Reassessing Risk in Russia: Emerging Confidence in Emerging Markets

5th CFO Summit Emerging Europe & CIS October 17, 2012

Alexey Kornya, Vice President and Chief Financial Officer

MTS at a glance

Emerging confidence in emerging markets

Russia: local liquidity and financing

▪ MTS at a glance

Contents

2

The leading telecommunications provider in Russia and the Commonwealth of Independent States (CIS)

MTS one of the BRANDZ™ Top 100 Most Powerful Brands

‐ MTS included in the ranking in 2008, 2009, 2010, 2011 and 2012

‐ 85th brand overall with a brand value of $9.5 bln

Level III ADRs (NYSE:MBT) have been publicly

traded on the New York Stock Exchange since June 2000

MTS is majority-owned by Sistema JSFC (LSE:SSA), the largest diversified public financial corporation in Russia and the CIS

MTS at a glance

3

9 867.3 11 293.2 12 318.7 13 181.0

2009 2010 2011 2012E

Total Group

Revenue

(USD mln)

+34%

Total

Subscribers*

(millions)

Subscribers, Russia 2009 2010 2011 Q2 2012

Mobile (millions) 69.3 71.4 70.0 69.6

HH passed, 000s 7 502 9 890 11 433 11 507

BB Internet, 000s 1 298 1 805 2 152 2 285

Pay TV, 000s 1 762 2 580 2 987 2 937

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

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

102.4

108.1

106.1 105.6

2009 2010 2011 Q2 2012

MTS at a glance

Emerging confidence in emerging markets

Russia: local liquidity and financing

▪ Emerging markets are drivers of economic growth

▪ Budgetary discipline and ample reserves

▪ Low indebtedness

▪ Sovereign ratings fail to reflect economic reality

▪ Corporate credit ratings lagging

▪ Volatile stock market

Contents

4

4.3% 4.3% 3.7% 3.8%

-1%

1%

3%

5%

7%

9%

11%

2010 2011 2012E 2013ERussia USA EuropeOECD Developing Asia Latin America

Emerging markets are drivers of economic growth

5

Source: IMF, OECD data and forecast

GDP growth forecast

Source: Citi Bank

Real consumption growth forecast

Emerging markets are growing and consuming ‐ IMF forecasts about 4% GDP growth for 2012-2013

in Russia ‐ Higher growth rates in developing Asia ‐ Consumption growth in BRIC markets markedly

higher than developing markets ‐ Russian market characterized by moderate growth

and high disposable income

Emerging markets are working ‐ Unemployment in emerging markets generally

lower than developed markets ‐ Russia boasted a moderate unemployment rate of

5.2% in August 2012

Inflation is under control ‐ Russia’s inflation rate of 4.6% for January-August

2012 4.8% 5.2%

4.4%

-2%

0%

2%

4%

6%

8%

10%

12%

2011 2012E 2013E

USA Russia EuropeBrazil China India

Russia: budgetary discipline and ample reserves

6

Source: Citi Bank

Fiscal balance (% of GDP)**

Source: Russian Central Bank; *as of October 2012

Russian Central Bank international reserves (USD bln)*

Russia has substantial international reserves* – ≈$530 bln in international reserves as of October 2012

– 19-fold increase since 2000

– Trending upward

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

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

compared to 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 bln

China 3,236

Japan 1,259

EU 813

Russia 499

Brazil 352

India 298

World reserves of foreign exchange and gold as of 2011

Source: CIA World Factbook

-8%

-6%

-4%

-2%

0%

2%

4%

2011 2012E 2013E

Europe USA Russia China Brazil

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

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

Russia: low indebtedness

7

Source: Citi Bank

Government debt (% of GDP)

Source: McKinsey, 2012

Household debt (% of GDP)

Among leading global economic regions, Russia boasts low government debt

‐ Russia has a very low government debt as a % of GDP in comparison with the USA and Europe

‐ Debt level to remain stable

Household resilience ‐ Russian households are virtually unleveraged,

in particular 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

Russia: Sovereign ratings fail to reflect economic reality

8

Source of forecasts: IMF, Citi bank

Unlike developed market peers, merging 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 2012F

