4
Investment Highlights
Largest non-natural resource based holding in Russia
Diversified portfolio of assets, asset value of US$5.5bn
Strong growth history and perspectives
Strategic partnerships with leading international players
History of successful management of major projects in Russia
Industry leadership
Geographic leadership - Moscow market
Sistema is a leading Russian holding company with a high growth potential
5
History and Ownership
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Sistema founded
Won privatisation tender for MGTS
Invested in MTS
Acquired control of MTS and MGTS
MTS IPO
Acquisition of assets in insurance, retail and technology sectors
Consistent development of asset base and transparent ownership structure
2003
Debut $350m Eurobond; purchase of controlling
stake in MTS
Vladimir Evtushenkov
Management and directors
78.1% 21.9%
Telecoms Technology Insurance
Real EstateOther
businesses
Sistema JSFC
6
Board of Management
Key Shareholders and Managers
Company Management Vladimir P. Evtushenkov
Majority Shareholder (78%)
Chairman of the Board
Founder of Sistema
Evgeny G. Novitsky
Director
President of Sistema since 1995
Alexander Y. Goncharuk
Director
General Director of OAO CSC
Arkady I. Volsky
Independent Director
President of the Russian Union of Industrialists and Entrepreneurs
Stanislav V. Emelyanov
Independent Director
Academician, Head of International Scientific Research Institute of Automatic Control
Levan S. Vasadze
First Vice President
Strategy and Development
Alexey N. Buyanov
First Vice President, CFO
Finance and Investment
Shareholder Meeting
Chairman of the Board of DirectorsBoard of Directors
President
Internal Audit Department
Corporate Strategy
Committee
Finance & Investment Committee
Finance & Investment
Strategy & Development
PR and Corporate
Communication
Property and Legal
7
Corporate Governance
Strong commitment to establish checks and balances within the Company:
– Finance and Investment Committee empowered to vet all major investment decisions
– International Consulting Council set up in May 2003 as advisory body for key strategic matters
– 2 out of 13 BoD members are independent
High transparency and disclosure standards
– Among first Russian companies to disclose beneficial owners in 2002
– High quality of corporate governance in publicly traded subsidiaries MTS: S&P Corporate Governance Score of 7.4, highest among Russian companies
– In 2003, Sistema created Investor Relations Department Single point of contact for investors, analysts and media
– In 2003, Sistema initiated semi-annual public disclosure of US GAAP financial reports
Sistema’s role as an investor in its subsidiaries as a guarantee of the profound understanding of transparency requirements
Sistema adheres to the highest standards of corporate governance
8
Portfolio Composition Four business sectors make up the core of Sistema’s investment portfolio
Sistema Asset Value Breakdown Sistema Sales Breakdown
Telecommunications80.3%
Other7.8%Technology
1.4%
Insurance3.3%
Finance and Securities7.2%
Finance and Securities1.0%
Insurance4.9%
Technology1.7% Other
5.3%
Telecommunications87.1%
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Strategic Goals
Focused business development strategy
Building a balanced portfolio of operating companies Growing size and value of technology, insurance, real estate and retail
businesses
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
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Telecommunications
MTS, the largest mobile operator in Central and Eastern Europe with over 15mn subscribers in November 2003
Sistema’s telecom division is the leading telecom provider in the traditional and alternative fixed-line segments in Moscow with over 4.7mn active lines in service and a market share of over 60% in 1H2003
Sistema is Moscow’s leading dial-up and broadband Internet services provider with a market share of 41% in 2002
The largest diversified telecom portfolio in Russia
Wireless
P-Com
Fixed-line
MGTS
MTU-Inform
Comstar
Telmos
Internet &data
services
MTU-Intel
Golden Line
Alternative operators
Incumbent
MCC
50.6%
60%
11%
56%*
72%
73%
59%
84%
84%
Sistema
MTS
* voting interest
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Microelectronics
Telecom Equipment and Software
Industrial &Consumer Electronics
Sitronics99%
Technology
Russia’s leading semiconductor manufacturer in Zelenograd with more than 40-year history
High-quality manufacturing process is ISO-9001 certified
Significant share of export revenues
Extensive R&D capabilities, 500 scientists employed
Considerable market potential: Sitronics, Russia’s consumer electronics umbrella brand, operates in $5bn market (2002)
Recently established presence in the telecom equipment market in Russia ($3.4bn in 2002) via Czech manufacturer Strom Telecom
Leading diversified technology business in Russia
Technology Division
100% Scientific Center
56% Mikron
28%Corona
Elion70%
Elaks64%
VZPP-Mikron
51%
52%
Kvant28%
70%
Strom-Telecom
80% Angstrem8%
Angstrem-M8%
R&D
NIITM
ICM
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Insurance
One of the leading insurance companies in a high-growth Russian insurance market of $9.6bn (in 2002)
Strategic partnership with Allianz AG (45.27% of ROSNO) bringing industry expertise and improving efficiency
Nationwide coverage: 78 branches located throughout the Russian Federation
Diversified portfolio (over 160) of tailor-made insurance products
Prudent insurance policies based on international standards
Top 3 Russian insurer leveraging on combination of local experience and international know how
47% (51% voting)
Insurance Division
ROSNO
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Real Estate
Highly prominent segment with high cash generation capacity
Sistema Hals is one of the leading real estate developers in Moscow with numerous international awards
Real estate was one of our initial businesses - we started it early in ‘90s
