UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
☐ | Registration Statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 |
or
☒ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 31, 20212022
or
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
or
☐ | Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 333-12032
MOBILE TELESYSTEMS PUBLIC JOINT STOCK COMPANY
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
RUSSIAN FEDERATIONRussian Federation
(Jurisdiction of incorporation or organization)
4 Marksistskaya Street, Moscow 109147 Russian Federation
(Address of principal executive offices)
Polina V. UgryumovaAndrey M. Kamenskiy
Director, Investor RelationsVice President, Finance and Chief Financial Officer
5 Vorontsovskaya Street, bldg. 2, 109147 Moscow Russian Federation
Phone: +7 495 223 20 25, E mail: ir@mts.ru
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act: None
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Listed, not for trading or quotation purposes, but only in connection with the registration of common ADSs pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Title of Each Class |
COMMON AMERICAN DEPOSITARY SHARES, EACH REPRESENTING TWO COMMON SHARES |
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COMMON SHARES, PAR VALUE 0.10 RUSSIAN RUBLES PER SHARE |
None(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Title of Each Class |
None |
None(Title of Class)
Indicate the number of outstanding shares of each of the issuer'sissuer’s classes of capital or common stock as of the close of the period covered by the annual report.
1,129,245,695 ordinary shares, par value 0.10 Russian rubles each and 391,398,362 American Depositary Shares as of December 31, 20212022
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer ☐ | Non-accelerated filer ☐ | Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† | The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ | International Financial Reporting Standards as issued by | Other ☐ |
| the International Accounting Standards Board ☒ | |
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻☐ No ☒
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Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation | 121 | ||
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
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i
ABOUT THIS ANNUAL REPORT
Unless otherwise indicated or unless the context requires otherwise, references in this document to (i) “MTS,” “the Group,” “the Company,” “we,” “us,” or “our” are to Mobile TeleSystems Public Joint Stock Company individually or together with its
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subsidiaries as the context may require; (ii) “Vodafone Ukraine” and “VF Ukraine” are to Private Joint Stock Company “VF Ukraine”(formerly PJSC MTS Ukraine) which is our former subsidiary in Ukraine disposed of in December 2019; (iii) “Uzdunrobita” are to our former subsidiary in Uzbekistan, which was deconsolidated in 2013; (iv) “MTS-Turkmenistan” our Turkmenistan subsidiary and “BCTI” are to Barash Communication Technologies, Inc., our former Turkmenistan subsidiary, which was compelled to suspend communication services in Turkmenistan in 2017; (v) “Comstar” or “Comstar-UTS” are to COMSTAR—United TeleSystems, our former fixed line subsidiary, which was merged into MTS PJSC in 2011; (vi) “MGTS” are to Public Joint Stock Company Moscow City Telephone Network, our Moscow public switched telephone network (“PSTN”) fixed line subsidiary; and (vii) “MTS-Armenia,” “K-Telecom” or “VivaCell-MTS” are to our Armenian subsidiary; (viii) “MTS Bank” are to MTS Bank PJSC «MTS Bank», our subsidiary that provides banking services; (ix) “UMS” are to Universal Mobile Systems LLC, our former subsidiary in Uzbekistan which was deconsolidated in 2016; (x) “NVision” or “NVision Group” are to our former subsidiary which provided integration services and was sold in 2019 to Sistema, becoming a related party,(xi) “Sistema” are to Sistema Public Joint Stock Financial Corporation, our significant shareholder. We refer to Mobile TeleSystems LLC, our 49% owned equity investee in Belarus, as “MTS Belarus.” As MTS Belarus is an equity investee, our revenues and subscriber data do not include MTS Belarus.
In this document, references to “U.S. dollars,” “dollars,” “$” or “USD” are to the lawful currency of the United States, “Russian rubles,” “rubles” or “RUB” are to the lawful currency of the Russian Federation, “hryvnias”“dram” are to the lawful currency of Ukraine,Armenia, “soms” are to the lawful currency of Uzbekistan, “manats” are to the lawful currency of Turkmenistan, “dram” are to the lawful currency of Armenia and “€,” “euro” or “EUR” are to the lawful currency of the member states of the European Union that adopted a single currency in accordance with the Treaty of Rome establishing the European Economic Community, as amended by the treaty on the European Union, signed at Maastricht on February 7, 1992. References in this document to “shares” or “ordinary shares” are to our ordinary shares, “ADSs” are to our American depositary shares,Depositary Shares, each of which represents two ordinary shares, and “ADRs” are to the American depositary receiptsDepositary Receipts that evidence our ADSs. Prior to May 3, 2010, each ADS represented five ordinary shares of our common stock. “CIS” refers to the Commonwealth of Independent States. “CBR” refers to the Central Bank of Russia.
None of the websites referred to in this document, including where a link is provided, nor any of the information contained on such websites is incorporated by reference in this document.
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The following tables show, for the periods indicated, certain information regarding the exchange rate between the ruble and the U.S. dollar, based on data published by the CBR. These rates may differ from the actual rates used in preparation of our financial statements and other financial information provided herein.
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| | Rubles per U.S. dollar | | Rubles per U.S. dollar | ||||||||||||
Years ended December 31, |
| High |
| Low |
| Average(1) |
| Period End |
| High |
| Low |
| Average(1) |
| Period End |
2019 |
| 69.47 |
| 61.72 |
| 64.74 |
| 61.91 | ||||||||
2020 |
| 80.88 |
| 60.95 |
| 72.15 |
| 73.88 |
| 80.88 |
| 60.95 |
| 72.15 |
| 73.88 |
2021 | | 77.77 | | 69.55 | | 73.65 | | 74.29 |
| 77.77 |
| 69.55 |
| 73.65 |
| 74.29 |
2022 | | 120.38 | | 51.16 | | 68.55 | | 70.34 |
(1) | The average of the exchange rates on the last business day of each full month during the relevant period. |
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| | Rubles per | ||
| | U.S. dollar | ||
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| High |
| Low |
July 2021 | | 74.63 | | 72.72 |
August 2021 | | 74.36 |
| 72.79 |
September 2021 | | 73.44 |
| 72.51 |
October 2021 | | 72.92 |
| 69.55 |
November 2021 | | 75.58 |
| 70.52 |
December 2021 | | 74.89 |
| 73.19 |
January 2022 | | 78.95 |
| 74.29 |
February 2022 | | 86.93 |
| 74.72 |
March 2022(1) | | 120.38 |
| 84.09 |
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| | Rubles per | ||
| | U.S. dollar | ||
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| High |
| Low |
April 2022 | | 83.59 | | 71.02 |
May 2022 | | 71.02 |
| 56.30 |
June 2022 | | 61.97 |
| 51.16 |
July 2022 | | 63.14 |
| 52.51 |
August 2022 | | 62.05 |
| 59.13 |
September 2022 | | 61.18 |
| 57.41 |
October 2022 | | 63.76 |
| 55.30 |
November 2022 | | 62.10 |
| 60.22 |
December 2022 | | 72.13 | | 60.88 |
January 2023 | | 70.34 | | 67.57 |
February 2023 | | 75.43 | | 70.04 |
March 2023 | | 77.24 |
| 74.89 |
Source: CBR.
