Diversification: Diversification: Key to Economic Key to Economic

DevelopmentDevelopment

1. ECONOMY

2. INVESTMENT

3. STRATEGY OF ECONOMIC GROWTH

4. SISTEMA CASE STUDY

5. Q&A

April 2004Russian Economic Forum

London

2

1. ECONOMIC CONTEXT• Strong economy: 7.3% GDP growth for 2003

• High oil prices

• Strong domestic demand

• Large FX (>$61 bn) and fiscal (>$7 bn) reserves

• Budget surplus since 2000 (2% of GDP in 2003)

• Strong rouble and declining inflation

• Widespread corporate restructuring and growing labour productivity

• Progress of structural reforms in key areas (tax, natural monopolies, land and administration)

• Moody’s upgrade to investment grade (“Baa3” rating) as an evidence of economical and political progress recognition

0

1

2

3

4

5

6

7

8

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

Rat

e, %

10

12

14

16

18

20

22

24

26

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

Rat

e, %

GDP / Industrial Production Growth, %YOY

CPI, %YOY

RUSSIA HAS DEMONSTRATED STRONG MACROECONOMIC PERFORMANCE OVER THE PAST TWO YEARS

Source: Goskomstat

3

1.1 GROWTH DYNAMICS

ARE HIGH COMMODITY PRICES THE ONLY SOURCE OF ECONOMIC GROWTH?

????????RUSSIAN ECONOMY’S GROWTH RATES RAISE QUESTIONS ON THEIR UNDERLYING REASONS

Source: Goskomstat

Oil Price (US$/barrel)

1999 2000 2001 2002 2003 2004

Growth Rates (%)

0

2

4

6

8

10

12

1999 2000 2001 2002 2003

GDP Industrial Production

4

87,0%

44,6%

19,8%

14,0%

13,0%

10,4%

9,3%

8,8%

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

MTS

ROSNO

Engineering

Construction

Consumer Services

Retail

Fuel

Iron Industry

1.2 SOURCES OF ECONOMIC GROWTH

SERVICES, MANUFACTURING AND

CONSTRUCTION ARE BECOMING THE NEW GROWTH LEADERS

THE NEW TREND

• Commodity factor still vital• However, growth rates in the raw materials sector are beginning to lag behind those in manufacturing, construction and services

MANUFACTURING INDUSTRIES, CONSTRUCTION AND SERVICES ARE BECOMING SIGNIFICANT SOURCES OF ECONOMIC GROWTH

Source: Goskomstat, IMF, IRG

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1.3 PRODUCTION BREAKDOWN

MANUFACTURING INDUSTRIES STILL CONSTITUTE ONLY ABOUT 40% OF TOTAL INDUSTRIAL PRODUCTION, BUT THEIR SHARE WILL GROW

Engineering and Metalworking20,1%

Food Processing14,2%

Chemical and Petrochemical5,7%

Construction Materials3,1%

Light Industry1,4%

Fuel20,1%

Energy11,1%

Nonferrous Metallurgy7,7%

Iron Industry8,4%

Timber, Cellulose and Paper4,1%

Other Sectors4,0%

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Metals and Metal Goods 14%

Machines, Equipment and Vehicles 9%

Chemical Products 7%

Timber, Cellulose and Paper 4%

Fuel and Energy 58%

Other Goods 6%

Textiles, Textile Products and Shoes 1%

Food and Agricultural Materials 2%

1.4 EXPORTS BREAKDOWN

EXPORTS ARE DOMINATED BY COMMODITIES (>70%), HOWEVER, THE SHARE OF PROCESSED GOODS IS ALSO INCREASING

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Telecom Sector Revenues

$6,7

$4,1$5,2

$6,7

$8,7

$12,6

0

3

6

9

12

15

1998 1999 2000 2001 2002 2003Е

USD bn.

Incumbent Operators

Alternative Operators

Telecom Investment

$1,5

$1,1

$1,8$2,0 $2,1

$3,2

0

1

2

3

4

1998 1999 2000 2001 2002 2003Е

USD bn.

