
| 9,646 |
Loss allowance |
| (3,099) |
| (1,446) |
| (8,147) |
| (12,692) |
| | | | | | | | |
Total |
| 84,959 |
| 2,370 |
| 1,805 |
| 89,134 |
The table below summarizes information regarding the quality of loans to legal entities:
| | | | | | | | |
As of December 31, 2021 |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
Low to fair risk |
| 20,575 |
| 721 |
| — |
| 21,296 |
Monitoring |
| 5,700 |
| 72 |
| — |
| 5,772 |
Doubtful | | — | | — | | 767 | | 767 |
Impaired |
| — |
| — |
| 2,280 |
| 2,280 |
Loss allowance |
| (818) |
| (25) |
| (2,295) |
| (3,138) |
| | | | | | | | |
Total |
| 25,457 |
| 768 |
| 752 |
| 26,977 |
F-80
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
| | | | | | | | |
As of December 31, 2020 |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
Low to fair risk |
| 12,136 |
| 2,947 |
| — |
| 15,083 |
Monitoring |
| 6,106 |
| 3,649 |
| — |
| 9,755 |
Doubtful | | — | | — | | 877 | | 877 |
Impaired |
| — |
| — |
| 2,623 |
| 2,623 |
Loss allowance |
| (899) |
| (141) |
| (2,704) |
| (3,744) |
|
|
|
|
|
|
|
|
|
Total |
| 17,343 |
| 6,455 |
| 796 |
| 24,594 |
Analysis by credit quality of loans to individuals outstanding as of December 31, 2021 is as follows:
| | | | | | | | | |
|
| |
| |
| |
| Provision for |
|
| | |
| Provision for | | |
| ECL to | |
As of December 31, 2021 | | Gross loans | | ECL | | Net loans |
| gross loans | |
Collectively assessed |
|
|
|
|
|
|
|
| |
Not past due |
| 175,422 |
| (6,297) |
| 169,125 |
| 4 | % |
Overdue: |
| |
| |
| |
|
| |
up to 30 days |
| 3,989 |
| (1,090) |
| 2,899 |
| 27 | % |
31 to 60 days |
| 2,007 |
| (1,240) |
| 767 |
| 62 | % |
61 to 90 days |
| 1,584 |
| (1,093) |
| 491 |
| 69 | % |
91 to 180 days |
| 3,248 |
| (2,499) |
| 749 |
| 77 | % |
over 180 days |
| 6,641 |
| (5,659) |
| 982 |
| 85 | % |
Total collectively assessed loans |
| 192,891 |
| (17,878) |
| 175,013 |
| 9 | % |
Individually impaired |
| |
| |
| |
|
| |
Not past due |
| 364 |
| (22) |
| 342 |
| 6 | % |
Overdue: |
| |
| |
| |
|
| |
up to 30 days |
| — |
| — |
| — |
| 0 | % |
31 to 60 days |
| 8 |
| — |
| 8 |
| 0 | % |
61 to 90 days |
| 3 |
| (1) |
| 2 |
| 33 | % |
91 to 180 days |
| 5 |
| (1) |
| 4 |
| 20 | % |
over 180 days |
| 181 |
| (74) |
| 107 |
| 41 | % |
Total individually impaired loans |
| 561 |
| (98) |
| 463 |
| 17 | % |
Total |
| 193,452 |
| (17,976) |
| 175,476 |
| 9 | % |
Analysis by credit quality of loans to medium-sized enterprises and small businesses outstanding as of December 31, 2021 is as follows:
| | | | | | | | | |
|
| |
| |
| |
| Provision for |
|
| | |
| Provision for | | |
| ECL to | |
As of December 31, 2021 | | Gross loans | | ECL | | Net loans |
| gross loans | |
Collectively assessed |
|
|
|
|
|
|
|
| |
Not past due |
| 1,079 |
| (22) |
| 1,057 |
| 2 | % |
Overdue: |
| |
| — |
| |
|
| |
up to 30 days |
| 19 |
| (8) |
| 11 |
| 42 | % |
31 to 60 days |
| 15 |
| (14) |
| 1 |
| 93 | % |
61 to 90 days |
| 11 |
| (10) |
| 1 |
| 91 | % |
91 to 180 days |
| 14 |
| (11) |
| 3 |
| 79 | % |
over 180 days |
| 568 |
| (374) |
| 194 |
| 66 | % |
Total collectively assessed loans |
| 1,706 |
| (439) |
| 1,267 |
| 26 | % |
F-81
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Analysis by credit quality of loans to individuals outstanding as of December 31, 2020 is as follows:
| | | | | | | | | |
|
| |
| |
| |
| Provision for |
|
| | | | Provision for | | | | ECL to gross |
|
As of December 31, 2020 | | Gross loans | | ECL | | Net loans | | loans |
|
Collectively assessed |
|
|
|
|
|
|
|
| |
Not past due |
| 88,056 |
| (3,101) |
| 84,955 |
| 4 | % |
Overdue: |
|
|
|
|
|
|
|
| |
up to 30 days |
| 2,370 |
| (507) |
| 1,863 |
| 21 | % |
31 to 60 days |
| 841 |
| (506) |
| 335 |
| 60 | % |
61 to 90 days |
| 605 |
| (432) |
| 173 |
| 71 | % |
91 to 180 days |
| 1,739 |
| (1,373) |
| 366 |
| 79 | % |
over 180 days |
| 7,523 |
| (6,431) |
| 1,092 |
| 85 | % |
| | | | | | | | | |
Total collectively assessed loans |
| 101,134 |
| (12,350) |
| 88,784 |
| 12 | % |
| | | | | | | | | |
Individually impaired |
|
|
|
|
|
|
|
| |
Not past due |
| 256 |
| (90) |
| 166 |
| 35 | % |
Overdue: |
|
|
|
|
|
|
|
| |
up to 30 days |
| 46 |
| (12) |
| 34 |
| 0 | % |
31 to 60 days |
| 7 |
| — |
| 7 |
| 0 | % |
61 to 90 days |
| — |
| — |
| — |
| — | |
91 to 180 days |
| 6 |
| — |
| 6 |
| 0 | % |
over 180 days |
| 377 |
| (240) |
| 137 |
| 64 | % |
| | | | | | | | | |
Total individually impaired loans |
| 692 |
| (342) |
| 350 |
| 49 | % |
| | | | | | | | | |
Total |
| 101,826 |
| (12,692) |
| 89,134 |
| 12 | % |
Analysis by credit quality of loans to medium-sized enterprises and small businesses outstanding as of December 31, 2020 is as follows:
| | | | | | | | | |
|
| |
| |
| |
| Provision for |
|
| | | | Provision for | | | | ECL to gross |
|
As of December 31, 2020 | | Gross loans | | ECL | | Net loans | | loans |
|
Collectively assessed |
|
|
|
|
|
|
|
| |
Not past due |
| 1,025 |
| (16) |
| 1,009 |
| 2 | % |
Overdue: |
|
|
|
|
|
|
|
| |
up to 30 days |
| 29 |
| (6) |
| 23 |
| 21 | % |
31 to 60 days |
| 8 |
| (3) |
| 5 |
| 37 | % |
61 to 90 days |
| 8 |
| (5) |
| 3 |
| 64 | % |
91 to 180 days |
| 22 |
| (12) |
| 10 |
| 54 | % |
over 180 days |
| 644 |
| (407) |
| 237 |
| 63 | % |
| | | | | | | | | |
Total collectively assessed loans |
| 1,736 |
| (449) |
| 1,287 |
| 26 | % |
F-82
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Bank deposits and liabilities
The table below represents the structure and amounts of current and non-current bank deposits and liabilities as of December 31, 2021 and 2020.