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The exchange rate between the ruble and the U.S. dollar quoted by the CBR for March 31, 2022April 10, 2023 was 84.0982.40 rubles per U.S. dollar.
iiiii
SUMMARY RISK FACTORS
Our business is subject to a number of risks of which you should be aware of before making an investment decision. These risks are discussed more fully in the below “Risk Factors” section of this annual report. The following summarizes some, but not all, of the risks provided below:
Risks Relating to Economic Risks in Our Countries of Operation including, among others, the following risks:
● | Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares. |
● | The imposition of sanctions on MTS Bank and the potential for further international sanctions and export restrictions affecting the Group may have a material adverse impact on our business, financial condition and result of operations. |
● | Economic volatility in the countries where we operate could adversely affect our business. |
● | Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries. |
● | Failure to comply with existing laws and regulations as well as requirements of international and regional standards or to obtain all approvals, authorizations and permits required to transmit television channels or operate telecommunications equipment, or the findings of government inspections or increased governmental regulation of our operations, could result in a disruption in our business and substantial additional compliance costs and sanctions. |
● | Russian and foreign legislation on personal data and information security in information systems and communication networks may turn out to be hard to implement and require significant resources. Inability to comply with the requirements may lead to sanctions. |
● | The Russian taxation system is underdeveloped and any imposition of significant additional tax liabilities could have a material adverse effect on our business, financial condition or results of operations. |
Risks Relating to Our Shares and ADSs and the Trading Market including, among others, the following risks:
● | ADS holders who have not yet converted their ADSs into shares may face difficulties (including a loss of value) in converting their ADSs into shares or may even be unable to do so. |
● | The market price of our shares has been and may continue to be volatile. |
● | Shareholders may be unable to repatriate distributions made on the shares. |
● | Foreign judgments may not be enforceable against us. |
Risks Relating to Our Financial Condition including, among others, the following risks:
● | Continued turmoil in the credit markets could cause our business, financial condition, results of operations and the value of our shares to suffer. |
● | Our inability to generate sufficient free cash flow to satisfy our debt service obligations or to refinance debt on commercially reasonable terms, could materially adversely affect our business, financial condition, results of operations and prospects. |
● | Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of shares. |
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● | If we are unable to obtain adequate capital, we may have to limit our operations substantially, which could have a material adverse effect on our business, financial condition, results of operations and prospects. |
Risks Relating to Business Operations in Emerging Markets
● | Emerging markets such as the Russian Federation and other CIS countries are subject to greater risks than more developed markets, including significant legal, economic, social, regulatory, tax and political risks which could have a material adverse effect on our business and could cause the value of our shares |
Risks Relating to Our Business including, among others, the following risks:
● | The telecommunications and digital services market is characterized by rapid technological change, which could render our services obsolete or non-competitive and result in the loss of our market share and a decrease in our revenues. |
● | We are subject to anti-corruption laws in the jurisdictions in which we operate, including anti-corruption laws of Russia and the US Foreign Corrupt Practices Act (the “FCPA”), and we may be subject to the UK Bribery Act 2010 (the “UK Bribery Act”). Our failure to comply therewith could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations. |
● | We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA and the SEC Order. |
● | We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation. |
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● | If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices, which may diminish our market share and result in a loss of revenues and margins. |
● | We may not realize the benefits we expect to receive from our investments in 4G and 5G wireless services and Internet of Things (IoT) technologies, which could have a material adverse effect on our business and results of operations. |
● | If we are unable to successfully develop and/or deploy 4G and 5G wireless services in the countries in which we operate, or if any operators in those markets obtain a significant technological and/or commercial advantage over us in 4G and 5G wireless services, it may have a material adverse effect on our business and results of operations in the long term. |
● | Failure to renew our licenses, or receive renewed or new licenses with similar terms to our existing licenses, could have a material adverse effect on our business and results of operations. |
● | Failure to monitor, manage and prevent MTS Bank’s operational and technological risks, could have a material adverse effect on our business, financial condition and results of operations. |
● | Changes to the rules and regulations involving roaming charges in Russia may adversely affect our financial condition and results of operations. |
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Risks Relating to Our Financial Condition including, among others, the following risks:
Risks Relating to Our Countries of Operation including, among others, the following risks:
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Risks Relating to Our Shares and ADSs and the Trading Market including, among others, the following risks:
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGFORWARD LOOKING STATEMENTS
Matters discussed in this document may constitute forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 (the “U.S. Securities Act”), and Section 21E of the U.S. Securities Exchange Act of 1934 (the “U.S. Exchange Act”). The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their businesses. Forward-looking statements include statements concerning plans, objectives, goals, strategies, risks and their assessment, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.
