SVYAZ INVEST

Svyazinvest: New Growth Opportunities

Deputy General Director of OAO Svyazinvest K.V.Belyaev

June, 2005

SVYAZ INVEST

I. OAO Svyazinvest in the telecommunications sector

II. VAS development

III. Corporate reform and business optimization

IV. Natural monopoly status and tariff regulation

Svyazinvest – new growth opportunities

SVYAZ INVEST

JSC Svyazinvest: group structure

State75% - 1 share

Mustcom25% + 1 share

JSC Svyazinvest

7 mega-regionals

JSC Rostelecom MGTSOther

Controlling stake

Blocking stake

Company history:

• Svyazinvest foundation – 18 September, 1995

• Sale of a 25% + 1 share stake to Mustcom – July 1997

• Regional consolidation of companies – 72 regional telecom operators were merged into 7 mega-regionals in 2000-2002

SVYAZ INVEST

JSC North West Telecom 3.6 m lines in service market cap $688 mn

JSC CenterTelecom 6.2 m lines in service market cap $813 mn

JSC South Telecom 3.8 m lines in service market cap $444 mn

JSC Dalsvyaz 1.2 m lines in service market cap $171 mn

JSC Sibirtelecom 3.8 m lines in service market cap $995 mn

JSC Uralsvyazinform 3.8 m lines in service market cap $1,568 mn

JSC VolgaTelecom 4.3 m lines in service market cap $1,274 mn

Svyazinvest Companies’ Geography

JSC Rostelecom extensive backbone network covers virtually all Russia’s territory. Its total length approaches 200,000 km. The company’s market capitalization stands at $ 1,963 mn

SVYAZ INVEST

Svyazinvest major economic indicators, 2004

1.561.28

0.993.8

2.8

4.9

3.6

6.4

4.9

2002 2003 20042002 2003 2004Revenue Expense

Revenue and operating expense* Operating income*

31.3

33.0

Installed capacity

34.9

2002 2003 2004

Lines, mn

2005 (estimate)

5.7

7.6

1.82

2005 (estimate)2005 (estimate)

36.0

USD, bnUSD, bn

* data include JSC MGTS figures

SVYAZ INVEST

I. OAO Svyazinvest in the telecommunications sector

II. VAS development

III. Corporate reform and business optimization

IV. Natural monopoly status and tariff regulation

Svyazinvest – new growth opportunities

SVYAZ INVEST

OAO Svyazinvest possesses substantial resources to expedite VAS development

Infrastructure of Svyazinvest companies is unique

Svyazinvest companies have significant subscriber bases and access to end users

Svyazinvest companies’ geography spans the entire territory of the Russian Federation

Svyazinvest companies’ marketing strategy sees the roll out of multi-service networks as a major priority

Svyazinvest companies’ test facilities serve as platforms to try out new equipment for multi-service networks

Development of multi-service networks will boost electronic commerce, facilitate

consolidation of branches and business partners into a single information environment

SVYAZ INVEST

Intelligent networks

In 2004, companies’ revenue generated from intelligent services rose 50% y-on-y

Services

Pre-paid universal card

Televoting

Extra-pay services

‘Hot lines’

Intelligent platforms of various levels are used by

all mega-regional companies

OAO Rostelecom provides intelligent services

Russiawide

SVYAZ INVEST

Development of multi-media services

OAO Uralsvyazinform was the first in Russia to build a commercial network based on NGN technology

•broadband Internet access•video-on-demand (VOD)•Internet-Protocol TV (IPTV)

•virtual private networks (VPN)•virtual leased lines (VLL)•IP Centrex –virtual private voice networks•video- and audio- conferences•IP-contact center

Svyazinvest companies, running NGN are able

to provide new intelligent multi-media

services

Services for residential customers

Services for businesses

SVYAZ INVEST

Internet-Services and IP-Telephony

597

1018

2002 2003 2004

Internet traffic, TB

1 868

61

91

2002 2003

USD, mn

Revenues from Internet-services and IP-telephony

2004

156

2005 revenues from Internet and IP-telephony guidelines are $260 mn

SVYAZ INVEST

Svyazinvest provides cellular services in 20 regions of the Russian Federation.

Svyazinvest subsidiaries and affiliates pursue the policy of cellular business consolidation and its integration with the fixed-line business.In 2004 revenues from cellular services amounted to $519 mn, up 40% against 2003.

Subscriber base growth

(GSM-standard):

530

2 1503 000

4 8005 508

Svyazinvest holds a strong position in regional cellular market

01.01.0401.01.02 01.01.03 01.01.05

1 200

1 9082 367

subscribers, th subscribers, th

Regional subscriber bases

(01.04.05):

Sibirea Volga Urals01.04.05

SVYAZ INVEST

Integration of fixed and mobile communications – new development opportunities

OAO Uralsvyazinform is consolidating its subsidiary GSM assets, aiming to converge traditional and value-added services

Synergetic effect from fixed and

mobile communications

integration

Integration of products and

services

Integration of operational functions

Integration of network

infrastructure

•Promotion of packet services

•Designing new products

•Unified marketing and sales strategy

•Creation of unified brand

•Unified call centers

•Consolidation of call centers

•Integration of back offices

•Unified network development strategy

•Software integration

•Integration of billing and IT services

•Single vendor equipment

En

han

cin

g co

mp

etit

iven

ess

SVYAZ INVEST

Growing investments in VAS development in 2005

Traditional telephony

USD 661 mn

USD 464 mn

USD 239 mn

USD 371 mn

Other

2003 2005, target2004

159,6

298,6

464,0

Development of infrastructure

VAS and IT technologies

Dynamics of investments in VAS

Share of investments in development of VAS will double to reach 27% of the total investments.Payback period will be 3-4 years.