| | | | |
|
| December 31, | ||
| | 2021 | | 2020 |
Customer accounts |
| 192,177 | | 139,438 |
Due to banks and other financial institutions |
| 21,430 | | 24,644 |
Debt securities issued |
| 5,581 | | 1,840 |
Financial liabilities at fair value through profit or loss |
| — | | 2 |
Other financial liabilities |
| 2,181 | | 1,753 |
Total bank deposits and liabilities |
| 221,369 | | 167,677 |
Less: current portion |
| (207,056) | | (165,794) |
Total bank deposits and liabilities, non-current |
| 14,313 | | 1,883 |
The structure and amounts of customer accounts of December 31, 2021 and 2020 are presented below:
| | | | |
|
| December 31, | ||
| | 2021 | | 2020 |
Legal entities |
|
| |
|
- Current/settlement accounts |
| 13,311 | | 13,163 |
- Term deposits |
| 63,003 | | 19,466 |
|
|
| |
|
Individuals |
|
| |
|
- Current/settlement accounts |
| 20,654 | | 18,219 |
- Term deposits |
| 95,209 | | 88,590 |
|
|
| |
|
Total customer accounts |
| 192,177 | | 139,438 |
The structure and amounts of due to banks as of December 31, 2021 and 2020 are presented below:
| | | | |
|
| December 31, | ||
| | 2021 | | 2020 |
Loans under repurchase agreements |
| 9,333 | | 20,540 |
Loans and term deposits from banks and other financial institutions |
| 9,474 | | 2,732 |
Correspondent accounts of other banks |
| 2,623 | | 1,372 |
Total due to banks |
| 21,430 | | 24,644 |
Loans under repurchase agreements were secured by the following collateral:
● | Securities measured at fair value through profit/loss with the value of RUB 1,946 million and RUB 9,678 million as of December 31, 2021 and 2020 respectively; |
● | Securities measured at amortized cost with the value of RUB 8,624 million and RUB 1,557 million as of December 31, 2021 and 2020 respectively; |
● | Federal Loan Bonds (OFZ) received from Deposit Insurance Agency (DIA) as a subordinated securities loan in the amount of RUB 0 million and RUB 6,374 million as of December 31, 2021 and 2020 respectively. |
F-83
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
In November 2015, MTS Bank received a subordinated debt of RUB 7,246 million in the form of OFZ from the state corporation DIA with the date of maturity January 22, 2025. In accordance with the terms of the contract, MTS Bank should return the securities to the creditor at the end of the contract period. The Group does not recognize the securities and the obligation to return them to the creditor in the consolidated statement of financial position as of December 31, 2021 and 2020. In accordance with the contract, MTS Bank should comply with certain covenants with respect to capital, loan portfolio, employee benefits. If the above conditions are not met, DIA may apply penalties to MTS Bank. The contract also includes certain restrictions on sale or repledge of the securities by MTS Bank.
An analysis of liquidity and interest rate risk inherent to bank assets as of December 31, 2021 and 2020 is presented in the following table.
The following tables, based on the information provided to the management of the Group, reflect the structure of assets and liabilities in accordance with the contractual maturity, with the exception of trading securities at fair value through profit or loss (classified as up to 1 month) and cash placed in the Central Bank of the Russian Federation as obligatory reserve deposits (FOR). Obligatory reserve deposits are allocated by age pro rate to customer accounts.
In the liquidity analysis, the deposits of individuals are disclosed by maturities in accordance with the agreement. According to Russian legislation these deposits can be withdrawn upon a request within 1 month. However, on the basis of the analysis of the Group’s history and experience, such deposits are extended rather than withdrawn.
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Up to | | 1 month to | | 3 months to | | 1 year to | | Over | | Maturity | | |
As of December 31, 2021 |
| 1 month |
| 3 months |
| 1 year |
| 5 years |
| 5 years |
| undefined |
| Total |
| | | | | | | | | | | | | | |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
Financial assets at fair value through profit or loss |
| 24,769 |
| — |
| — |
| — |
| — |
| 1 |
| 24,770 |
Due from banks |
| 1,781 |
| — |
| — |
| — |
| — |
| — |
| 1,781 |
Loans to customers |
| 9,985 |
| 18,848 |
| 50,342 |
| 109,949 |
| 11,346 |
| 1,983 |
| 202,453 |
Investments in securities |
| 9 |
| 514 |
| 5,555 |
| 2,808 |
| — |
| — |
| 8,886 |
| | | | | | | | | | | | | | |
Total interest bearing financial assets |
| 36,544 |
| 19,362 |
| 55,897 |
| 112,757 |
| 11,346 |
| 1,984 |
| 237,890 |
| | | | | | | | | | | | | | |
Cash and cash equivalents |
| 15,974 |
| — |
| — |
| — |
| — |
| — |
| 15,974 |
Due from banks | | — | | — | | — | | — | | — | | 1,733 | | 1,733 |
Other financial assets | | 2,272 | | 6 | | 15 | | — | | — | | 31 | | 2,324 |
| | | | | | | | | | | | | | |
Total non-interest bearing financial assets |
| 18,246 |
| 6 |
| 15 |
| — |
| — |
| 1,764 |
| 20,031 |
| | | | | | | | | | | | | | |
Total financial assets |
| 54,790 |
| 19,368 |
| 55,912 |
| 112,757 |
| 11,346 |
| 3,747 |
| 257,920 |
F-84
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
| | | | | | | | | | | | | | |
|
| |
| |
| |
| |
| | | |
| |