MTS desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation and other relevant law. This document and any other written or oral statements made by us or on our behalf may include forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “predict,” “plan,” “may,” “should,” “could” and similar expressions identify forward-looking statements. Forward-looking statements appear in a number of places including, without limitation, “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on our Company—B. Business Overview,” “Item 5. Operating and Financial Review and Prospects,” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk” and include statements regarding:
● | our strategies, future plans, economic outlook, industry trends and potential for future growth; |
● | our liquidity, capital resources and capital expenditures; |
● | our payment of dividends; |
● | our capital structure, including our indebtedness amounts; |
● | our ability to generate sufficient cash flow to meet our debt service obligations; |
● | our ability to achieve the anticipated levels of profitability; |
● | our ability to timely develop and introduce new products and services; |
● | our ability to obtain and maintain interconnect agreements; |
● | our ability to secure the necessary spectrum and network infrastructure equipment; |
● | our ability to meet license requirements and to obtain and maintain licenses and regulatory approvals; |
● | our ability to maintain adequate customer care and to manage our churn rate; and |
● | our ability to manage our rapid growth and train additional personnel. |
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The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections. In addition to these important factors and matters discussed elsewhere herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include:
● | growth in demand for our services; |
● | changes in consumer preferences or demand for our products; |
● | availability of external financing on commercially acceptable terms; |
● | the developments of our markets; |
● | the highly competitive nature of our industry and changes to our business resulting from increased competition; |
● | the impact of regulatory initiatives; |
● | the rapid technological changes in our industry; |
● | cost and synergy of our recent acquisitions; |
● | the acceptance of new products and services by customers; |
● | the condition of the economies of Russia, and certain other countries of the CIS; |
● | risks relating to legislation, regulation and taxation in Russia and certain other CIS countries, including laws, regulations, decrees and decisions governing each of the telecommunications industries in the countries where we operate, currency and exchange controls relating to entities in Russia and other countries where we operate and taxation legislation relating to entities in Russia and other countries where we operate, and their official interpretation by governmental and other regulatory bodies and by the courts of Russia and the CIS; |
● | political stability in Russia and certain other CIS countries; |
● | further deterioration in |
● | the impact of general business and global economic conditions and other important factors described herein and from time to time in the reports filed by us with the U.S. Securities and Exchange Commission (the “SEC”). |
All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. Readers are cautioned not to place undue reliance on these forward-looking statements. Except to the extent required by law, neither we, nor any of our respective agents, employees or advisors intends or has any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained or incorporated by reference in this document.
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PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3.Key Information
A. | [Reserved] |
B. | Capitalization and Indebtedness |
Not applicable.
C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
D. Risk Factors
An investment in our securities involves a certain degree of risk.risks. You should carefully consider the following information about these risks, together with other information contained in this document, before you decide to buy our securities. If any of the following risks actually occurs, our business, prospectus, financial condition or results of operations could be materially adversely affected. In that case, the value of our securities could also decline and you could lose all or part of your investment. In addition, please read “Cautionary Statement Regarding Forward-Looking Statements” where we describe additional uncertainties associated with our business and the forward looking statements included in this document.
Risks Relating to Economic Risks in Our Countries of Operation
Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.
Starting from February 2022, the EU, the U.S., the UK and certain other countries have imposed new significant sanctions and export control measures on Russia, particular sectors of Russian economy, and some Russian and Belarusian persons and entities. Most recently, these sanctions were extended to MTS Bank. See “—Political and Social Risks— The imposition of sanctions on MTS Bank and the potential for further international sanctions and export restrictions affecting the Group may have a material adverse impact on our business, financial condition and result of operations.” For example, on April 11, 2023, Felix Evtushenkov, the Chairman of our Board of Directors, was designated under asset freeze and travel ban sanctions by the HM Treasury of the United Kingdom. Mr. Evtushenkov resigned as Chairman and member of the Board of Directors effective April 17, 2023. The continuation or expansion of such restrictions as well as uncertainty due to changes in the regulatory environment in Russia may raise additional compliance and operational challenges for the Company and its staff and adversely affect the business of the Company and its customers and suppliers.
In addition, a number of western companies and exchanges have taken further action suspending, stopping, or restricting their operations in Russia by their own initiative. On February 28, 2022, trading on the Moscow Exchange in all equity securities was temporally suspended (including the Company’s ordinary shares). Also, on February 28, 2022, the New York Stock Exchange halted trading in the Company’s ADSs and shares of certain other Russian companies. The Company’s ADSs were effectively delisted from New York Stock exchange on August 8th, 2022.
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In addition, starting from February 2022, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) repeatedly issued regulations introducing new export control measures on Russia and Russian legal entities, therefore licenses of BIS generally are now required for the export, reexport in Russia or transfer (in country) of a number of items subject to the Export Administration Regulations (“EAR”), including electronics, computers, telecommunications and information security, sensors and lasers, navigation and avionics, marine, and aerospace and propulsion. Similar restrictions have also been issued on certain non-dual-use categories of goods (including luxury goods such as cars, watches, alcohol, leather goods, yachts, etc.). Most export license applications for Russia now are subject to a policy of denial. BIS issued and expanded similar export control measures relating to Belarus. For example, in February 2023, our wholly owned subsidiary, Vision Labs, was included by BIS into the Entity list. As a result, exports of items subject to the EAR to Vision Labs may now require a license. Starting from February 2022 the UK, the EU and certain other countries also issued a significant number of sanction and export control measures relating to Russia. These restrictions are similar to the measures introduced by the U.S. and includes, inter alia: (i) sanctions that block the property of certain Russian entities and individuals, including a number of financial institutions; (ii) targeted sanctions that prohibit certain debt and/or equity or other transactions with identified companies (including those operating in the Russian financial, energy, and defense sectors); (iii) restrictions on transactions with the Russian Central Bank, National Wealth Fund, Ministry of Finance; (iv) territorial sanctions restricting investment in and trade at Crimea, Donetsk, and Luhansk People’s Republics, as well as Kherson and Zaporizhia regions; and (v) restrictions on delivery of goods, software and dual-use technologies in Russia, as well as certain categories of other goods, including luxury goods. In addition, a number of Russian financial institutions have been removed from the SWIFT messaging system. In addition to these measures some countries prohibited provision of particular services to Russian persons, including management and tax consulting services, IT and PR consulting services, as well as legal advisory and marketing research services.
Moreover, the restrictions introduced by the U.S., the EU, the UK and other countries may impact supply chain and cost of delivery of equipment and other products, and our business and financial condition.
In particular, pursuant to Decrees of the President of the Russian Federation, Orders of the Russian Government and acts of the Central Bank of Russia a special procedure is established for the execution by residents of certain contracts with foreign legal entities and individuals. In particular, transactions for the provision of credits and loans to certain non-residents, as well as transactions that concern the ownership title to securities and real estate are subject to restrictions. Such transactions may be carried out subject to permits issued by the Special government Commission.
