Russia: Think Differently

The Harriman Institute, Columbia University April 08, 2013

Alexey Kornya, Vice President and Chief Financial Officer, Mobile Telesystems OJSC (MTS)

▪ MTS dynamics

▪ Farewell to alms

▪ Russia is growing

▪ Russia is working

▪ Russia is saving

▪ Russia lives within means

Contents

2

Russia’s untold growth story

Russia as an “unbanked” market

Opportunities in Russia

MTS Dynamics

3 *Including subscribers of Mobile TeleSystems LLC, a mobile operator in Belarus, in which

MTS owns a 49% stake and CDMA subscribers in Ukraine.

In June 2000, MTS launched its IPO on the New York Stock Exchange. Since the IPO, MTS has transformed itself into

the leading integrated telecommunications provider in Central and Eastern Europe, offering mobile and fixed voice, broadband and pay TV services

2011

Mobile carrier Mobile + fixed broadband + cable TV + retail + banking

Presence in 83 of the Russia’s regions and four

countries: Ukraine, Belarus, Armenia, and Turkmenistan

1,139 employees

62,077 employees

514,000 subscribers

101.2* mln mobile subscribers

71.2 mln mobile subscribers in Russia 11.7 mln households passed with broadband in Russia

2.9 million Pay-TV subscribers in Russia

Annual revenues of $354 million Annual revenues of $12.436 bln

Presence in 19 Russia’s regions

2000 Today

Farewell to alms

4

*In current international prices in purchasing power partity terms, World Bank Data **At US prices in purchasing power parity terms, source: Center of Strategic Research http://www.csr.ru/2009-04-23-10-40-41/381-2013-03-28-08-08-08#_ftn5

***According to the World Barometer survey conducted by Romir/Gallup International/WIN

Gross National Income (GNI) per capita in 2000: $6,660*

In 2000, 5% of Russians survived on less than $2 a day

Gini coefficient in 2000: 0.40

MTS’s growth is reflective of Russia’s tremendous dynamics of its economy and society in 2000 – 2013

Early 2000s

Gross National Income (GNI) per capita in 2011: $20,560

Early 2010s

In 2000 – 2010 real disposable incomes of Russians increased 2.5 times. Incomes were increasing across all strata of the Russian population. In 2000 – 2011, the Gini coefficient reflecting relative income distribution increased only slightly – from 0.40 to 0.42 (compared to 0.47 in US)

Gini coefficient in 2011: 0.42

Russia has overcome absolute poverty

In 2011, the percentage of population living on below $2 a day declined 100 times – to 0.057%

“Cat indicator”: every second household in Russia’s largest cities has a pet, most of them are cats. Russians spend twice as much as Americans on cat food - $401 per year and $220 per year respectively

In 1999, 64.4% of the population had incomes below the US poverty line – $13 a day

By 2010, this number had decreased by more than 2 times – to 30.6%

Russia is growing

5

Source: IMF, OECD data and forecast

GDP growth

Source: Worldbank database

Inflation rate, annual %, consumer prices

4.3% 3.6%

3.7%

-2%

0%

2%

4%

6%

8%

10%

2011 2012 2013EUSA Russia EU Brazil China India

Russia is growing ‐ IMF forecasts 3.7% -3.8% GDP growth for 2013-2014

in Russia

Russia has a burgeoning middle class

‐ Based on the OECD definitions, 55% of households with annual incomes in the $6,000 - $15,000 range were considered ‘middle class’ in 2011. This is much a higher proportion than in the other BRIC economies of Brazil (30%), China (21%) and India (11%).

‐ The number of people with annual incomes in excess $15,000 surged from over 1.4 million in 2005 to more than 20.3 million in 2011 – 14.3% of the population.