| | Up to | | 1 month to | | 3 months to | | 1 year to | | Over 5 | | Maturity | | |
| | 1 month | | 3 months | | 1 year | | 5 years | | years |
| undefined |
| Total |
Financial liabilities | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Due to banks and other financial institutions |
| (18,788) |
| — |
| — |
| (19) |
| — | | — |
| (18,807) |
Customer accounts |
| (35,294) |
| (13,801) | | (95,472) | | (9,114) |
| — | | — |
| (153,681) |
Debt securities issued |
| (32) |
| — | | (350) | | (5,199) |
| — | | — |
| (5,581) |
Lease obligations |
| (17) |
| (44) | | (200) | | (471) |
| — | | — |
| (732) |
| | | | | | | | | | | | | | |
Total interest bearing financial liabilities |
| (54,131) |
| (13,845) | | (96,022) | | (14,803) |
| — | | — |
| (178,801) |
| | | | | | | | | | | | | | |
Due to banks and other financial institutions |
| (2,623) |
| — |
| — |
| — |
| — | | — |
| (2,623) |
Customer accounts | | (38,496) | | — | | — | | — | | — | | — | | (38,496) |
Other financial liabilities |
| (2,857) |
| (1,147) |
| (2,262) |
| — |
| — | | — |
| (6,266) |
| | | | | | | | | | | | | | |
Total non-interest bearing financial liabilities |
| (43,976) |
| (1,147) |
| (2,262) |
| — |
| — | | — |
| (47,385) |
| | | | | | | | | | | | | | |
Total financial liabilities | | (98,107) | | (14,992) | | (98,284) | | (14,803) | | — | | — | | (226,186) |
| | | | | | | | | | | | | | |
Liquidity gap | | (43,317) | | 4,376 | | (42,372) | | 97,954 | | 11,346 | | | | |
| | | | | | | | | | | | | | |
Stable sources of funding | | 43,901 | | (2,392) | | 43,814 | | (3,519) | | (81,804) | | | | |
| | | | | | | | | | | | | | |
Net liquidity gap | | 584 | | 1,984 | | 1,442 | | 94,435 | | (70,458) | | | | |
| | | | | | | | | | | | | | |
Cumulative liquidity gap | | 584 | | 2,568 | | 4,010 | | 98,445 | | 27,987 | | | | |
| | | | | | | | | | | | | | |
| | Up to | | 1 month to | | 3 months to | | 1 year to | | Over | | Maturity | |
|
As of December 31, 2020 |
| 1 month |
| 3 months |
| 1 year |
| 5 years |
| 5 years |
| undefined |
| Total |
| | | | | | | | | | | | | | |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
Financial assets at fair value through profit or loss |
| 21,823 |
| — |
| — |
| — |
| — |
| 1 |
| 21,824 |
Due from banks |
| 16,915 |
| — |
| — |
| — |
| — |
| — |
| 16,915 |
Loans to customers |
| 4,547 |
| 8,134 |
| 34,523 |
| 55,438 |
| 8,971 |
| 1,971 |
| 113,584 |
Investments in securities |
| 15 |
| 166 |
| 643 |
| 8,760 |
| — |
| — |
| 9,584 |
| | | | | | | | | | | | | | |
Total interest bearing financial assets |
| 43,300 |
| 8,300 |
| 35,166 |
| 64,198 |
| 8,971 |
| 1,972 |
| 161,907 |
| | | | | | | | | | | | | | |
Cash and cash equivalents |
| 22,274 |
| — |
| — |
| — |
| — |
| — |
| 22,274 |
Due from banks | | 1,180 | | — | | — | | — | | — | | — | | 1,180 |
Currency forwards and options not designated as hedges | | 1 | | 1 | | — | | — | | — | | — | | 2 |
Other financial assets | | 876 | | 125 | | 35 | | — | | — | | 47 | | 1,083 |
| | | | | | | | | | | | | | |
Total non-interest bearing financial assets |
| 24,331 |
| 126 |
| 35 |
| — |
| — |
| 47 |
| 24,539 |
| | | | | | | | | | | | | | |
Total financial assets |
| 67,631 |
| 8,426 |
| 35,201 |
| 64,198 |
| 8,971 |
| 2,019 |
| 186,446 |
F-85
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
| | | | | | | | | | | | |
|
| Up to 1 |
| 1 month to |
| 3 months to |
| 1 year to |
| Over |
| |
| | month | | 3 months | | 1 year | | 5 years | | 5 years | | Total |
Financial liabilities | | | | | | | | | | | | |
| | | | | | | | | | | | |
Due to banks and other financial institutions |
| (22,962) | | — | | (127) | | — |
| — |
| (23,089) |
Customer accounts |
| (19,046) | | (15,049) | | (69,677) | | (1,423) |
| — |
| (105,195) |
Debt securities issued |
| (1,204) | | — | | (341) | | (295) |
| — |
| (1,840) |
Lease obligations |
| (11) | | (39) | | (164) | | (320) |
| — |
| (534) |
| | | | | | | | | | | | |
Total interest bearing financial liabilities |
| (43,223) |
| (15,088) |
| (70,309) |
| (2,038) |
| — |
| (130,658) |
| | | | | | | | | | | | |
Currency forwards and options not designated as hedges |
| (1) | | (1) | | — | | — | | — |
| (2) |
Due to banks and other financial institutions |
| (1,372) | | — | | — | | — | | — |
| (1,372) |
Customer accounts |
| (33,908) | | — | | — | | — | | — |
| (33,908) |
Other financial liabilities |
| (1,837) | | (492) | | (1,472) | | — | | — |
| (3,801) |
| | | | | | | | | | | | |
Total non-interest bearing financial liabilities |
| (37,118) | | (493) | | (1,472) | | — | | — |
| (39,083) |
| | | | | | | | | | | | |
Total financial liabilities |
| (80,341) | | (15,581) | | (71,781) | | (2,038) | | — |
| (169,741) |
| | | | | | | | | | | | |
Liquidity gap |
| (12,710) | | (7,155) | | (36,580) | | 62,160 | | 8,971 |
|
|
| | | | | | | | | | | | |
Stable sources of funding |
| 41,502 | | 2,342 | | 30,933 | | (15,732) | | (59,045) |
|
|
| | | | | | | | | | | | |
Net liquidity gap |
| 28,792 | | (4,813) | | (5,647) | | 46,428 | | (50,074) |
|
|
| | | | | | | | | | | | |
Cumulative liquidity gap |
| 28,792 | | 23,979 | | 18,332 | | 64,760 | | 14,686 |
|
|
Analysis of the liquidity and interest rate risks as of December 31, 2021 and 2020 is presented in the following table. The amounts in the table below represent future aggregate undiscounted cash flows.