Furthermore, a special procedure has been established for the fulfillment by residents (debtors) of their obligations in excess of 10 million rubles (or equivalent of this amount in foreign currency) per month on credits, loans and financial instruments (including payment of bond coupons and dividends) to foreign persons (creditors). These obligations are fulfilled by the debtor with the permission of the Central Bank of Russia (for credit organizations), the Finance Ministry of the Russian Federation (for other debtors) or in rubles through special accounts of type "C". In addition, the Central Bank of Russia is authorized to set limits on the amount of funds for transfers by non-residents from their accounts opened in the Russian Federation to the accounts of other non-residents, as well as for the purchase by non-residents of foreign currency in the foreign exchange market of Russia. Additionally, restrictions on transfers by certain non-residents of funds held on their accounts opened in Russia to any accounts opened outside the Russian Federation was introduced on April 1, 2022.
Moreover, in June 2022 the EU and Switzerland imposed blocking sanctions on the National Settlement Depository (“NSD”). Since NSD is, inter alia, a part of the chain of record keeping and custody of securities circulating on SPB Exchange and MOEX, all transactions with foreign securities of European companies were suspended for Russian investors (purchase and sale, receiving of coupons and dividends, etc.) if their rights are recorded with NSD. Additionally, because of these restrictions, non-resident holders of Eurobonds issued by Russian companies may not be able to receive coupons on these securities. In addition, the Federal law No. 114 dated April 16, 2022 “On Amendments to the Federal Law “On Joint Stock Companies” and certain legislative acts of the Russian Federation” requires Russian companies to terminate foreign depositary programs, under which the depositary receipts of such companies (including the Company) are listed on foreign stock exchanges. The Russian Government Commission on Monitoring Foreign Investment decided that MTS could retain its depositary program until July 12, 2022. Accordingly, currently MTS’ shares’ trading outside of the Russian Federation in the form of depositary receipts is stopped. The Company’s ADSs were delisted from the NYSE effective August 8, 2022.
Under the winding down process of the ADS program, the last day of period guaranteed for conversion of MTS ADRs into underlying ordinary shares was January 12, 2023. See “Risks Relating to Our Shares and ADSs and the Trading Market - ADS holders who have not yet converted their ADSs into shares may face difficulties (including a loss of value) in converting their ADSs into shares or may even be unable to do so.”
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The underlying shares continue to be listed on MOEX, which remains the sole listing venue of our equity securities.
Moreover, on April 3, 2022 certain deputies of the State Duma and members of the Federation Council of the Federal Assembly of the Russian Federation announced amendments to the Criminal Code of the Russian Federation that would establish criminal liability for complying with foreign sanctions on the territory of the Russian Federation. If such amendments were adopted, they could limit MTS’s access to foreign supplies of materials and equipment, as foreign counterparties may be unable to work with MTS, which could have a material adverse effect on our business, financial condition, results of operations, prospects and the value of our shares.
The aforementioned geopolitical events, and any of their continuation, has had and may continue to have a negative impact on the volatility and trading price of the Group’s securities. Developments relating to these matters are highly unpredictable, occur swiftly and often with little notice, and are mostly outside the control of the MTS Group. The risk that any MTS Group member, or individuals holding positions within the MTS Group as well as its counterparties, staff and shareholders, may be affected by sanctions designations cannot be excluded. Current and future risks to the MTS Group include, among others, the risk of reduced or blocked access to capital markets and ability to obtain financing on commercially reasonable terms (or at all), the risk of restrictions on the import of certain equipment and software (including technical services and support), risk of changes in conditions, restrictions or termination of work with partners and organizations, as well as the risk of further depreciation of the Russian ruble against other currencies and risk of key interest rate increases, which may adversely impact the MTS Group and its counterparties. In addition, the continuation or expansion of sanction restrictions may also adversely affect our roaming revenue.
Operations of MTS Belarus, which is also a part of MTS Group, are also susceptible to the risks described above, as well as to specific sanctions risks arising from the EU, the U.S., the UK and certain other countries’ sanctions and export controls regimes imposed in respect of Belarus since February 2022.
See also “—Political and Social Risks— The imposition of sanctions on MTS Bank and the potential for further international sanctions and export restrictions affecting the Group may have a material adverse impact on our business, financial condition and result of operations.”
The imposition of sanctions on MTS Bank and the potential for further international sanctions and export restrictions affecting the Group may have a material adverse impact on our business, financial condition and result of operations.
In February 2023, the US Office of Foreign Assets Control (OFAC) and the UK Office of Financial Sanctions Implementation (OFSI) designated MTS Bank as a sanctioned person pursuant to applicable sanctions regulations adopted by the US and the UK, respectively.
The full impact and potential implications of the imposed sanctions on MTS Bank on the Group’s operations, assets and liabilities cannot be reliably estimated at this time. It is expected, however, that the imposition of sanctions on MTS Bank will lead to significant operational and governance challenges for MTS Bank which could consequentially adversely affect the Group’s business and financial performance. By way of illustration, from an operational perspective MTS Bank is now subject to so-called “blocking” (asset-freeze) sanctions maintained by the US and the UK. Among other matters, these sanctions require US and UK third parties, including banks, to block or freeze assets which MTS Bank holds with such parties or otherwise block the settlement of payments to or from MTS Bank and its counterparties. We expect this to lead to complexities for MTS Bank in operating its business, including when dealing with its assets, satisfying liabilities owed to counterparties and entering into agreements with international parties and other stakeholders. In addition, from a governance perspective, the imposition of sanctions on MTS Bank may impact its ability to deal with other members of the Group and their respective directors and senior executives.
Although no other member of the Group has become the subject of sanctions (except for export restrictions for Vision Labs due to its inclusion by BIS into the Entity list), it is unclear at this stage how the imposition of sanctions on MTS Bank will affect the Group more broadly. For example, it is possible that counterparties and other stakeholders may take a more cautious approach when dealing with the Group. Moreover, we cannot rule out that additional restrictive measures could be implemented that could further affect our business.
See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
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Economic volatility in the countries where we operate could adversely affect our business.
The economies of Russia and other countries where we operate have experienced periods of volatility and downturns.
Russian GDP grew by 4.7% in 2021, and decreased by 2.1% in 2022. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
Any future economic downturns in Russia or the other countries where we operate, could lead to a decrease in demand for our services and, consequently, in our revenues, and negatively affect our liquidity position and ability to obtain further debt financing, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
The Russian banking system remains underdeveloped, the number of creditworthy banks in Russia is limited and another banking crisis could place severe liquidity constraints on our business.
