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Svyazinvest: New Growth Opportunities. Deputy General Director of OAO Svyazinvest K.V.Belyaev June, 2005. Svyazinvest – new growth opportunities. I. OAO Svyazinvest in the telecommunications sector. II. VAS development. III. Corporate reform and business optimization.

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Svyazinvest new growth opportunities

Svyazinvest:New Growth Opportunities

Deputy General Director of OAO SvyazinvestK.V.Belyaev

June, 2005


Svyazinvest new growth opportunities1

Svyazinvest – new growth opportunities

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

Controlling stake

State

75% - 1 share

Mustcom

25% + 1 share

Blocking stake

JSC Svyazinvest

JSC Rostelecom

MGTS

Other

7 mega-regionals

JSC Svyazinvest: group structure

  • 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


Svyazinvest new growth opportunities

Svyazinvest Companies’ Geography

JSC CenterTelecom

6.2 m lines in service

market cap $813 mn

JSC Uralsvyazinform

3.8 m lines in service

market cap $1,568 mn

JSC North West Telecom

3.6 m lines in service

market cap $688 mn

JSC South Telecom

3.8 m lines in service

market cap $444 mn

JSC VolgaTelecom

4.3 m lines in service

market cap $1,274 mn

JSC Sibirtelecom

3.8 m lines in service

market cap $995 mn

JSC Dalsvyaz

1.2 m lines in service

market cap $171 mn

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


Svyazinvest major economic indicators 2004

Svyazinvest major economic indicators, 2004

Revenue and operating expense*

Operating income*

7.6

6.4

USD, bn

USD, bn

1.82

5.7

4.9

4.9

1.56

1.28

3.8

3.6

0.99

2.8

2002

2003

2004

2005 (estimate)

2003

2002

2004

2005 (estimate)

RevenueExpense

Installed capacity

36.0

34.9

Lines, mn

33.0

31.3

2002

2003

2004

2005 (estimate)

* data include JSC MGTS figures


Svyazinvest new growth opportunities2

Svyazinvest – new growth opportunities

I. OAO Svyazinvest in the telecommunications sector

II. VAS development

III. Corporate reform and business optimization

IV. Natural monopoly status and tariff regulation


Oao svyazinvest possesses substantial resources to expedite vas development

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 partnersinto asingle information environment


Intelligent networks

Intelligent networks

Pre-paid universal card

Intelligent platforms of various levels are used by all mega-regional companies

Televoting

Services

Extra-pay services

OAO Rostelecom provides intelligent services Russiawide

‘Hot lines’

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


Development of multi media services

Development of multi-media services

Services for residential customers

  • broadband Internet access

  • video-on-demand (VOD)

  • Internet-Protocol TV(IPTV)

Svyazinvest companies, running NGN are able to provide new intelligent multi-media services

  • virtual private networks (VPN)

  • virtual leased lines(VLL)

  • IPCentrex –

  • virtual private voice networks

  • video- and audio- conferences

  • IP-contact center

Services for businesses

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


Internet services and ip telephony

Internet-Services and IP-Telephony

Revenues from Internet-services and IP-telephony

Internet traffic, TB

156

1 868

USD, mn

91

1018

61

597

2002

2003

2004

2002

2003

2004

2005 revenues from InternetandIP-telephonyguidelines are $260 mn


Svyazinvest new growth opportunities

Svyazinvest holds a strong position in regional cellular market

Subscriber base growth

(GSM-standard):

Regional subscriber bases

(01.04.05):

2 367

1 908

subscribers, th

subscribers, th

1 200

01.01.02

01.01.03

01.01.05

01.04.05

01.01.04

Urals

Sibirea

Volga

  • 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.


Integration of fixed and mobile communications new development opportunities

  • Promotion of packet services

  • Designing new products

  • Unified marketing and sales strategy

  • Creation of unified brand

Integration of products and services

Integration of operational functions

Integration of network infrastructure

  • Unified call centers

  • Consolidation of call centers

  • Integration of back offices

Synergetic effect from fixed and mobile communications integration

Enhancing competitiveness

  • Unified network development strategy

  • Software integration

  • Integration of billing and IT services

  • Single vendor equipment

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


Growing investments in vas development in 2005

Growing investments in VAS development in 2005

Dynamics of investments in VAS

Investment plan breakdown

464,0

USD

mn

USD 239 mn

298,6

USD 661 mn

159,6

USD 371 mn

USD 464 mn

2004

2005, target

2003

Development of infrastructure

Traditional telephony

  • Share of investments in development of VAS will double to reach 27% of the total investments.

  • Payback period will be 3-4 years.

Other

VAS and IT technologies


Svyazinvest new growth opportunities3

Svyazinvest – new growth opportunities

I. OAO Svyazinvest in the telecommunications industry

II. VAS development

III. Corporate reform and business optimization

IV. Natural monopoly status and tariff regulation


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

personnel cost cutting

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

operational cost cutting

equipment cost cutting

ERP system – implementation results

Comprehensive

financial

management

Efficient human resources management

Effective procurement management


Unified billing system implementation results

Improved corporate governance standards

  • Higher revenue

  • Modernization of infrastructure

IMPLEMENTATION RESULTS

  • Lower costs

Higher quality customer service

Unified billing system – implementation results

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

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


Operating risk management

Operating risk management

Objective:

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

Tasks:

  • 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

Results:

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

  • Gaining additional financial benefits by improving management system

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


Headcount optimization

Headcount optimization

Lines per employee and local network digitalization rate

Number of employees

Employees, th

Lines/employee

%

102

95

85

77

56.0

51.1

43.8

37.5

43,8 %

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


Svyazinvest new growth opportunities4

Svyazinvest – new growth opportunities

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

The need has arisen to review ‘natural monopoly’ criteria

‘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…’*

Criterion № 1 – absence of competition

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

Criterion № 2 – no close substitutes for goods

Dynamics of mobile communications in Russia

Dynamics of installed capacity at RTOs

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

* Law ‘On Natural Monopolies’


Tariffs for local telephone services

Tariffs for local telephone services

Average monthly rate, USD*

18.0

17.0

Average monthly rate for

mega-regional

companies is $6,9 per line

15.8

12.5

11.4

8.7

7.8

6.9

6.9

6.3

6.0

5.7

STC

VolgaTelecom

Centertelecom

Sibirtelecom

NWT

Uralsvyazinform

Dalsvyaz

Cesky-Telecom

Matav

TPSA

Lietuvos Telecomas

Lattelekom

Average monthly rate in Russia is still about 50% lower than in Central and Eastern Europe, and is 60% lower than in Western Europe.

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


Svyazinvest new growth opportunities

The need to finetune regulatory policies

  • To enable the holding’s companiesto work out flexible tariff plansfor 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’

  • To recognize competitionin the fixed-line sector in large Russian cities andto releasethese marketsfromtariff regulation


Svyazinvest new growth opportunities

Thank you!


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