| | | | | | | | | ��� | | | | | | | |
| | Weighted | | | | | | | | | | | | | | |
|
| average |
| Up to |
| 1 month to |
| 3 months to |
| 1 year to |
| Over |
| Maturity |
| |
As of December 31, 2021 | | interest rate | | 1 month | | 3 months | | 1 year | | 5 years | | 5 years | | undefined | | Total |
| | | | | | | | | | | | | | | | |
Interest bearing financial liabilities | | | | | | | | | | | | | | | | |
Due to banks | | 8.4 | % | (18,788) | | — | | (19) | | — | | — | | — | | (18,807) |
Customer accounts | | 6.3 | % | (35,402) | | (13,964) | | (98,665) | | (10,164) | | — | | — | | (158,195) |
Debt securities issued | | 7.3 | % | (33) | | — | | (695) | | (5,389) | | — | | — | | (6,117) |
Lease obligations | | 5.2 | % | (11) | | (45) | | (200) | | (471) | | (1) | | — | | (728) |
| |
| | | | | | | | | | | | | | |
Total interest bearing financial liabilities | |
| | (54,234) | | (14,009) | | (99,579) | | (16,024) | | (1) | | — | | (183,847) |
| |
| | | | | | | | | | | | | | |
Non-interest bearing financial liabilities | |
| | | | | | | | | | | | | | |
Due to banks | |
| | (2,623) | | — | | — | | — | | — | | — | | (2,623) |
Customer accounts | |
| | (38,496) | | — | | — | | — | | — | | — | | (38,496) |
Other financial liabilities | |
| | (2,857) | | (1,147) | | (2,262) | | — | | — | | — | | (6,266) |
Total non-interest bearing financial liabilities and commitments | |
| | (43,976) | | (1,147) | | (2,262) | | — | | — | | — | | (47,385) |
| |
| | | | | | | | | | | | | | |
Total financial liabilities | |
| | (98,210) | | (15,156) | | (101,841) | | (16,024) | | (1) | | — | | (231,232) |
F-86
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
| | | | | | | | | | | | | | | | |
| | Weighted | | | | | | | | | | | | | | |
|
| average | | Up to | | 1 month to | | 3 months to | | 1 year to | | Over | | Maturity | | |
As of December 31, 2020 | | interest rate |
| 1 month |
| 3 months |
| 1 year | �� | 5 years |
| 5 years |
| undefined |
| Total |
| | | | | | | | | | | | | | | | |
Interest bearing financial liabilities | | | | | | | | | | | | | | | | |
Due to banks |
| 4.4 | % | (22,962) | | — | | (127) | | — | | — | | — | | (23,089) |
Customer accounts |
| 5.9 | % | (19,265) | | (15,292) | | (71,248) | | (1,458) | | — | | — | | (107,263) |
Debt securities issued |
| 4.0 | % | (1,204) | | — | | (348) | | (321) | | — | | — | | (1,873) |
Lease obligations | | 6.1 | % | (10) | | (40) | | (165) | | (319) | | — | | — | | (534) |
| | | | | | | | | | | | | | | | |
Total interest bearing financial liabilities |
| | | (43,441) | | (15,332) | | (71,888) | | (2,098) | | — | | — | | (132,759) |
| | | | | | | | | | | | | | | | |
Non-interest bearing financial liabilities |
| | | — | | — | | — | | — | | — | | — | | — |
Financial liabilities at fair value through profit or loss | | | | — | | — | | — | | — | | — | | — | | — |
Due to banks |
| | | (1,372) | | — | | — | | — | | — | | — | | (1,372) |
Customer accounts | | | | (33,908) | | — | | — | | — | | — | | — | | (33,908) |
Other financial liabilities | | | | (1,837) | | (492) | | (1,472) | | — | | — | | — | | (3,801) |
Total non-interest bearing financial liabilities and commitments | | | | (37,117) | | (492) | | (1,472) | | — | | — | | — | | (39,081) |
| | | | | | | | | | | | | | | | |
Total financial liabilities |
| | | (80,558) | | (15,824) | | (73,360) | | (2,098) | | — | | — | | (171,840) |
The Group has contingent liabilities (future period obligations) represented by bank guarantees in amount of RUB 21.9 million as at December 31, 2021 (RUB 9.8 million as at December 31, 2020).
Information on the maximum amount of credit risk on guarantees issued and commitments on loans is presented below:
| | | | | | | | |
As of December 31, 2021 |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| | | | | | | | |
Commitments on loans |
| 36,759 |
| 745 |
| 33 |
| 37,537 |
Guarantees issued |
| 13,798 |
| 2,257 |
| 100 |
| 16,155 |
| | | | | | | | |
Less provision |
| (687) |
| (15) |
| (50) |
| (752) |
| | | | | | | | |
Total commitments on loans and guarantees issued |
| 49,870 |
| 2,987 |
| 83 |
| 52,940 |
| | | | | | | | |
As of December 31, 2020 |
| Stage 1 |
| Stage 2 |
| Stage 3 |
| Total |
| | | | | | | | |
Commitments on loans |
| 21,410 |
| 1,729 |
| 56 |
| 23,195 |
Guarantees issued |
| 21,426 |
| 2,084 |
| 247 |
| 23,757 |
| | | | | | | | |
Less provision |
| (340) |
| (33) |
| (213) |
| (586) |
| | | | | | | | |
Total commitments on loans and guarantees issued |
| 42,496 |
| 3,780 |
| 90 |
| 46,366 |
31. RELATED PARTIES
Related parties include the controlling shareholder of the Group, entities under common ownership with the Group, affiliated companies, associates and joint ventures.
F-87
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Terms and conditions of transactions with related parties – Outstanding balances as of December 31, 2021 and 2020, were unsecured and settlements are made on a cash basis. There have been no guarantees provided or received for any related party receivables or payables. As of December 31, 2021, the Group had 0 significant amounts of impairment relating to receivables owed by related parties as well as expenses recognized during the twelve months ended December 31, 2021, 2020 and 2019 with respect to bad or doubtful debts from related parties.
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.
