Letter from the President

Alexander Provotorov
President and Chief Executive Officer

Dear Shareholders and Stakeholders,

A great deal has been achieved in 2011 and it has become clear that the foundations we have been laying to create a national telecommunications champion are bearing fruit. We successfully completed the legal reorganisation of the Group by finalising the merger of seven inter-regional telecoms companies, and Dagsvyazinform, with Rostelecom and the united Company started trading under a single share on MICEX in August 2011. Our ordinary shares have now also been included in the Large Cap Segment of the MSCI Global Standard Indices and the MSCI Russia Index in September, carrying a 3.43% weighting. This is a major development for us and reflects Rostelecom’s standing as a blue chip investment.

In May, we announced a 5-year strategy designed to make Rostelecom the top Russian telecoms operator both in terms of revenue and the number of subscribers. The new strategy is Rostelecom’s response to significant market changes and once the strategy is fully implemented, Rostelecom will become a universal operator with a particular focus on wireless and wireline broadband services. Our new strategy brings together all of our businesses into one and all our businesses will operate under a single new brand identity that we launched in September.

Our current infrastructure places us in a position of unprecedented strength across Russia, and major steps have been taken to unlock significant potential in other parts of our business, primarily in fixed and mobile data, and the Pay-TV segment.

A number of successful new tariffs and offerings have been launched as part of this strategy. Among them is a bundle service which combines all of Rostelecom’s united services in a single offering, which has led to more than 500 thousand new subscribers signing-up. We have also launched a unique federal broadband offering, capable of reaching customers across the whole of Russia, which offers customers the freedom to choose which services they require to better control their spending.

Our current infrastructure places us in a position of unprecedented strength across Russia, and major steps have been taken to unlock significant potential in other parts of our business, primarily in fixed and mobile data, and the pay-TV segment. We are looking to develop our data services, we are modernising our last mile technology, we are constructing a multi-standard mobile network and we are looking to invest in a ten-fold increase of our backbone capacity. Our mobile segment now has all the approvals it needs to use our licensed frequencies and we plan to build 3G networks in 27 Russian regions in 2012. We are also ahead of the curve in terms of providing 4G networks, having been one of the first players to sign an agreement with Scartel (Yota), the Russian mobile broadband provider, to jointly develop and utilise fourth generation networks across Russia. We always look at ways of sharing costs and if teaming up with other providers helps us achieve this, then we will share infrastructure, as, for example, our strategic cooperation memorandum with Mobile TeleSystems suggests.

We carried out a great deal of work for the Government, including the E-Government programme and video surveillance system to monitor the voting process during the Russian Presidential elections, and the quality and efficiency with which the projects have been completed demonstrates why we have become a preferred partner.

2011 was an extremely busy year on the M&A front too. As well as acquiring NTK, the largest independent cable TV operator and information provider in Russia, to strengthen our triple services, we also acquired a series of regional Russian operators to strengthen our market positions and we also bought an operator in the Republic of Armenia in line with our strategy to acquire operators in the CIS region with a high concentration of traffic.

All of this strengthens our position to do more work for the Russian Government. We carried out a great deal of work for the Government, including the E-Government programme and video surveillance system to monitor the voting process during the Russian Presidential elections, and the quality and efficiency with which the projects have been completed demonstrates why we have become a preferred partner. We are therefore well positioned to participate competitively in Government tenders as they look to invest over RUB 300 billion in the modernisation of education and public health systems in 2012.

Finally, we worked closely on the merger of Svyazinvest into Rostelecom. This process was started, following the signing of Decree on the reorganisation of OJSC Rostelecom by the President of Russia. The Decree states that a unified company will be created by merging Svyazinvest and its total assets with Rostelecom. The Russian Federation’s stake in Rostelecom will amount to over 50% of ordinary shares when coupled with a stake belonging to Vnesheconombank. We hope that this deal will be finalized within the time stated by the President of Russia.

We are therefore well on the way to achieving our objective of becoming the number one Russian telecoms operator both in terms of revenue and the number of subscribers. We operate in markets with tremendous growth potential and we fully intend to capitalize on this. Possessing a leading position in such a dynamic market will only serve to strengthen our economic value as well as our ability to deliver superior shareholder returns regardless of the global economic outlook.

Apart from tremendous potential in our fundamental business we see 3 areas of further unlocking currently hidden value in:

  • proposed decreasing in the number of shares outstanding after the planned merge with Svayzinvest and subsequent change in multiples;
  • capitalizing on revision of real estate portfolio; and
  • increasing the share of IT and clouding projects using the expertize from E-Government project diversifying us from being a pure telecom company.

We look forward to keeping you up to date with our progress over the coming year.

Alexander Provotorov
President and Chief Executive
Officer

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