Foreign Investment

Domestic Investment

Penetration

21% 22% 23% 24% 25%27%

1% 1% 2%

6%

25%

13%

0%

10%

20%

30%

40%

50%

1998 1999 2000 2001 2002 2003Е

Fixed Line Wireless

Source: Ministry of Telecommunications, Company data

CAGR 1999-2003 – 32%

Share of Telecoms in Russia's GDP

2,5%

2,1% 2,0%2,2%

2,5%

2,9%

0%

1%

2%

3%

4%

1998 1999 2000 2001 2002 2003Е

Global Average (3.6%)

TELECOM SECTOR REVENUES ARE RAPIDLY GROWING WHILE STILL RETAINING HIGH GROWTH POTENTIAL

1.5 CASE STUDY: TELECOMS

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2. SOURCES FOR FUTURE GROWTH

GROWTH OF DOMESTIC CONSTRUCTION AND SERVICES

GROWTH OF EXPORTS IN THE MANUFACTURING SECTOR

I N V E S T M E N T

HI-TECH PROJECTSDEEPER PROCESSING OF RAW MATERIALS

DOMESTIC

ECONOMIC

GROWTH

DOMESTIC ECONOMIC GROWTH SHOULD COME FROM FOUR MAIN SOURCES

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13%

69%

193%

50%

34%

67%

0% 50% 100% 150% 200% 250%

Sistema

Foreign DirectInvestment

MTS

Total ForeignInvestment

MGTS

CAPEX

RUSSIAN AND FOREIGN INVESTORS ARE READY TO INVEST IN THE NON-NATURAL RESOURCES SECTOR

2.1 INVESTMENT

No 25%

No view 6%

Yes 69%

Do you see a move away from dollar denominated export sectors to rouble-heavy domestic sectors?

Source: Goskomstat, company informationSource: Ansdell Report 2004

Investment Growth (%)

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2.2 INVESTMENT GROWTH

FOREIGN INVESTORS PLAN TO INCREASE THEIR EXPOSURE TO RUSSIA, BUT IT DEPENDS ON A NUMBER OF FACTORS

Will you invest more into Russia?

Wait and see 16%

No 8%

No view 8%

Yes 68%

What factors would lead you to increase your exposure to Russia?

Progress on reforms

Resolution of YUKOSsituation

Rise in oil prices

Bettercorporategovernance

More IPOs

Government on sideof minor investors

36%

21%

14%

11%

9%

9%

Source: Ansdell Report 2004

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You might see a shift from export-oriented sectors to more domestic sectors. Russian export sectors will probably be hurt by the currency trend, whilst domestic stocks will benefit from the fact that high oil prices are making Russian people richer which means they have more money to spend on consumer goods. The reliance on oil has over-loaded the Russian economy in some respects. I do think we will see the Russian government make efforts to move the economy away from the oil & gas sectors to other sectors in the future.

Buy-side analyst

We would like to see a signal from local consumers in Russia that they are buying more consumer goods. Most of the listed companies in Russia are oil and telecoms companies. I would increase my exposure if there was an offering from other sectors such as the foods/consumer goods sector.

European emerging markets fund manager

2.3 FUTURE INVESTMENT DIRECTION

FOREIGN INVESTORS BELIEVE IN COMPANIES POISED TO BENEFIT FROM GROWING DOMESTIC CONSUMPTION

Source: Ansdell Report 2004

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3. STRATEGY OF ECONOMIC GROWTH

STATEBUSINESS

1. Legal and infrastructural framework for economic development

2. Industrial policy

1. Implementing investment projects

2. Satisfying the market’s needs

RUSSIA’S ECONOMIC GROWTH

AREA OF

I N T E R A C T I O N

ECONOMIC GROWTH IN RUSSIA IS ONLY ACHIEVABLE WITH EFFICIENT COOPERATION BETWEEN BUSINESS AND THE STATE

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3.1 COMPETITIVE ECONOMY

PROJECTS

Infrastructural Innovative

COMPETITIVE ECONOMY MEANS SUPPORTING PROMISING PROJECTS RATHER THAN STAGNATING SECTORS

SAMPLE PROJECTS:

• Development of microchip exports (Mikron)

• Telecom equipment manufacturing (Strom Telecom)

• Billing software production (Strom Telecom)

• ADSL services (MTU-Intel)

• Development of ‘smart’ offices (Sistema Hals)

Impact on the sector and general business

environmentValue Chains

Competitive Product

1. Objectiveness 2. Transparency

3. Systemic Approach

COMPETITIVEECONOMY

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• Largest non-natural resource based conglomerate in Russia• Diversified portfolio of assets with high degree of control over its subsidiaries