F-88
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Balances of related parties’ transactions were as follows:
| | | | |
|
| December 31, | ||
|
| 2021 |
| 2020 |
ASSETS FROM RELATED PARTIES |
| | | |
|
| | | |
NON-CURRENT ASSETS: |
| | | |
|
| | | |
Property, plant and equipment | |
|
|
|
Sistema's subsidiaries | | 1,347 |
| 1,096 |
Other related parties | | 34 |
| 13 |
Right-of-use assets, Gross Book Value | | |
|
|
Sistema's subsidiaries | | 4,432 |
| 4,845 |
Other related parties | | 111 |
| 112 |
Right-of-use assets, Accumulated Depreciation |
| | | |
Sistema's subsidiaries | | (1,586) | | (1,580) |
Other related parties |
| (46) | | (17) |
Other investments | |
|
|
|
The Group’s associates | | 625 |
| 159 |
Sistema's subsidiaries | | 117 |
| 370 |
Other related parties | | 2 | | — |
Accounts receivable, related parties | |
|
|
|
Sistema's subsidiaries | | 5,000 |
| 5,209 |
Bank deposits and loans to customers | | |
|
|
Sistema's associates | | 2,587 |
| 1,376 |
Sistema's subsidiaries | | 1,179 |
| 1,480 |
Total non-current assets |
| 13,802 | | 13,063 |
|
| | | |
CURRENT ASSETS: |
| | | |
Accounts receivable, related parties | |
|
|
|
Sistema's subsidiaries | | 1,255 |
| 4,571 |
The Group’s associates | | 911 |
| 1,397 |
Sistema, parent company | | - |
| 2,829 |
Other related parties | | 121 |
| 183 |
Bank deposits and loans to customers | |
|
|
|
Sistema's associates | | 2,078 |
| 2,819 |
Sistema's subsidiaries | | 820 |
| 3 |
Key management personnel of the Group and its parent | | 87 |
| 48 |
Short-term investments | | |
|
|
Sistema's subsidiaries | | 2,377 |
| 3 |
Sistema, parent company | | 1,443 | | — |
Cash and cash equivalents | | | | |
Sistema's subsidiaries |
| 1,311 | | 321 |
Other financial assets |
| | | |
Sistema, parent company |
| 1,829 | | 1,831 |
Sistema's subsidiaries |
| 300 | | 461 |
Other related parties |
| 109 | | — |
Other assets |
| | | |
Sistema's subsidiaries | | 1,059 | | 1,518 |
Other related parties |
| 83 | | 8 |
Total current assets |
| 13,783 | | 15,992 |
TOTAL ASSETS FROM RELATED PARTIES |
| 27,585 | | 29,055 |
| | | | |
LIABILITIES TO RELATED PARTIES | | | | |
NON-CURRENT LIABILITIES: | | | | |
Lease obligations | | | | |
Sistema's subsidiaries | | 3,968 | | 4,801 |
Other related parties | | 70 | | 77 |
Bank deposits and liabilities | | | | |
Key management personnel of the Group and its parent | | 1,433 | | 124 |
| | | | |
Total non-current liabilities | | 5,471 | | 5,002 |
| | | | |
CURRENT LIABILITIES: | | | | |
Accounts payable, related parties | | | | |
Sistema's subsidiaries | | 2,756 | | 1,631 |
The Group’s associates | | 711 |
| 553 |
Sistema's associates | | 632 |
| 958 |
Other related parties | | 8 |
| 4 |
Borrowings | | |
| |
The Group’s associates | | 2,129 | | 1,776 |
Other related parties | | 11 | | 16 |
Lease obligations | | |
| |
Sistema's subsidiaries | | 551 | | 724 |
Other related parties | | 13 |
| 14 |
Bank deposits and liabilities | | |
| |
Key management personnel of the Group and its parent | | 32,886 | | 34,708 |
Sistema's subsidiaries | | 22,312 |
| 10,752 |
Sistema's associates | | 9,163 |
| 2,689 |
Sistema, parent company | | 2,042 |
| 3,218 |
Other related parties | | 376 |
| 881 |
Total current liabilities | | 73,590 |
| 57,924 |
TOTAL LIABILITIES TO RELATED PARTIES | | 79,061 |
| 62,926 |
F-89
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Operating transactions – During the twelve months ended December 31, 2021, 2020 and 2019 the Group provided the following services to related parties – electricity supply by MTS Energo, software supplies, Internet and video/image transmission services, roaming, interconnect and other telecommunication services, banking and call center services.
At the same time the Group incurred security expenses, roaming and interconnect expenses, transfer of line-cable structures, dismantling equipment expenses, rent expenses and other expenses, and recognized income from scrap metal sales and other operations.
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Revenue |
|
|
|
|
|
|
Sistema's subsidiaries | | 4,294 | | 4,371 | | 3,740 |
Sistema's associates | | 752 | | 615 | | 407 |
The Group's associates | | 622 | | 418 | | 550 |
Other related parties |
| 691 |
| 428 |
| 235 |
| | | | | | |
Total Revenue |
| 6,359 |
| 5,832 |
| 4,932 |
| | | | | | |
Cost of services | | | | | | |
Sistema's subsidiaries | | 2,143 | | 599 | | 507 |
Key management personnel of the Group and its parent | | 1,476 | | 1,830 | | 1,973 |
Sistema's associates | | 281 | | 127 | | 139 |
Sistema, parent company | | 233 | | 141 | | 377 |
Other related parties | | 173 | | 145 | | 241 |
| | | | | | |
Selling, general and administrative expenses | | | | | | |
Key management personnel of the Group and its parent | | 4,256 | | 2,003 | | 2,372 |
Sistema's subsidiaries | | 728 | | 625 | | 672 |
Other related parties | | 84 | | 66 | | 144 |
| | | | | | |
Other operating income / (expense) |
| |
| |
|
|
Sistema's subsidiaries | | 2,831 | | 2,160 | | 5,203 |
Other related parties | | 59 | | (13) | | (13) |
| | | | | | |
Operating profit / (loss) |
| (125) |
| 2,443 |
| 3,697 |
| | | | | | |
Finance income / (loss) | | | | | | |
Sistema's subsidiaries | | 935 | | 1,492 | | 1,259 |
The Group's associates | | (101) | | (63) | | 475 |
Sistema, parent company | | 79 | | 295 | | 367 |
Other related parties | | (6) | | 7 | | 8 |
| | | | | | |
Other non-operating income / (expense) | | | | | | |
The Group's associates | | — | | (278) | | — |
Other related parties | | 41 | | — | | — |
| | | | | | |
Profit before tax | | 823 | | 3,896 | | 5,806 |
F-90
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
During the years ended December 31, 2021, 2020 and 2019, the Group acquired property, plant and equipment and intangible assets from the related parties in the amount of:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
| | | | | | |
Sistema's associates | | 2,530 | | 6,299 | | 410 |
Sistema's subsidiaries | | 10,330 | | 3,324 | | 656 |
The Group's associates | | 122 | | 127 | | 178 |
Other related parties |
| — |
| 112 | | — |
Total purchases of property, plant and equipment, intangible assets and other assets, related parties |
| 12,982 |
| 9,862 |
| 1,244 |
Lease payments – During the years ended December 31, 2021, 2020 and 2019, the Group made lease payments (capitalized in accordance with IFRS 16) in the amount of RUB 1,361 million, RUB 1,530 million and RUB 1,240 million, respectively, to the related parties.
Business Nedvizhimost
In February 2015 and further in May 2015, the Group sold its 100% stake in Rent Nedvizhimost to Business Nedvizhimost for RUB 8,500 million, repaid mainly in 2015-2018. The remaining part of receivable was restructured in 2018 implying Central Bank key rate + 1.5% and maturing in December 31, 2021. As of December 31, 2021 receivables in amount of RUB 3,372 was fully repaid.
In March 2019, in order to optimize the processes of real estate management, the Group sold a number of buildings with carrying value of RUB 1,479 million to Business Nedvizhimost for the consideration of RUB 7,247 million (including VAT). The consideration is payable by installments for 10 years at 9% per annum with the collateral in the form of disposed buildings granted by the buyer. At the same time, the Group entered into a number of agreements to lease spaces in the buildings sold for the period of up to 15 years (leaseback).