Russia’s banking and financial services systems are less developed or regulated as compared to other countries, and Russian legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent application. Many Russian banks currently do not meet international banking standards, and the transparency of the Russian banking sector in some respects still lags far behind internationally accepted norms. Aided by inadequate supervision by the regulators, certain banks do not follow existing CBR regulations with respect to lending criteria, credit quality, loan loss reserves or diversification of exposure. Furthermore, in Russia, bank deposits made by corporate entities are generally not insured.
In recent years, there has been a rapid increase in lending by Russian banks, which has been accompanied by a deterioration in the credit quality of the borrowers. In addition, a robust domestic corporate debt market is leading Russian banks (including the banks with which we conduct banking transactions) to hold increasingly large amounts of Russian corporate ruble bonds in their portfolios, which is further deteriorating the risk profile of Russian bank assets. The serious deficiencies in the Russian banking sector, combined with the deterioration in the credit portfolios of Russian banks, may result in the banking sector being more susceptible to market downturns or economic slowdowns, including due to Russian corporate defaults that may occur during any such market downturn or economic slowdown. In addition, the CBR has from time to time revoked the licenses of certain Russian banks, which resulted in market rumors about additional bank closures and many depositors withdrawing their savings. Recently, a number of banks and credit institutions have lost their licenses due to the deficiency of capital and failure to meet the CBR requirements. In 2014-2018, for instance, the CBR revoked the licenses of a number of Russian banks for reasons associated with implementing high-risk lending policies, loss of liquidity and non-compliance with anti-money laundering legislation. A combination of these factors may result in a significant deterioration in the financial fundamentals of Russian banks, notably liquidity, asset quality and profitability. In addition, the Russian banking sector may experience volatility and weaker financial results due to the ongoing volatility in the global financial and commodity markets, as well as any decline in the Russian economy as a result of geopolitical events, COVID-19 or declines in oil prices.
There is currently a limited number of sufficiently creditworthy Russian banks and few ruble denominated financial instruments in which we can invest our excess ruble cash. We hold the bulk of our excess ruble and foreign currency cash in Russian banks.
In the event of a banking crisis, Russian companies may be subject to severe liquidity constraints due to the limited supply of domestic savings and the withdrawal of foreign funding sources that may occur during such crisis. Another banking crisis or the bankruptcy or insolvency of the banks from which we receive or with which we hold our funds could result in the loss of our deposits or affect our ability to complete banking transactions in Russia, which could have a material adverse effect on our business, financial condition and results of operations. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
The physical infrastructure in Russia and the other countries where we operate is generally in poor condition, which could disrupt our normal business activities and adversely impact our results.
The physical infrastructure in Russia and the other countries where we operate does not always meet modern technical requirements, has not been always funded and maintained over the past years.
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Particularly affected are the rail and road networks, power generation and transmission systems, communication systems and building stock.
In addition, the road conditions throughout our countries of operation may be poor with many roads not meeting minimum quality and safety standards, causing disruptions and delays in the transportation of goods to and within these countries. The governments of the countries where we operate are actively considering plans to reorganize their national rail, electricity and communications systems. Any such reorganization may lead to additional costs and increased tariffs while failing to generate the anticipated capital investment needed to repair, maintain and improve these systems. The deterioration or insufficient renewal of the physical infrastructure in the countries where we operate harms the national economies, adds costs to doing business in these countries and impedes companies to operate effectively. These difficulties can impact us directly; for example, we keep portable electrical generators to help us maintain base station operations in the event of power outages. Further deterioration of the physical infrastructure in Russia and the other countries where we operate could have a material adverse effect on our business, financial condition and results of operations. In addition, the increased charges and tariffs that may result from the government reorganization may also have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries.
The economies of the countries where we operate are vulnerable to market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in Russia and the other countries where we operate, and businesses in these countries could consequently face severe liquidity constraints. Additionally, as Russia produces and exports large amounts of oil and gas, the Russian economy is especially vulnerable to the price of oil and gas on the world market and a decline in the price of oil and gas could negatively impact its economy. See also “—Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of shares”. In addition, recent military conflicts and international terrorist activity have significantly impacted the oil and gas prices globally, and pose additional risks to the Russian economy. Russia is also a major producer and exporter of metal products and its economy is vulnerable to world commodity prices and the imposition of sanctions, tariffs and/or anti-dumping measures by the United States, the European Union or other principal export markets.
The disruptions recently experienced in the domestic and international capital markets have led to reduced liquidity and increased credit risk premiums for certain market participants and have resulted in a reduction of available financing. Companies located in emerging markets, including us, may be particularly susceptible to these disruptions and reductions in the availability of credit or increases in financing costs. To the extent that the current market downturn continues or worsens, it may lead to constraints on our liquidity and ability to obtain debt financing, which may have a material adverse effect on our business, financial conditions and results of operations. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
Political and Social Risks
Political and governmental volatility in Russia and other countries of our operations could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares.
The political and economic situation in Russia has been negatively affected by geopolitical events, the economic sanctions imposed by the United States, the European Union, Switzerland, the United Kingdom and other countries, the ongoing volatile economic conditions and other factors. Other countries where we operate may pose similar challenges. Current and possible future political changes in Russia and other countries where we operate, major policy shifts or a lack of consensus between the various branches of power and powerful economic groups could affect economic and regulatory reforms. This could, in turn, lead to political volatility or conflicts among powerful economic groups, which could have a material adverse effect on our business, financial condition, results of operations, prospects and the value of our shares. For example, after the presidential elections, which took place on August 9, 2020, protests began in Belarus. Moreover, the United States, the European Union, the United Kingdom and other countries have imposed additional sanctions on certain Belarusian persons and entities. Further volatility of the political and social situation can negatively affect our business, financial position and operations. A deterioration of the socio-political situation in Russia could also trigger an event of default under some of our loan agreements.
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On July 4, 2020, the Law of the Russian Federation on Amendment to the Constitution of the Russian Federation came into force which implemented a number of constitutional reforms aimed at altering the balance of power between the legislative, executive and judicial branches and introducing certain other changes to the Constitution of the Russian Federation. This Law, among other things, prioritizes the Constitution of the Russian Federation over international treaties and the decisions of international bodies, strengthens the Russian State Council as an advisory board to the Russian President and grants the Russian Federal Council with authority to terminate the powers of the judges of the Constitutional Court of Russia upon the recommendation of the Russian President. These amendments to the Constitution may have a significant impact on the Russian political landscape and regulatory environment and lead to other changes that are currently difficult to predict. See also “—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
Potential conflict between central and regional authorities could create an uncertain operating environment hindering our long-term planning ability.