USD

mn

Investment plan breakdown

SVYAZ INVEST

I. OAO Svyazinvest in the telecommunications industry

II. VAS development

III. Corporate reform and business optimization

IV. Natural monopoly status and tariff regulation

Svyazinvest – new growth opportunities

SVYAZ INVEST

ERP system – implementation results

financial planning and data consolidation

implementation of separate accounting

drawing up tax and management reports

management of payables and receivables

management of fixed assets

cash flow control system

management of investments and various financial instruments

operational cost cutting

equipment cost cutting

personnel cost cutting

fully functional HR management (staff list, payroll, training)

Comprehensive financial

management

Efficient human resources

management

Effective procurement management

SVYAZ INVEST

The first phase of the billing system transformation is being successfully completed:

Unified billing system – implementation results

Higher revenue

Lower costs

Higher quality customer service

IMPLEMENTATION RESULTS

Improved corporate governance standards

Modernization of infrastructure

Major results:

- Existing billing systems and processes at all companies have been assessed

- Terms of Reference for automated billing systems have been worked out

- A 4-year high-level plan has been drawn up

- An in-depth model implementation plan has been designed for all companies of the holding

SVYAZ INVEST

to establish an operating risk management system, allowing to forecast risks and reduce risk losses in RTO business processes

to establish an operating risk management system, allowing to forecast risks and reduce risk losses in RTO business processesObjective:Objective:

to identify and estimate risks of a process at RTOs to uncover and rectify defects in the internal control systems and to work out control

procedures to confine, minimize or eliminate the outcome of risk events to create a system to monitor business processes in order to detect risks of a

process and to take the necessary measures

to identify and estimate risks of a process at RTOs to uncover and rectify defects in the internal control systems and to work out control

procedures to confine, minimize or eliminate the outcome of risk events to create a system to monitor business processes in order to detect risks of a

process and to take the necessary measures

Tasks: Tasks:

Reduction of financial losses through minimization, localization and removal of risk events

Gaining additional financial benefits by improving management system

Reduction of financial losses through minimization, localization and removal of risk events

Gaining additional financial benefits by improving management systemResults: Results:

Operating risk management

OAO Sibirtelecom and OAO STC are implementing pilot projects: key approaches to risk management of a process have been developed, internal audit department

structures have been modified

SVYAZ INVEST

Headcount optimization

0

10

20

30

40

50

60

2002 2003 2004 2005 (план)

0

20

40

60

80

100

120

Local network digitalization Lines per employee

364,4325,0336,0350,3

0

50

100

150

200

250

300

350

400

450

500

2002 2003 2004 2005

The program of headcount optimization is under way in Svyazinvest Group of companies

43.8

56.0

51.1

43,8 %

37.5

%

77

102

9585

Lines/employee

Number of employeesLines per employee and local

network digitalization rateEmployees, th

SVYAZ INVEST

I. OAO Svyazinvest in the telecommunications sector

II. VAS development

III. Corporate reform and business optimization

IV. Natural monopoly status and tariff regulation

Svyazinvest – new growth opportunities

SVYAZ INVEST

‘natural monopoly – is market situation where from the technological point of view demand is met more effectively in the absence of competition and there are no close substitutes for the goods produced by the natural monopoly holder…’*

* Law ‘On Natural Monopolies’

Criterion № 1 – absence of competition

Criterion № 2 – no close substitutes for goods

Mobile cannibalization can be observed on the telecom market – mobile communications ousts fixed-line one

Dynamics of mobile communications in Russia

Dynamics of installed capacity at RTOs

A drop in Svyazinvest revenue mix share points to a high level of competition on Russia’s telecom market

The need has arisen to review ‘natural monopoly’ criteria

SVYAZ INVEST

Tariffs for local telephone services

Average monthly rate, USD*

Average monthly rate in Russia is still about 50% lower than in Central and Eastern Europe,

and is 60% lower than in Western Europe.

Average monthly rate formega-regional

companies is $6,9 per line

5.7 6.0 6.3 6.9

12.511.4

7.86.9

8.7

17.018.0

15.8

STC VolgaTelecom

Centertelecom

Sibirtelecom

NWT Uralsvyazinform

Dalsvyaz Cesky-Telecom

Matav TPSA Lietuvos Telecomas

Lattelekom

* CeskyTelecom, Matav, Lietuvos Telecomas, Lattelekom – Company estimates

SVYAZ INVEST

The need to finetune regulatory policies

To recognize competition in the fixed-line sector in large Russian

cities and to release these markets from tariff regulation

To enable the holding’s companies to work out flexible tariff plans for different customer categories (that will become possible after the RF Government adopts the resolution ‘On State Regulation of Tariffs for Public Telecommunications and Postal Services’

SVYAZ INVEST

Thank you!