As a result of this transaction, the Group recorded right-of-use assets of RUB 3,123 million, lease obligation of RUB 5,197 million and recognized a gain in the amount of RUB 1,745 million as a part of “Other income” in consolidated statement of profit or loss in 2019.
In December 2021, the Group purchased 5-year 10.8% coupon notes of Business-Nedvizhimost, in the amount of RUB 2,100 million. The notes were accounted as financial assets at fair value through profit and loss and disclosed within subtotal “Assets in Sistema Capital trust management” (Note 28). As of December 31, 2021, the investment amounted to RUB 2,105 million.
Sistema
In March 2019, the Group disposed of its 18.69% interest in the Group’s associate OZON to Sistema for RUB 7,902 million (Note 16). As of December 31, 2021 Sistema has fully repaid its obligations. As of December 31, 2020 the balance of accounts receivable amounted to RUB 2,829 million.
Nvision Group
In October 2020, the Group disposed of 100% in Nvision Group to Sistema and since then it is considered to be a related party instead of subsidiary of the Group (Note 11). The Group continues to purchase software, services and other intangible assets from Nvision Group.
The amounts software, services and other intangible assets purchased during the years ended December 31, 2021 and 2020, were RUB 7,181 million and RUB 2,261 million, respectively.
F-91
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Remuneration of key management personnel – Key management personnel of the Group are members of the Board of Directors and Management Board. During the years ended December 31, 2021, 2020 and 2019, their total remuneration amounted to RUB 1,885 million, RUB 1,309 million and RUB 1,574 million, respectively, including social contributions of RUB 374 million, RUB 214 million and RUB 219 million, respectively. These amounts comprised of RUB 719 million, RUB 690 million and RUB 917 million in base salaries and 1,166 RUB million, RUB 619 million and RUB 657 million in bonuses paid pursuant to a bonus plan, respectively (including social contributions).
The management and directors are also entitled to cash-settled and equity-settled share-based payments. Related compensation accrued during the years ended December 31, 2021, 2020 and 2019, amounted to RUB 2,929 million, RUB 694 million and RUB 798 million, respectively, including social contributions amounted to RUB 338 million, RUB 79 million and RUB 53 million, respectively. For more details see Note 32.
32. STOCK-BASED COMPENSATIONS
The Group has a number of share plans used to award shares to directors, executive officers and employees as part of their remuneration package. The Group share plans include both equity-settled and cash-settled compensations.
Equity-settled share based awards are measured at fair value (excluding the effect on non-market-based conditions) at the date of grant. The fair value determined at the grant date of equity-settled share-based award is based on the Group’s estimate of the shares that will eventually vest and adjusted for the effect of non-market based conditions. A corresponding increase in additional paid-in capital is also recognized.
For cash-settled based awards the fair value is newly determined at each reporting date and at the settlement date, the changes in the fair value are recognized in profit or loss, until the liability under the share plan is settled.
The share awards have a maximum term of 3 years.
The share awards granted in 2021 have an attached market condition based of Group’s market capitalization, which is taken into account when calculating the fair value of the share awards. The share awards granted before 2021 had only performance condition related to certain financial target (Free Cash Flow), which were treated as non-market vesting conditions.
The fair value of share awards is based on the observed market price of the Group’s shares (ordinary or ADR), adjusted for expected dividends reduced to the current value using a risk-free interest rate.
The equity-settled share based awards displayed the following development in the financial years 2021 and 2020:
| | | | | | | | | | |
| | Twelve month ended December 31, | ||||||||
|
| 2021 | | 2020 | ||||||
| | | | | Weighted- | | | | | Weighted- |
| | | | | average fair | | | | | average fair |
| | Shares | | | value per share | | Shares | | | value per share |
| | (in thousands) | | | (in RUB) | | (in thousands) | | | (in RUB) |
| | | | | | | | | | |
Outstanding at the beginning of the period | | 3,194 | | | 424 | | 3,907 | | | 444 |
Granted during the period | | 18,733 | | | 249 | | 1,818 | | | 415 |
Forfeited during the period | | (447) | | | 407 | | (373) | | | 391 |
Exercised during the period |
| (814) | (1) |
| 406 |
| (2,158) | (2) |
| 443 |
Outstanding at the end of the period |
| 20,666 | |
| 327 |
| 3,194 | |
| 424 |
Exercisable at the end of the period |
| 6,246 | |
| 361 |
| 1,494 | |
| 408 |
F-92
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The equity-settled share based awards were estimated using the following range of exercise prices and the weighted-average remaining contractual terms:
| | | | | | |
|
| December 31, 2021 | ||||
| | | | | | Weighted- |
| | | | | | average |
| | | | Range of | | remaining |
| | Shares (in | | exercise prices | | contractual term |
| | thousands) | | (in RUB) | | (in month) |
Outstanding shares | | 20,666 | |
| |
|
Incl. to be exercised in 2022 | | 5,689 | | 153-599 | | 3 |
to be exercised in 2023 | | 6,241 | | 136-545 | | 15 |
to be exercised in 2024 | | 8,736 | | 121-846 | | 27 |
The cash-settled share based awards displayed the following development in the financial years 2021 and 2020:
| | | | | | | | |
|
| Twelve month ended December 31, | ||||||
| | 2021 | | 2020 | ||||
| | | | Weighted- | | | | Weighted- |
| | | | average fair | | | | average fair |
| | Shares |
| value per share |
| Shares |
| value per share |
| | (in thousands) | | (in RUB) | | (in thousands) | | (in RUB) |
Outstanding at the beginning of the period | | 725 | | 707 | | 2,466 | | 857 |
Granted during the period | | 3,788 | | 423 | | 510 | | 782 |
Forfeited during the period | | (298) | | 678 | | (241) | | 782 |
Exercised during the period |
| (729) | (1) | 707 |
| (2,011) | (1) | 812 |
Outstanding at the end of the period |
| 3,485 | | 402 |
| 725 | | 707 |
Exercisable at the end of the period |
| 1,598 | | 638 |
| 725 | | 707 |
The cash-settled share based awards were estimated using the following range of exercise prices and the weighted-average remaining contractual terms:
| | | | | | |
| | December 31, 2021 | ||||
| | | | | | Weighted- |
| | | | | | average |
| | | | Range of | | remaining |
| | Shares | | exercise prices | | contractual term |
|
| (in thousands) |
| (in RUB) |
| (in month) |
Outstanding shares, Incl. |
| 3,485 |
|
|
|
|
to be exercised in 2022, based on ADR |
| 969 |
| 953 |
| 3 |
to be exercised in 2022, based on ordinary shares |
| 629 |
| 153 |
| 3 |
to be exercised in 2023, based on ordinary shares |
| 629 |
| 136-273 |
| 15 |
to be exercised in 2024, based on ordinary shares |
| 1,258 |
| 121-605 |
| 27 |
Due to high volatility of Russian stock market at the end of the financial year 2021, the market performance condition for equity-settled share based awards granted in 2021 was modified. The resulting change in the incremental fair value of the share-based compensation totaled to RUB 145 per share for instruments to be executed as of December 31, 2021, RUB 68 per share for instruments to be executed as of December 31, 2022, and RUB 49 per share for instruments to be executed as of December 31, 2023, respectively.