(% of GDP)

GDP Growth 2012F

Germany AAA/stable 65% 3.3% AAA/stable 83% 0.9%

USA AAA/stable 69% 1.9% AA+/neg 107% 2.2%

Spain AAA/stable 46% 3.5% BBB+/neg 91% -1.5%

Italy A+/stable 95% 1.7% BBB+/neg 129% -2.3%

China A/positive 20% 14.2% AA-/stable 16% 7.8%

Russia BBB+/pos 7% 8.5% BBB/stable 9% 3.7%

Brazil BB+/pos 55% 6.1% BBB/stable 54% 1.5%

India BBB-/stable 79% 9.8% BBB-/neg 69% 4.9%

Company EV/EBITDA

2009 P/E

2009 EV/EBITDA

2012 P/E

2012

Revenue Growth 2009

– 2012E

OIBDA margin 2012E

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% 41-42%

Russia: corporate credit ratings lagging

9

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

Russia: volatile stock market

10

Russian stock market is vulnerable to global turmoil, as the major capital investments come from abroad

At the end of 2008 major capital outflows from the Russian market were recorded

‐ Russia places no restrictions on capital; minimal currency and FOREX controls enable capital to move freely in and out of the Russian market

Source: HSBC

Russian RTS Index dynamics vs. other stock markets

Capital outflow from Russia during 2008 crisis

20

40

60

80

100

120

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

RTS FTSE100 DJI S&P500 Bovespa Nikkei225 Hang Seng

0%

2%

4%

6%

8%

10%

12%

14%Ja

n-0

7

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Russia as % of MSCI Allocation of GEM funds to Russia

MTS at a glance

Emerging confidence in emerging markets

Russia: local liquidity and financing ▪ Emergence of local liquidity and financing

▪ Growth in financing

▪ Increase in local funds borrowing

▪ Growth in financing: supporting CAPEX

▪ MTS migrates debt portfolio from USD to RUB

▪ MTS optimizes repayment schedule

Contents

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2

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24

06.08 12.08 06.09 12.09 06.10 12.10 06.11 12.11 06.12

Mosprime CB Repo Ref Rate CPI% %

Russia: emergence of local liquidity and financing

12

Interest rate of CBRF operations

Source: CBRF Balance of transactions is calculated as a net worth between Bank of Russia liabilities to the banking sector and Bank of Russia claims on the banking sector

CBRF balance for liquidity

Source: CBRF, GKS

Since 2009, the Central Bank of Russia has taken leading role in stimulating local capital markets

‐ Liquidity support has enabled Russian corporates to take advantage of reasonable borrowing rates through multiple debt instruments

‐ Capital infusion has attracted other investors and enabled leading banks to increase their credit portfolios

‐ Emergence of local markets enabled many leading Russian corporates to access credit when Western markets were frozen

Key factors impacting Central Bank decisions ‐ CPI growth rates vs. forecast ‐ Risks of an economic slowdown ‐ Control of interest rates and forex volatility

Central Bank increases volume of refinancing ‐ Current volume of refinancing reaches RUB 2.5

trillion ‐ More than 1.5-fold potential increase is

announced ‐ The largest volume of liquidity provided is

offered on the weekly repo auctions, which volumes have increased substantially in the last year

-1500

-1300

-1100

-900

-700

-500

-300

-100

100

300

500

700

900

-1 500

-1 300

-1 100

-900

-700

-500

-300

-100

100

300

500

700

900

06.08 12.08 06.09 12.09 06.10 12.10 06.11 12.11 06.12

RUB bln RUB bln

Growth in financing

13

4Q 2012

Volume of assets of typical Russian bank

0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1 400 000

1 600 000

Biggest Medium Small

01.01.2008

01.01.2009

01.01.2010

01.01.2011

01.01.2012

01.09.2012

mln RUB

Source: CBRF

Russian banks are increasing in size and scope to service various sectors of economy

Sustained volume of lending to companies of various sizes and individuals

‐ 40% growth rate in 2011

Significant gap between large and small

banks reflect: ‐ Capital-intensity of Russian economy (e.g.