Russia has relatively high inflation, though

recently the inflation rate has been going down

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2010 2008 2009 2011 2012

Russia is working

Source: CIA The World Factbook

Unemployment rates, 2011

Labor productivity as of GDP per hour worked as % of USA (USA = 100%)

Source: OECD, data as of 2011

21.7%

9.5% 9.3% 9.0% 8.1% 6.6%

0%

5%

10%

15%

20%

25%

Spain EU France USA UK Russia

*Source: European Social Survey, 2010 **Source: Worldbank database

Russia is getting healthier ‐ After a decade of post-Soviet decline, the birth

rate improved nearly 50% from 2000 to 2010 ‐ Russia has also seen life expectancy improve to

68.8 years in 2010 from a post-Soviet low of 64.5 years in 1994 according to the World Bank

Russia is working

‐ Low unemployment rates compared to USA and OECD economies

Russia is well-educated

‐ 99% literacy rate ‐ 39% of the population in the 25-39 years age

group have university degrees, compared to 20% in Germany and 31% in the UK*

‐ Engineering, manufacturing and construction graduates in 2009 - 3.2 per 1000 people in Russia compared to 0.7 per 1000 people in US**

Russia is getting more productive ‐ Labor productivity in Russia has increased

by nearly 50% since 2002 ‐ Still Russia has a lower productivity level than

developed countries; increasing productivity remains one of the key challenges

6 0 50 100 150

Australia

France

Germany

Greece

Korea

Luxembourg

Mexico

Netherlands

Norway

Turkey

United Kingdom

United States

Russian Federation

Russia is saving

7

Source: World Bank, estimates for 2012 – 2013

Fiscal balance (% of GDP)*

Russia has substantial international reserves** – ≈$526 bln in international reserves as of March 2013

– 19-fold increase since 2000

– Trending upward

Russia has budgetary discipline – Minimal government budget deficit as a % of

GDP compared to the developed world and

BRIC countries

**Includes hard-currency reserves, gold, IMF , supplementary foreign exchange reserves held with IMF

Country Foreign exchange and gold reserves, USD mln

China 3,549

Japan 1,351

Russia 561

Taiwan 391

Brazil 371

India 287

World reserves of foreign exchange and gold

Source: CIA World Factbook, December 2012

*The balance of a government's tax revenues, plus any proceeds from asset sales, less government spending

28 37 48

68 117

168

289

464

456 448 483

511 530

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-10

-8

-6

-4

-2

0

2

4

6

8

10 BrazilChinaGermanyRussiaUnited States

Russia lives within means

8 Source: McKinsey, 2012

Household debt (% of GDP)

Low government debt ‐ Russia has a very low government debt as a

% of GDP in comparison with the USA, Europe and other BRIC economies

‐ Debt level is not expected to grow

Household resilience ‐ Russian households are virtually

unleveraged, especially when compared to household debt in Western markets

‐ Russia has the lowest household debt among the BRIC countries

98%

88%

82%

68%

59%

49%

46%

29%

15%

9%

8%

0% 20% 40% 60% 80% 100%

UK

US

Spain

Japan

Germany

France

Italy

China

Brazil

India

Russia

103% 107% 112%

87% 94% 94%

69% 69% 69%

54% 54% 55%

15% 16% 16% 8% 9% 8%

0%

20%

40%

60%

80%

100%

120%

2011 2012E 2013E USA Europe India Brazil China Russia

Source: Citi Bank

Government debt (% of GDP)

Russia’s untold growth story

Russia as an “unbanked” market

Opportunities in Russia

Contents

9

▪ Strong growth in retail banking

▪ Growth in retail lending

▪ Expected growth in payments

▪ Global trends: Banking + Telecom?

▪ MTS: seizing opportunities in financial services

▪ Russia’s digital landscape

▪ Russia’s connectivity

US

UK Sw edenSpain

SloveniaSlovakia

Romania

Portugal

Poland

Netherlands

Malta

Lithuania

LatviaItaly

Ireland

Hungary

GreeceGermanyFrance

Finland

Estonia

Czech Republic

Bulgaria

Belgium

Austria

China

Russia

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

-- 10.0 20.0 30.0 40.0 50.0

Strong growth in retail banking

Sources: Local Central Banks, EIU, FactSet as at 30 July 2012 Note: Regression based on Nominal GDP and Total Retail Loans as of 2011

GDP per Capita (€ ‘000)

Re

tail

Loan

s /

GD

P

Regression analysis suggests further growth potential in retail banking

Research analysts expect strong earnings growth in the Russian banking sector

Average EPS Growth CAGR

’11-’14

Russia

15.7%

Latin America

12.2%

Asia ex. Japan

12.2%

Emerging Europe ex.