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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Total expense in respect of Group’s share plans included in the consolidated statement of profit or loss in the financial year 2021 and 2020 totaled to RUB 4,767 million and RUB 2,176 million, respectively, thereof RUB 3,690 million and RUB 819 related to equity-settled share based awards.
As of December 31, 2021 and 2020, total liabilities recorded for share-based awards amounted to RUB 2,285 million and RUB 962 million, respectively.
The fair value of share-based awards vested at December 31, 2021 and December 31, 2020 was RUB 1,530 million and RUB 896 million, respectively.
33. SHAREHOLDERS’ EQUITY
Common stock (ordinary shares) – The Group had 1,998,381,575 authorized and issued ordinary shares with par value 0.1 RUB as of December 31, 2021 and 2020. Preferred shares have not been authorized and issued.
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. As of December 31, 2021, the total shares in treasury stock comprised 335,757,457 and 1,662,624,118 shares were outstanding. As of December 31, 2020, the total shares in treasury stock comprised 271,479,406 and 1,726,902,169 shares were outstanding.
Information on shares repurchased by the Group is presented as follows:
| | | | | | | | | | | | | |
| | December, 31 | | ||||||||||
| | 2021 | | 2020 | | 2019 | | ||||||
Repurchased from: |
| Shares | | RUBm | | Shares |
| RUBm |
| Shares |
| RUBm |
|
| | | | | | | | | | | | | |
Open market |
| 42,512,570 | | 13,981 | | 26,038,847 | | 8,525 | | 32,589,740 | | 8,472 | |
Sistema Finance |
| 22,796,040 | | 7,503 | | 22,758,872 | | 7,485 | | 28,929,344 | | 7,450 | |
Total |
| 65,308,610 | | 21,484 | | 48,797,719 | | 16,010 | | 61,519,084 | | 15,922 | |
Nature and purpose of reserves
Additional paid in capital is used to recognize equity-settled share-based payment transactions, results of capital transactions under common control; changes in ownership interest in subsidiaries that do not result in gain/loss of control and the excess of cash received over the acquisition cost of treasury shares.
Share-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.
Foreign currency translation reserve is used to record exchange differences arising from the translation of foreign subsidiaries financial statements from their functional to the presentation currency.
Financial instruments 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.
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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Non-controlling interests
As of December 31, 2021 and 2020, MGTS was the only subsidiary of the Group, which had material non-controlling interests.
The summarized financial information of MGTS is presented as follows:
| | | | | | |
MGTS |
| 2021 |
| 2020 |
| 2019 |
Non-controlling interests opening balance |
| (4,055) |
| (3,328) |
| (3,649) |
Profit for the year attributable to non-controlling interests |
| (803) |
| (675) |
| (806) |
Dividends to non-controlling interests |
| — |
| — |
| 1,123 |
Other |
| (51) |
| (52) |
| 4 |
Non-controlling interests closing balance |
| (4,909) |
| (4,055) |
| (3,328) |
| | | | |
| | December 31, | ||
MGTS |
| 2021 |
| 2020 |
Current assets |
| 34,282 |
| 17,052 |
Non-current assets |
| 57,631 |
| 66,129 |
Current liabilities |
| (13,497) |
| (18,471) |
Non-current liabilities |
| (17,691) |
| (19,881) |
| | | | | | |
| | Year ended December 31, | ||||
MGTS |
| 2021 |
| 2020 |
| 2019 |
Revenue, gross of intercompany |
| (41,255) |
| (41,103) |
| (39,479) |
Profit for the year, gross of intercompany |
| (14,203) |
| (11,811) |
| (14,148) |
Dividends
As a leading telecommunications group with a home base in developing markets, the primary need of the Group 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.
The Group 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 number of factors, including cash flow from operations, capital expenditures, and the Group’s debt position.
For 2019-2021, MTS management commited to a minimum cumulative payout of RUB 28.0 per share per calendar year through semi-annual payments.
The Group may take decisions on the 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 Accounting Standards (RAS), denominated in Russian Rubles, after certain deductions.
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PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
The following table summarizes the Group’s declared cash dividends for the years ended December 31, 2021, 2020 and 2019:
| | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
Dividends declared (including dividends on treasury shares of 12,082, 6,936 and 9,449 respectively) |
| 74,049 |
| 58,948 |
| 83,751 |
Dividends, RUB per ADS |
| 74.12 |
| 59.00 |
| 83.82 |
Dividends, RUB per share |
| 37.06 |
| 29.50 |
| 41.91 |
As of December 31, 2021 and 2020, dividends payable were RUB 68 million and RUB 108 million, respectively, and included in the trade and other payables within the consolidated statement of financial position.
34. COMMITMENTS AND CONTINGENCIES
Capital commitments – As of December 31, 2021 and 2020, the Group had entered into purchase agreements of approximately RUB 67,614 and 62,616 million to acquire property, plant and equipment, intangible assets and costs related thereto.
Taxation – Management believes that it has adequately provided for tax liabilities in the accompanying condensed 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.
The Group estimates the following contingent liabilities in respect of additional tax settlements:
| | | | |
|
| December 31, | ||
| | 2021 | | 2020 |
Contingent liabilities for additional taxes other than income tax |
| 860 |
| 1,043 |
Contingent liabilities for additional income taxes |
| 1,132 |
| 892 |
Licenses – Management believes that as of December 31, 2021 the Group complied with conditions of the licenses used.
Litigation – In the ordinary course of business, the Group is party to various legal, tax and customs proceedings, and subject to claims, some of which relate to developing markets and evolving fiscal and regulatory environments within MTS’s markets of operation.
Litigation related to operations in Turkmenistan - In September 2017, the Group’s subsidiary in Turkmenistan MTS Turkmenistan or MTS-TM, suspended the provision of telecommunication services to its subscribers, due to the termination by Turkmen state-owned companies and state authorities of line rental, frequency allocation, interconnect, and other agreements necessary to provide telecommunication services. The license for the provision of telecommunication services on the territory of Turkmenistan was valid until July 2018.
In July 2018, the Group filed a Request for Arbitration against the Sovereign State of Turkmenistan with the World Bank’s International Center for Settlement of Investments Disputes (“ICSID”) in order to protect its legal rights and investments in Turkmenistan. As of December 31, 2021 the case is pending.