oil/gas, metals/mining and infrastructure sectors prominent)

‐ Consolidation in marketplace ‐ Expansion of consumer credit

Assets growth of large banks is 2-3 times

higher than that of medium and small banks

Competition and broader liquidity pool steadily driving rates downward

Average rates on short-term loans extended by Russian credit institutions

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18

2008 2009 2010 2011 2012

in USD in EUR in RUB% %

Source: CBRF

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

09.201203.201209.201103.201109.201003.201009.200903.2009

bln

USD

bln

USD

RuBonds Eurobonds

Increase in local funds borrowing

14

Volume of corporate bonds, RUB bln

Volume of corporate and private loans, RUB trl

Credit volumes are growing at high rates

In years prior to 2008 global financial crisis, Russian corporates began looking at the developing ruble bond market for funding

Liquidity issues abroad have heightened interest in Ruble-based bonds since 2009

Though markets are fickle like in the West, ruble bonds are increasingly being used to finance Russian corporates

Overall the Russian bond market has made corporates less depending on Western markets and provide access to liquidity to meet the needs of local companies

Source: Cbonds agency

*Compared to September 2011; Source: CBRF

+141%

+36%

15.8 18.0 25.4

17.1

3.3 2.7

3.0

1.7 2.5

3.5

5.3

4.5 0.1

0.1

0.1

0.1

0

10

20

30

40

2009 2010 2011 Sep 2012Legal Entities in RUB Legal Entities in Foreign CurrencyIndividuals in RUB Individuals in Foreign Currency

+12% +39% +16%*

Growth in financing: supporting CAPEX

15

4Q 2012

Increasing asset base, government support and more local lending have enabled small, medium and large Russian banks to increase their capital base

Capital growth rates of Russian banks exceeded volumes of lending growth rates during 2009-2011

Investments in fixed assets in Russia have been increasing steadily since 2009 driven by more funding on better terms available on the internal market

6.6

8.7 7.9 9.2

10.8 +5.5%

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012E

Corporate investments (fixed assets) in Russia (RUB trl)

Source: GKS, Ministry of Economic Development

Capital of typical Russian bank

0

30 000

60 000

90 000

120 000

150 000

180 000

Biggest Medium Smallest

01.01.2008

01.01.2009

01.01.2010

01.01.2011

01.01.2012

01.09.2012

mln RUB

Source: CBRF

Example: MTS migrates debt portfolio from USD to RUB

Currency distribution as of Q3 2012*

From 2008 until now, MTS has migrated its primary debt currency from USD to RUB

The company has utilized bilateral facilities, ECA-backed facilities, Eurobonds and hedging to more closely align its debt portfolio to its primary currency of revenue

At the same time, the Company has succeeded in increase the duration of its financing and lowering its average cost of debt

Currency distribution as of FY2008

USD

69%

EUR 11%

RUB

20%

*Including Forex hedging in the amount of $300 mln as of Q3 2012 16

Duration: 2.9 years

Duration: 3.8 years

3% 76%

21%

RUB EUR

USD

$630 mln

$300 mln $360 mln

$413 mln

$162 mln $400 mln

56 bln

18 bln $400 mln

$238 mln

INGsyndicated

loan

Gazprombank INGsyndicated

loan

EBRD, EIB,NIB

INGsyndicated

loan

Eurobond Sberbank Gazprombank Eurobond

RUB

EUR

USD

Example: MTS optimizes repayment schedule

MTS’s debt payment schedule now features multiple instruments predominantly in rubles to match debt with currency of primary revenue and cash generation, optimize borrowing costs, increase tenor and maximize flexibility in the management of the Company’s debt portfolio

Debt repayment schedule as of Q3 2012 (USD mln)

247

750 1 281

323

325

454 440

730

1 278 1 221

92

17

93 318 202 199 142 85

750

2 136

246

1079 1079 1079

7

325 440

730 58 323

Q4 2012 2013 2014 2015 2016 2017 Thereafter

Loans in other currencies (USD/EUR) Eurobond Loans in rubles Ruble bonds

Repayment of major debt instruments since 2009

2009 2010 2012