− Involvement in 13 business sectors− Asset value of $5.5bn as of 1H2003

• Strong growth history and perspectives− Total consolidated asset growth of 306% from 1999 to 1H2003− Substantial market cap growth of MTS (NYSE: MBT)− Strong growth potential in core businesses and ventures

• Strategic partnerships with leading international players− e.g. Deutsche Telekom (MTS), Allianz AG (ROSNO), Volvo, Siemens, Accor

• History of successful management of major projects in Russia − First-hand knowledge of the business environment− Excellent track record of the management team

• Industry leadership − Sistema’s subsidiaries in each core business are industry leaders in their sectors

• Rated B by S&P and Fitch, and B1 by Moody’s

SISTEMA IS A PERFECT EXAMPLE OF SERVICE- AND HIGH-TECH-, RATHER THAN COMMODITY-BASED, GROWTH

4. SISTEMA AS A GROWTH CASE

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SISTEMA

Telecommunications Pharma & Biotech

Travel & Overseas Assets

Children’s Goods Retail

Mass Media

Radio & Space Technology

Banking

Insurance

Real Estate

Mobile Telecom

Fixed Line

CLECs

Internet

SERVICES VENTURESPRODUCTION

Aviation

Venture Fund

Electronics

MicroElectronics

IndustrialElectronics

White andBrownGoods

Softwareand IT

Sistema’s strategic focus

4.1 GROUP STRUCTURE

ALL OF SISTEMA’S BUSINESSES ARE CONCENTRATED OUTSIDE OF THE RAW MATERIALS SECTOR

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4.2 STRATEGIC PRINCIPLES

SISTEMA’S SUCCESS IS BASED ON FIVE CORE STRATEGIC PRINCIPLES

• Building a balanced portfolio of operating companies• Effective portfolio management

Portfolio Diversification

Return-Based Strategy

• Investing into companies with leading competitive positions• Establishing sales and earnings targets for operating companies• Disposing of underperforming assets

Management Capability

• Attracting, developing and motivating professionals, and building an effective management structure

Strategic Partnerships

• Successful development of strategic partnerships• Acquiring know-how, management skills and market knowledge

Focus• Concentration in services and high-tech industries with fast growth• Growing size and value of technology, insurance, real estate and retail

businesses

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4.3 PORTFOLIO COMPOSITION (as of June 30, 2003)

Telecommunications87.1%

Other5.3%

Technology1.7%

Insurance4.9%

Finance and Securities

1.0%

FOUR BUSINESS SECTORS MAKE UP THE CORE OF SISTEMA’S INVESTMENT PORTFOLIO

Sistema Asset Value Breakdown Sistema Sales Breakdown

Total: US$ 5.5 bn Total: US$ 1.6 bn

Telecommunications80.3%

Other7.8%Technology

1.4%

Insurance3.3%

Finance and Securities

7.2%

DUE TO THE SECTOR’S RAPID DEVELOPMENT, TELECOMS CONSTITUTE OVER 80% OF SISTEMA’S PORTFOLIO BOTH IN TERMS OF ASSETS AND REVENUES

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4.4 FINANCIAL SUCCESS

MTS EXAMPLE DEMONSTRATES HUGE POTENTIAL FOR VALUE CREATION IN SISTEMA’S CORE BUSINESSES

Mobile Telesystems (NYSY:MBT) Closing Price and Trading Volumes (April 2001-April 2004)

0

500

1000

1500

2000

2500

3000

Date

03.05.2004

01/28/2004

12/18/2003

11.11.2003

10.06.2003

08/28/2003

07/23/2003

06/16/2003

05.08.2003

04.01.2003

02/24/2003

01/15/2003

12.06.2002

10/30/2002

09/24/2002

08/16/2002

07.11.2002

06.04.2002

04/26/2002

03/20/2002

02.11.2002

01.03.2002

11/26/2001

10/18/2001

09.06.2001

07/31/2001

06/22/2001

05/16/2001

$0

$20

$40

$60

$80

$100

$120

$140

$160

MTS EXAMPLE

• Deutsche Telekom/Sistema strategic partnership

• #1 in the Russian market

• Market Cap exceeds $13 bn (04.2004)

• 3.3 times Market Cap growth over past 12 months

+230%

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5……………………………………………….?THANK YOU FOR YOUR ATTENTION

5. Q&A