Antimonopoly proceedings – In August 2018, the Federal Antimonopoly Service of Russia (“FAS Russia”) charged MTS and other federal operators with violation of antimonopoly laws in respect to establishing discriminatory terms and conditions for bulk SMS pricing for the banks with state-owned equity interest as compared to the terms and conditions for other banks and later – with establishing unreasonably high bulk SMS prices. In May 2019, FAS Russia considered that MTS had breached the provisions of antimonopoly laws in respect to establishing discriminatory terms and conditions for bulk SMS pricing and charging unreasonably high bulk SMS prices, prescribing MTS to cease its violations. MTS contested the decision and the prescription of FAS Russia in the Moscow Arbitration Court, which upheld the position of FAS Russia in November 2019, following by the Arbitration Court of Appeal in March 2020. MTS filed a cassation appeal to the Arbitration Court of the Moscow District, which also upheld the position of FAS
F-96
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Russia. In December 2020, MTS cassation appeal was rejected by the Judicial Chamber of the Supreme Court. In March 2021, Deputy Chairman of the Supreme Court of the Russian Federation upheld the rejection. In August 2021, the Group paid the fine imposed by FAS Russia in full amount of RUB 189 million.
In April, June and July 2021, JSC “Tinkoff Bank”, PJSC “Sovсombank” and JSC “Raiffeisenbank” initiated litigations against the Group, claiming reimbursement for losses incurred in connection with violation of antimonopoly laws in respect to establishing unreasonably high bulk SMS prices. Commercial Court of the City of Moscow has dismissed all three claims in full. It’s currently impossible to predict the timing or outcome of the litigations on violation of antimonopoly laws in respect to establishing unreasonably high bulk SMS prices. Management of the Group believes that as of December 31, 2021 it has adequately provided for claims related to SMS pricing.
Potential adverse effects of economic instability and sanctions in Russia – In February 2022, following an escalation in conflict between Russia and Ukraine, the EU, US, UK and certain other countries have imposed significant new sanctions and export controls on Russian and Belarusian persons and entities. These include, among others, restrictions targeting several major Russian financial institutions and the Central Bank of Russia (“CBR”), a number of companies and individuals as well as technology export controls.
On February 28, 2022, trading on the Moscow Exchange in all equity securities was suspended (including MTS PJSC ordinary shares), with the suspension later extended through at least March 1. Also on February 28, the New York Stock Exchange halted trading in the Company’s American depositary shares (“ADSs”) and those of certain other Russian companies.
Developments relating to these matters are highly unpredictable, occur swiftly and often with little notice and are mostly outside the control of the Group, and the risk that any Group member, or individuals holding positions within the Group as well as its counterparties, may be affected by future sanctions designations cannot be excluded. Current and future risks to the Group include, among others, the risk of reduced or blocked access to capital markets and ability to obtain financing on commercially reasonable terms (or at all), the risk of restrictions on the import of certain equipment and software, as well as the risk of further depreciation of the Russian ruble against other currencies (which has already occurred to a significant extent), which may adversely impact the Company's investment process as a significant portion of its capital expenditures are denominated in or linked to foreign currencies. In addition, rate hikes by the Central Bank of Russia, which has increased its key rate to 20%, will increase the Company's financing costs due to the impact on floating-rate credit facilities.
In addition, the CBR has prohibited Russian securities market professionals from carrying out depositary activities and register maintenance and from effecting sales of securities of Russian companies by non-Russian residents (with a very limited number of exceptions), with the effect that, among other things, no ADSs can be converted into ordinary shares for such non-Russian residents. Furthermore, the CBR has prohibited Russian companies from making any payments, including dividends, on securities of Russian companies to non-Russian residents, with the result that any non-Russian resident holders of our ADSs as of the relevant record date for payment of dividends would be ineligible to receive such dividends. These developments could materially adversely affect the liquidity in, and the value of, our ADSs.
Operations of MTS Bank, the Group’s subsidiary, are susceptible to the risks affecting the Group’s borrowers’ ability to repay amounts due to the Group, which may be impacted by the overall macroeconomic environment and business climate. Adverse changes in economic conditions may result in deterioration in the value of collateral held against loans and other obligations.
The Group is currently unaware of any designation of the Company, its subsidiaries, or members of its management team with regards to sanctions recently imposed by the EU, US, UK, and certain other countries.
Management remains focused on ensuring operational continuity and providing uninterrupted connectivity and other services for customers. Management believes it is taking the appropriate measures to support the sustainability of the Group’s business in the current circumstances.
F-97
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions of Russian Rubles unless otherwise stated)
Compliance monitorship – In March 2019, the Group reached a resolution with the United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) relating to the previously disclosed investigation concerning the Group’s former subsidiary in Uzbekistan, consented to the entry of an administrative cease-and-desist order (the “Order”) by the SEC and entered a deferred prosecution agreement (“DPA”). Under the DPA and the Order in September 2019 the Group appointed an independent compliance monitor for, inter alia, review, testing and perfecting MTS’ anti-corruption compliance code, policies, and procedures.
As of December 31, 2021 the Group has not received notice from the SEC, the DOJ or the monitor of any breach of the terms of the DPA or the Order. However, given a variety of factors, including the COVID-19 pandemic, the Group has agreed to a one-year extension of the DPA and the monitorship with the DOJ and the SEC to (i) provide the Group with adequate time to implement necessary enhancements to certain critical components of the Group’s anti-corruption compliance and ethics program and (ii) allow the monitor sufficient time to be able to complete its review of the remedial efforts, including the Group’s implementation of the monitor’s recommendations and an assessment of the sustainability of the Group’s remedial actions. The term of the monitorship will continue until September 2023.
In connection with compliance monitorship, certain transactions were identified relating to the Group’s subsidiary in Armenia, and such transactions were disclosed to the DOJ and SEC. The DOJ and SEC have requested information regarding the transactions and the Group has initiated an investigation into the matter. It’s currently impossible to predict the timing or outcome of the investigation.
In December 2020, the Group received a request for information from the DOJ concerning certain historical transactions with a supplier of telecommunication and information technology. Currently, the Group is cooperating to provide information to the DOJ and the SEC responsive to the request.
Class action complaint - In March 2019, a proposed class action complaint on behalf of Shayan Salim and all other persons similarly situated has been filed in the United States District Court for the Eastern District of New York against MTS PJSC and certain of its managers. On 1 March 2021, US District Judge of Eastern District Court of New York granted MTS’s motion to dismiss with prejudice and dismissed the complaint in full. The plaintiff has filed an appeal for dismissal resolution of Eastern District Court of New York. As of December 31, 2021 the appeal is pending. It’s currently impossible to predict the outcome of the litigation.
35. SUBSEQUENT EVENTS
Refer to Note 34 for potential adverse effects of economic instability and sanctions in Russia.
Acquisition of VisionLabs – In February 2022, the Group acquired a 100% ownership interest in VisionLabs B.V. (“VisionLabs”), leading provider of computer vision and machine learning solutions. The acquisition is aimed at reinforcement of the Group’s artificial intelligence product portfolio in the computer vision space, and enhancing the potential of the Group’s digital ecosystem. See Note 5 for the details of the acquisition.
F-98