Russia

7.9%

US

6.2%

Western Europe

(1.4%)

14.4%15.8% 16.8%

2012E 2013E 2014E

6.8% 8.4% 9.2%

2012E 2013E 2014E

13.2%11.7% 11.9%

2012E 2013E 2014E

12.8%10.7%

11.8%

2012E 2013E 2014E

4.0%7.3% 7.5%

2012E 2013E 2014E

3.1% 2.3%(4.9%)

2012E 2013E 2014E

Russia 2011A

Russia 2030E

Russia’s retail loans are expected to grow at 19% CAGR 2011 – 2030 based on regression analysis

10

Growth in retail lending

Revenue in Russian retail loan products sector, RUB bln

Sources: McKinsey, Rosstat, CBRF, Bankir.ru

Retail lending products in Russia by volumes issued, RUB trln

+34% CAGR +7.2% CAGR +6.2%

11

1.9 2.0 2.1 2.2 2.3

0.7 0.7 0.8 0.8 0.9

1.6 1.6 1.8 1.9

2.0 0.3 0.5 0.6

0.7 0.7

2011 2012E 2013E 2014E 2015EConsumer credits Auto loans Mortgage Credit cards

493

719

927

1 189

1 528

2011 2012E 2013E 2014E 2015E

Number of credit cards issued in Russia as at the end of the year, mln Number of credit cards per capita, 2011

5.7

8.9 9.3 8.6

10.0 11.0

11.8 12.7 12.5

14.3 15.2

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E

0.1 0.2 0.2 0.2

0.9

1.7

2.8

Russia China Poland Italy UK USA Japan

Penetration of credit products in Russia is significantly lower than in developed and developing markets Volume of retail lending is forecasted to grow at 7.2% CAGR in 2012-2015 Under-penetration in Russia’s credit cards is even more pronounced than in the broader retail banking and indicates more

rapid expected growth

Expected growth in payments in Russia and globally

The volume of e-payments in 2011 in Russia is estimated at RUB 987 bln

In 2012-2014 the volume of payments and transfers by individuals is expected to grow at an annual rate of 20% in Russia

Quick growth of credit cards penetration will be a driving turnover of payments

2 389 3 225

4 289 5 790 987

1 188

1 354

1 570

3 950

4 490

5 194

6 009

1 732

1 954

2 166

2 400

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

2011 2012E 2013E 2014E

Electronic Payments

Payments & Transfers w/o Open Bank Account

Payments & Transfers through Moneys Transfer Systems and Post Office

Payments by Bank Card

Source: IE Market Research Corporation 2011, Yankee Group 2011, Gartner Report 2011, Mobile Payments Today 2011. 12

Gross Value of Global Mobile Payment Transactions, USD bln

2010 2011 2012E 2013E 2014E 2015E

545

245

110

60 30

10

+122.5% CAGR

Mobile penetration globally by far exceeds penetration in financial services: 2 billion credit card users versus 5 billion mobile phone users

Mobile payments will be growing much faster than e-commerce; CAGR of 122.5% is forecasted in mobile payments 2010-2915E compared to only 15% CAGR in turnover of e-commerce

Market volume for payments and money transfer by individuals in Russia, RUB mln

Comments Companies Scale Country

Global trends: telecom + banking

China & Hong Kong

China Mobile bought 20% stake in Shanghai Pudong for USD 5.8bn

Pakistan Telenor bought a 51% stake in Tameer for USD12.5mn

Date

Nov 2008

Min

ori

ty S

har

eh

old

ing

Maj

ori

ty

Shar

eh

old

ing

Mar 2010

Launch of joint mobile finance platform

Platform includes money transfer, bill payment and cash withdrawal

Par

tne

rsh

ip Nov 2010 Kenya M-Pesa: 9.5 million

users

Equity bank: 4.5 million customers

Partners offer current account to, accessible through mobile phone

Use of M-Pesa credit scores for short term loans by Equity bank

Jo

int

Ven

ture

Oct 2011 Mexico America Movil to invest USD 50mn

Plans to offer bank accounts to America Movil customers

13

In March 2013, MTS acquired a 25.1% stake in a Russian mid-cap bank: MTS Bank. This is just one of the many examples of how carriers and banks globally are seeking to unlock synergies by combining finance and telecom

Mar 2013

Strategic cooperation to develop mobile payments, mobile transfer and mobile bank cards

Russia MTS acquired a 25.1% stake in MTS Bank (prior to Feb 2012 known as MBRD) for RUR 5.09 billion

Promotes innovative financial products in the “unbanked” Russian market Stimulates sales of smartphones and data-generating devices

MTS: seizing opportunities in financial services

Why expand into financial services?