Specializes in developing premium offices, luxury apartments, retail space and cottages
We have an excellent track record in developing premium offices for foreign corporates, having completed projects for Daimler-Chrysler, Dresdner Bank, BNP, Samsung Electronics, and others
Very attractive portfolio of projects in Moscow’s booming real estate market
98%
LandchaftSistema Hals
98%
Real Estate Division
Hals-Management Sistema-Temp
86% 99%
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Other Businesses: Ownership Structure
Other Businesses
Retail
Detsky Mir
Detsky Mir Center
Travel services
Oil & Gas Mass mediaPharmaceu-
ticalsInternational operations
VAO Intourist
Sistema-NEFT
Sistema Mass Media
Medical Technology
Holding Company
ECU-Gest
71%
100%
91% 95% 100% 74% 99%
Belkamneft
UPK Nedra
33%
83%
Banking and Finance
MBRD
East-WestUnited Bank
30%
56%
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Portfolio Management
Core businesses:
– Main recipients of Sistema’s own investments
– Board level involvement mainly
– Emphasis on strategy, cash flow and key managers
Non-core businesses:
– Mostly self-funded, recipients of residual Sistema’s own investments
– Sistema closely involved with business process engineering
Sistema’s approach to managing an individual operating company is based on the business segment and development stage
18
Financial Strategy
Sound approach to financing:
– Core businesses financing through a combination of Sistema’s equity, own debt and involvement of strategic partners
– Non-Core Businesses financing mostly through internal cash flow generation and partnering initiatives
Commitment to optimize the quality and maturity profile of the debt portfolio
Diversification of debt instruments:
– Domestic ruble market (holding and subsidiary level financing)
– International debt capital markets Sistema US$350mn Reg S Eurobond issue outstanding
Sistema 144A/ Reg S Eurobond planned
Established MTS Eurobond curve (Global and 144A/Reg S issues)
‒ Project financing
Equity financing (potential application of MTS model to other subsidiaries)
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Financial Strategy: Cash Flow Sources
As an operating holding company, Sistema has three major cash flow sources:
Dividend Cash Flows
– Starting in 2002 MTS has changed its policy of dividend distribution with payout levels established in a shareholder agreement between Sistema and Deutsche Telekom, which should provide holding company with sound cash upstream
– In future, as our businesses mature, we expect dividends to become a significant recurring cash flow source for the holding company
Income from Real Estate
– Real Estate segment is different from our other business lines as it is capable to generate significant cashflows for the holding company in the short to mid term while other businesses (except for MTS) are at earlier stages of development
Capital Gains Potential
– We are quite flexible in respect of non-core asset disposals and are taking a tactical approach to managing our interests in these businesses
In addition to three major sources, Sistema receives consulting/management fees which are generally balanced against holding company’s administration costs
20
Sistema in Russian Economy Context
Rapid improvement in Russian economic profile creates unique opportunities for Sistema rapid development
Strong economic growth: 6.2-6.4% GDP growth expectations for 2003
Large FX (US$61bn) and fiscal (US$7bn) reserves
Budget surplus since 2000 (2% of GDP so far in 2003)
Stable exchange rate and declining inflation (13.2% as of September 2003)
Wide spread corporate restructuring and growing labour productivity
Progress of structural reforms in key areas (tax, natural monopolies, land and administration)
Moody’s upgrade to investment category (“Baa3” rating) as an evidence of economical and political progress recognition
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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
21
Financial Performance
Selected Items from US GAAP Audited Consolidated Financial Statements
Significant change of financial results in 1H2003 due to MTS consolidation
(1)Total Debt excludes notes payable and includes capital leases
22
Profitability
29.8%34.4% 36.4%34.4%
2000 2001 2002 1H2003
Sustainable profitability and efficient use of capital
Return on Capital Employed Return on Total Assets Return on Equity
14.3%17.3% 17.2% 17.9%
2000 2001 2002 1H2003
25.4%
39.1%32.9%
14.7%
2000 2001 2002 1H2003
Note:1. ROCE calculated as (Operating Income + Depreciation&Amortisation) / Average (Shareholders’ Equity + Total Debt)2. ROTA calculated as (Operating Income + Depreciation&Amortisation) / Average Total Assets3. ROE calculated as Net Income / Average Shareholders’ Equity
23
Credit Ratio Analysis
Moderate level of debt as compared against operating statistics and asset base
CFO / Net Interest Total Debt / CFO Total Debt/Total Assets
33.5%27.7% 25.7%
36.6%
2000 2001 2002 1H2003
4.2
2.0
4.8
2.6
2000 2001 2002 1H2003
4.2
6.5
2.7
4.4
2000 2001 2002 1H2003
Note:1. CFO/Net Interest is calculated as Cash flow from operations / (Interest Expense - Interest Income)
24
Asset Protection
Total Debt at 31 December 2002 $599.1
Liquid Investments (1) 1,748.0
Liquid Investments / Total Debt 2.9x
Total Debt at 1 July 2003 2,019.9
Liquid Investments (2) 3,268.0
Liquid Investments / Total Debt 1.6x
(1) Liquid investments represent 40.6% stake in MTS and 46% stake in MGTS valued as of 31 December 2002
(2) Liquid investments represent 50.6% stake in MTS and 46% stake in MGTS valued as of 1 July 2003
On the holding company level, Sistema’s credit strength is supported by a sufficiently large portfolio of traded securities - MTS and MGTS shares
Sistema’s two largest investments include listed companies, MTS and MGTS (MTS is listed on NYSE, MGTS is listed in Russia)
MTS and MGTS stakes value exceeds the total amount of consolidated debt by a significant margin