The Russian Federation is a federation of units, consisting of republics, territories, regions, cities of federal importance and autonomous regions and districts. The delineation of authority and jurisdiction among the members of the Russian Federation and the federal government is, in many instances, unclear and remains contested. A lack of consensus between the federal government and local or regional authorities could result in the enactment of conflicting legislation at various levels and may lead to political volatility. In particular, conflicting laws have been enacted in the areas of privatization, land legislation and licensing. Some of these laws, as well as governmental and administrative decisions implementing them and certain transactions consummated pursuant to them, have in the past been challenged in the courts, and such challenges may occur in the future. This lack of consensus may hinder our long-term planning efforts and create uncertainties in our operating environment, both of which may prevent us from effectively and efficiently implementing our business strategy.
Additionally, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict, which can halt normal economic activity and disrupt the economies of neighboring regions. The intensification of violence, including terrorist attacks and suicide bombings, or its spread to other parts of Russia, could have significant political consequences, including the imposition of a state of emergency in some parts or the whole of Russia. Moreover, any terrorist attacks and the resulting heightened security measures are likely to cause disruptions to domestic commerce and exports from Russia. Any of these factors could materially adversely affect our business and the value of our shares.
Crime and corruption could disrupt our ability to conduct our business and thus materially adversely affect our operations.
Crime and corruption could result in negative publicity, disrupt our ability to conduct our business and could thus materially adversely affect our business, financial condition, results of operations and prospects. Additionally, some members of the media in the countries we operate in regularly publish disparaging articles in return for payment. Any actions which could result in a negative effect on investor confidence in Russia’s business and legal environment could have a further material adverse effect on the Russian securities market and prices of Russian securities or securities issued or backed by Russian entities, including the shares.
Actions of fraudsters aimed against subscribers cause additional risks for operators. Despite our efforts to detect and prevent fraud, some forms of rendering services (for example, offering payments via external Internet sources) might entail risks of fraudulent charge-offs from subscribers’ personal accounts. Such fraud actions could materially adversely affect our business, financial condition, results of operations and prospects as well as our reputation and lead to an increase in subscriber churn.
Legal Risks and Uncertainties
Weaknesses relating to the legal system and legislation in the countries where we operate create an uncertain environment for investment and business activity, which could have a material adverse effect on the value of our shares.
Each of the countries we operate in is still developing the legal framework required to support the market economy. The following risk factors relating to these legal systems create uncertainties with respect to the legal and business decisions that we make, many of which do not exist in countries with more developed market economies:
● | inconsistencies between and among the constitution, federal and regional laws and subordinate legislation (presidential decrees and governmental, ministerial and local orders, decisions and resolutions) and other acts; |
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● | legislation ambiguities which do not allow to predict how these provisions should be followed and how an authorized body or a court will interpret these provisions; |
● | the lack of judicial and administrative guidance on interpreting certain legislation as well as conflicting interpretations of supreme general jurisdiction and arbitrazh courts; |
● | the lack of necessary legislation in the reality of digital economy and rapid developing of new technologies; |
● | the relative inexperience of judges and courts in interpreting certain aspects of legislation; |
● | the lack of an independent judiciary; |
● | a high degree of discretion on the part of governmental authorities, which could result in arbitrary actions such as suspension or termination of our licenses; and |
● | poorly developed bankruptcy and liquidation procedures and court practice that create possibilities of abuse. |
The recent nature of much of the legislation in the CIS countries, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of these legal systems in ways that may not always coincide with market developments result in ambiguities, inconsistencies and anomalies. In addition, legislation in these countries often contemplates implementing regulations that have not yet been promulgated, leaving substantial gaps in the regulatory infrastructure. All of these weaknesses could affect our ability to enforce our rights under our licenses and contracts, or to defend ourselves against claims by others. Moreover, it is possible that regulators, judicial authorities or third parties may challenge our internal procedures and bylaws, as well as our compliance with applicable laws, decrees and regulations.
Any inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations.
If we are unable to protect our business entities in the countries in which we operate from the withdrawal or suspension of required permissions or unwarranted regulatory scrutiny, this may adversely affect our business, financial condition and results of operations.
An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable.
MTS-Turkmenistan was compelled to suspend communication services in Turkmenistan from September 29, 2017, due to the actions of the Government of Turkmenistan, the Ministry of Communications of Turkmenistan, the state-owned telecommunications company, Turkmentelekom, and its wholly-owned subsidiary, Altyn Asyr, the state owned mobile operator in Turkmenistan. These actions resulted in the disconnection of international and long-distance zonal communication services and Internet access.
In July 2018, we filed a Request for Arbitration against the Sovereign State of Turkmenistan with the ICSID in order to protect its legal rights and investments in Turkmenistan. The Tribunal for these proceedings was constituted on December 18, 2018 and the Company subsequently filed its Memorial (statement of claim) with ICSID on March 29, 2019.
Unless resolved to our satisfaction, we intend to vigorously pursue our claims in arbitration and seek all available remedies.
In May 2022, the tribunal held the main hearing and we expect the final award to be rendered by the tribunal in 2023.
See also Note 33 to our audited consolidated financial statements and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Turkmenistan.”.
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Russian companies can be forced into liquidation on the basis of formal non-compliance with certain legal requirements.
Certain provisions of Russian law, including the general provisions of the Civil Code of the Russian Federation, may allow government authorities to seek a court order for the liquidation of a Russian legal entity on the basis of its formal non-compliance with certain requirements during formation, reorganization or during its operation.
For example, under Russian corporate law, if the net assets of a Russian joint stock company calculated on the basis of Russian accounting standards are lower than its charter capital as of the end of second reporting year or any subsequent reporting year, the company must either decrease its charter capital or be placed in liquidation. If the company fails to comply with these requirements, governmental or local authorities can seek the involuntary liquidation of such company in court.
Special rules are also provided for joint-stock companies. If, as of the end of the second reporting year or each subsequent reporting year, the company's net assets are lower than the amount of its charter capital:
● | the Board of Directors of the company, when preparing for the annual general meeting of shareholders, is obliged to include a section on the state of its net assets in the annual report of the company; |
● | the company is obliged to make one of the following decisions no later than 6 months after the end of the corresponding reporting year: |
o | to decrease its charter capital of the company to an amount not exceeding the value of its net assets; |
o | to liquidate the company. |
At the same time, if the company's net assets are less than its charter capital by more than 25 percent at the end of three, six, nine or twelve months of the reporting year following the second reporting year or each subsequent reporting year, at the end of which the company's net assets turned out to be less than its charter capital, the company twice with a periodicity of one once a month, it is obliged to place in the mass media, in which data on the state registration of legal entities are published, a notice of a decrease in the company's net assets.