MTS boasts the third largest retail banking network in Russia with more than 4,400 monobrand stores

MTS is one of Russia’s most trusted institutions. ‐ MTS is one of the two most valuable brands in Russia, according to

BRANDZ™ ranking compiled by Millward Brown in 2012

MTS can leverage extensive customer data for more efficient scoring procedures

14

Russia’s connectivity

15

Russia’s digital landscape

Odnoklassniki, Russia’s second-largest social network,

owned by Mail.ru Group

EPAM Systems, US-incorporated provider of software engineering

and IT consulting services with research centers in Russia and

Eastern Europe. IPOed in 2012 at the NYSE.

Yandex, the most popular search engine in Russia, IPOed at the

NASDAQ in 2011.

Ozon, Russia’s leading online retailer and one of the key players in the $10 billion e-commerce market in Russia

Mail.ru Group, Russia’s leading Internet company, owns two Russian social networks, My

World@Mail.Ru and Odnoklassniki.ru, and a stake

in the social network Vkontakte as well as stakes in

Facebook and Zynga. IPOed on LSE in 2010

Vkontakte.ru, Russia’s largest social network with over 140

million registered users. Owned by management and

Mail.ru Group

1C, a leading Russian business software developer, also known

for its video games

Digitizing Moscow GPON (Gigabyte Passive Optic Network) network is deployed by

MGTS, MTS’s fixed-line subsidiary in Moscow, to create a unique platform connecting 4.4 million Moscow apartments to fiber-optic networks supporting speeds up to one Gb/s and serves as network

backhaul to ensure faster speeds and higher reliability of connections in mobile networks

16

of contributions to Russian GDP attributable to the Internet economy in 2010, according to a BCG report. By 2015 the contribution will rise to 2.6%

1.9%

Russia’s untold growth story

Russia as an “unbanked” market

Opportunities in Russia

Contents

17

▪ Invest and do business with Russia

▪ Work in Russia

Invest and do business with Russia

Russia’s growth story is virtually unknown in the United States due to low intensity of economic ties between the countries

‐ In 2011, US Foreign Direct Investments in Russia amounted to $1.8 billion compared to $2.2 billion directed to Egypt’s economy

‐ In 2011, US goods accounted for less than 5% of Russia’s imports totaling $300 billion

‐ MTS is one of two Russian companies listed at the NYSE compared to 11 companies from India, 22 issuers from Brazil and 71 from China

‐ Opportunities: WTO entry/ PNTR granted

Why invest in Russia? ‐ Russia is growing, driven by sustained consumer demand ‐ Russia is less vulnerable to external shocks due to solid macro fundamentals ‐ Russia is set to benefit from an uplift in the global economy ‐ Russia is very cheap – trading at 5.1 x 12 months forward PE* ‐ Russian stocks are attractive dividend plays offering a 3.7% trailing dividend

yield ‐ Political and corporate governance risks are overdone

Why do business with Russia?

‐ Russia is forecasted to become the biggest consumer market in Europe and the world's fourth largest by 2020, according to Sberbank-CIB research

‐ Russia is modernizing its physical infrastructure. Russia’s investments in infrastructure are at a high level of 7% to GDP and are forecasted to grow at 3% CAGR 2012 – 2017, according to Morgan Stanley economists

‐ Russia is implementing structural reforms and improving business climate to boost growth

18 *Source: Morgan Stanley research as of March 26, 2013

Work in Russia

Career opportunities: ‐ Sustained demand for foreign professionals. In 2011, the inflow of

foreign specialists increased by 40% from the previous year, according to the Federal Migration Service