The creditor of the company, if his rights of claim arose before the publication of the notice of the decrease in the company's net assets, no later than 30 days from the date of the last publication of such notice, has the right to demand from the company the early fulfillment of the corresponding obligation, and if its early fulfillment is impossible, the termination of the obligation and compensation for related losses.
If, at the end of the second reporting year or each subsequent reporting year, the company's net assets turns out to be less than the minimum charter capital specified in the Federal Law "On Joint Stock Companies", the company is obliged to make a decision on its liquidation no later than six months after the end of the reporting year.
However, pursuant to the Federal Law No. 46-FZ dated March 8, 2022 “On Amendments to Certain Legislative Acts of the Russian Federation,” (in the edition as of December 28, 2022) a reduction in the value of the net assets of a Russian joint stock company below the size of its charter capital as of the end of 2022 and 2023 will not require:
● | when preparing for the annual general meeting of shareholders, the inclusion of a section on the state of net assets in the annual report; |
● | making a decision to reduce the charter capital to an amount not exceeding the value of its net assets, or to liquidate the company. |
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The existence of negative assets may not accurately reflect the actual ability to pay debts as they fall due. Many Russian companies have negative net assets due to very low historical asset values reflected on their Russian accounting standards balance sheets; however, their solvency, i.e., their ability to pay debts as they fall due, is not otherwise adversely affected by such negative net assets. Some Russian courts, in deciding whether or not to order the liquidation of a company for having negative net assets, have looked beyond the fact that the company failed to fully comply with all applicable legal requirements and have taken into account other factors, such as the financial standing of the company and its ability to meet its tax obligations, as well as the economic and social consequences of its liquidation. Nonetheless, creditors have the right to accelerate claims, and file damages claims, and governmental or local authorities may seek the liquidation of a company with negative net assets.
Courts have, on rare occasions, ordered the involuntary liquidation of a company for having net assets less than the minimum charter capital required by law, even if the company had continued to fulfill its obligations and had net assets in excess of the minimum charter capital at the time of liquidation.
The amount of net assets in accordance with the local accounting standards of some of our subsidiaries is less than the minimum charter capital required by law. Although these subsidiaries continue to meet all of their obligations to creditors, there is a minimal risk of their liquidation while the net assets remain below the minimum legal requirements.
There have also been cases in the past in which formal deficiencies in the establishment process of a Russian legal entity or non-compliance with provisions of Russian law have been used as a basis to seek the liquidation of a legal entity. Weaknesses in the Russian legal system create an uncertain legal environment, which makes the decisions of a Russian court or a governmental authority difficult, if not impossible, to predict. If involuntary liquidation were to occur, such liquidation could lead to significant negative consequences for our group.
Nevertheless, according to sub-paragraphs 1 and 2 of paragraph 1 of Article 17 of Federal Law No. 46-FZ dated 08.03.2022 "On Amendments to Certain Legislative Acts of the Russian Federation" (in the edition as of December 28, 2022) a decrease in the value of net assets in subsidiaries of MTS PJSC below the size of subsidiaries’ charter capital as of the end of 2022 and 2023 will not require the company to make a decision on reducing the charter capital to an amount not exceeding the value of its net assets or liquidation of the company.
Insufficient adherence to the independence and competitiveness of the judicial process, the difficulty of enforcing court decisions and governmental discretion in enforcing claims could prevent us or holders of our securities from obtaining effective redress in a court proceeding.
The judicial bodies in the countries where we operate are not always completely independent or immune from economic and political influences, and are often understaffed and underfunded. Judges and courts are often inexperienced in the area of business, corporate and industry (telecommunications) law. Judicial precedents generally have no binding effect on subsequent decisions, and not all court decisions are readily available to the public or organized in a manner that facilitates understanding. The judicial systems in these countries can also be slow or unjustifiably swift.
Enforcement of court orders can, in practice, be very difficult to achieve. All of these factors make judicial decisions in these countries difficult to predict and effective redress uncertain. Additionally, court claims are often used in furtherance of political and commercial aims or infighting. We may be subject to such claims and may not be able to receive a fair hearing. Additionally, court orders are not always enforced or followed by law enforcement agencies. Furthermore, recognition and enforcement of arbitral awards in countries where we operate is subject to compliance with corresponding rules of civil procedure and applicable laws, and courts in the countries where we operate may interpret applicable regulations in a manner which would result in denial of such recognition and enforcement.
These uncertainties also extend to property rights. For example, during Russia’s transformation from centrally planned economy to market economy, legislation has been enacted in the country to protect private property against uncompensated expropriation and nationalization. However, there is a risk that due to the lack of experience in enforcing these provisions and due to political factors, these protections would not be enforced in the event of an attempted expropriation or nationalization. Expropriation or nationalization of any of our entities, their assets or portions thereof, potentially without adequate compensation, would have a material adverse effect on our business, financial condition, results of operations and prospects.
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Failure to comply with existing laws and regulations as well as requirements of international and regional standards or to obtain all approvals, authorizations and permits required to transmit television channels or operate telecommunications equipment, or the findings of government inspections or increased governmental regulation of our operations, could result in a disruption in our business and substantial additional compliance costs and sanctions.
Our operations and properties are subject to regulation by various government entities and agencies in connection with obtaining and renewing various licenses, approvals, authorizations and permits, as well as with ongoing compliance with existing laws, regulations and standards. Regulatory authorities exercise considerable discretion in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licenses, approvals, authorizations and permits and in monitoring licensees’ compliance with the terms thereof. Russian authorities have the right to, and frequently do, conduct periodic inspections (planned and unscheduled) of our operations and properties throughout the year. Any such future inspections may conclude that we or our subsidiaries have violated laws, decrees or regulations, and we may be unable to refute such conclusions or remedy the violations. See also “—The regulatory environment for telecommunications in Russia and other countries where we operate or may operate in the future is uncertain and subject to political influence or manipulation, which may result in negative and arbitrary regulatory and other decisions against us on the basis of other than legal considerations and in preferential treatment for our competitors.”