‐ 25% of the Russian companies are either employing foreign specialist or plan to hire them, according to a survey conducted by recruitment website Headhunter.ru

‐ Opportunities for quicker promotion: 84% of expatriates reported increased career opportunities since emigrating to Russia, according to the 2010 HSBC Expat Explorer Survey

High-profile Russian government initiatives aimed at the modernization of

Russia’s economy that require expertise of foreign professionals: ‐ Infrastructure investments: from roads and airports to power grids and

broadband Internet ‐ Entities fostering start-up culture and promoting investments in high-

tech: Skolkovo Innovation Center, Russian Venture Company, Russian Direct Investment Fund

‐ Creation of a regional financial center in Moscow

Competitive compensation:

‐ Russia offers competitive compensation to foreign professionals at a level higher than in many countries around the world

‐ Russia has one of the lowest income tax rates in the world – 13% ‐ According to the HSBC Survey, the disposable income of 86% of the

expatriates have grown since they moved to Russia

19

Contact information

For further information:

Alexey Kornya

+7 495 911 6566

ir@mts.ru

www.mtsgsm.com

20

APPENDIX: sovereign ratings fail to reflect

economic reality

21

Source of forecasts: IMF, OECD, S&P

Unlike developed market peers, emerging market governments have maintained debt levels while adjusting to lower-growth environments

Russian sovereign ratings, although investment grade, remain relatively low compared to the developed countries despite a demonstrable track record of:

‐ Strong hard currency reserves ‐ Budgetary discipline ‐ Low household indebtedness ‐ Low governmental indebtedness

Since before the crisis, S&P has

actually reduced the sovereign debt rating for Russia despite stable GDP growth and fiscal discipline

Country

S&P rating/ outlook

2007

Gov’t debt 2007

(% of GDP)

GDP Growth

2007

Current S&P

rating/ outlook

Gov’t debt 2012

(% of GDP)

GDP Growth 2013E

Germany AAA/stable 65% 3.3% AAA/stable 87% 0.6%

USA AAA/stable 69% 1.9% AA+/neg 110% 2.0%

Spain AAA/stable 46% 3.5% BBB-/neg 94% -1.5%

Italy A+/stable 95% 1.7% BBB+/neg 127% -1.0%

China A/positive 20% 14.2% AA-/stable 16% 8.2%

Russia BBB+/pos 7% 8.5% BBB/stable 11% 3.7%

Brazil BB+/pos 55% 6.1% BBB/stable 55% 3.5%

India BBB-/stable 79% 9.8% BBB-/neg 69% 5.9%

Company EV/EBITDA

2009 P/E

2009 EV/EBITDA

2012 P/E

2012

Revenue Growth 2009

– 2012

OIBDA margin 2012

Vodacom 5.1x 10.9x 6.8x 13.1x 19% 35%

Turkcell 4.8x 11.7x 5.4x 12.1x 13% 31%

Portugal Telecom

4.8x 7.4x 5.0x 12.0x stable 33%

MTS 4.6x 14.7x 4.4x 9.8x 15% 42.6%

APPENDIX: corporate credit ratings lagging

22

Rating agencies continue to attach too much risk to Russian issuers despite profitable growth, stable cash flows, and low debt levels

Russian companies remain undervalued compared to other EM and European ‘problem’ market peers despite stronger or comparable growth prospects, higher profitability, stable FCF generation and a stronger balance sheet

Company S&P credit

rating/outlook 2009

FCF (USD mln)*

2009

Net Debt/ LTM

OIBDA 2009

Current S&P credit rating/

outlook

FCF (USD mln)*

2011

Net Debt/ LTM OIBDA

2011

Telecom Italia

BBB/stable 1,296 3.1 BBB/negative 3,361 2.3

Bharti BBB-/stable -304 0.4x BB+/stable 1,508 3.1x

Portugal Telecom

BBB/stable 1,084 2.4x BB+/negative 987 2.9x

MTS BB/stable 1,264 1.2x BB/stable 1,265 1.3x

Source: Goldman Sachs. FCF is calculated as OPCF minus Capex

S&P credit ratings of leading telecommunications companies Post-Crisis 2009 – 2011

Multiples of leading publicly traded telecommunications companies