Primarily due to delays in the issuance of permits, approvals and authorizations by regulatory authorities, it is frequently not possible to procure all of the permits for each of our base stations or other aspects of our network before we put the base stations into commercial operation or to amend or maintain all of the permits when we make changes to the location or technical specifications of our base stations.
We are constantly in the process of registration and re-registration of ownership over certain infrastructure facilities. For example, MGTS carries out measures aimed at registration of ownership rights to the cable line structures (CLS). At the same time, MGTS is not insured against the risks of challenging the ownership rights by third parties. MGTS performs legal registration of its ownership rights to minimize the risk. In case of receiving reasonable claims, MGTS reconciles cable line objects to distinguish the ownership rights. MGTS is ready to assert its rights to CLS in court when necessary.
In addition, we may be unable to transmit certain television channels if entities that provide television content to us do not possess the requisite licenses. In case such providers of television content do not obtain the required licenses, or have their existing licenses suspended or terminated, our selection of potential television channels for transmission could be significantly limited. The inability of operators to comply with requirements on sequence of channels, sound and image quality and signal reception points of national mandatory free television channels (pursuant to the Federal Law dated July 13, 2015 No. 257, Order dated July 31, 2020 No. 369, Order dated September 03, 2021 No. 921) may lead to suspension or termination of a license.
Furthermore, we could be subject to fines and other penalties, including forced suspension of our cable network operators’ activity for up to 90 days. In some cases of our service provision (for example, those employing GPON technology) power failures in subscribers’ households may lead to non-compliance with rules regulating local telephony communication services. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.
On June 1, 2018, Federal Law No. 245 “On Amendments to the Federal Law” On Communications” entered into force and is aimed at further aligning the process of entering into a contract for the provision of mobile radiotelephone communication services without appropriate identification of a subscriber (i.e., a user) of communication services. Operators may be subject to penalties and other sanctions, including the suspension of an operator’s activity for up to 90 days, for non-compliance with the Law.
Our failure to comply with existing laws and regulations of the countries where we operate as well as requirements of international and regional standards or to obtain all approvals, authorizations and permits required to operate telecommunications equipment, or the findings of government inspections including the State Labor Inspection Service may result in the imposition of fines or penalties or more severe sanctions including the suspension, amendment or termination of our licenses, approvals, authorizations and permits, or in requirements that we cease certain of our business activities, or in criminal and administrative penalties applicable to our officers. We have also engaged in certain disputes, which could require us to pay damages or settlements. We may incur expenses in defending these lawsuits. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation”.
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Moreover, an agreement or transaction entered into in violation of law may be invalidated and/or unwound by a court decision. Any such decisions, requirements or sanctions, or any increase in governmental regulation of our operations, could result in a disruption of our business and substantial additional compliance costs and could materially adversely affect our business, financial condition, results of operations and prospects. In addition, we may assume risks of potential claims from subscribers and regulating authorities regarding former activities of the acquired or merged businesses.
Generally, communication networks are vulnerable to physical or software break-ins, viruses, unauthorized interferences and similar events. Should such events occur with respect to our network elements, we may become subject for additional inspection by the regulatory authorities. Although we obtain all necessary permissions and certificates for the operation of our equipment and provide measures to protect confidential information, our failure to fully comply with all legislation requirements could result in the imposition of fines or penalties, additional government regulations, substantial additional compliance costs, disruption of our business including its suspension or termination, and other adverse effects.
We provide certain common contractual protections to the purchaser under the VF Ukraine Sale Agreement and are subject to certain post-closing obligations.
In December 2019, we sold our telecommunication business in Ukraine under an agreement entered into with Telco Solutions and Investments LLC, as purchaser, an entity affiliated with telecommunication company Bakcell LLC, which is a part of the NEQSOL Holding international group of companies (the “Sale Agreement”), see “Item 4.Information on our Company—A. History and Development” and Note 10 to our audited consolidated financial statements for details of the transaction. We provide certain common contractual protections to the purchaser and are subject to certain post-closing obligations under the Sale Agreement. Further, the Sale Agreement contains a post-completion price adjustment mechanism. As a result of applying this mechanism, the purchase price was adjusted in our favor so we were not required to pay any sum to the purchaser.
Although we do not anticipate any further material price adjustments or other liability under the Sale Agreement, there can be no assurance that a liability will not emerge in the future, in which case it could have an adverse effect on our financial position and results of operations.
According to the terms of the Sale Agreement, an additional consideration based on the performance of the discounted operations in Ukraine was receivable. The group received the first part of the additional contingent consideration in March 2021. In 2022 following uncertainty over the receipt of the consideration and economic volatility and sanctions in Russia, the group created expected credit allowance for the total amount of receivable and its value decreased to nil. See also Note 10 to our audited consolidated financial statements.
There is insufficient minority shareholder protection in Russia.
Minority shareholder protection under Russian law principally derives from (a) supermajority shareholder approval requirements for certain corporate actions, (b) the ability of a shareholder to demand that the company purchase the shares held by that shareholder if that shareholder voted against or did not participate in voting on certain types of actions, (c) the ability of a shareholder to sell his shares at a fair price when the control is changed, the company is acquired at a price determined in accordance with the requirements of the current legislation, (d) shareholders’ right to challenge decisions of the company’s management bodies in certain circumstances, and (e) shareholders’ right to challenge transactions which caused company’s loss. Companies are also required under Russian law to obtain the approval of disinterested shareholders for certain transactions with interested parties. In practice, enforcement of these protections has not always been effective. Shareholders of some companies have suffered as a result of fraudulent bankruptcies initiated by hostile creditors.
The supermajority shareholder approval requirement is met by a vote of 75% of all voting shares that are present at a shareholders’ meeting. Thus, controlling shareholders owning slightly less than 75% of outstanding shares of a company may have a 75% or more voting power if certain minority shareholders are not present at the meeting. In situations where controlling shareholders effectively have 75% or more of the voting power at a shareholders’ meeting, they are in a position to approve amendments to the charter of the company or significant transactions including asset transfers, which could be prejudicial to the interests of minority shareholders. It is possible that our controlling shareholder in the future may not operate us and our subsidiaries for the benefit of minority shareholders, and this could have a material adverse effect on the value of our shares.
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While the Federal Law on Joint Stock Companies provides that shareholders owning not less than 1% of the company’s outstanding common stock may bring an action for damages caused to a company by its CEO, member of the Board of Directors or its Management Board and certain other officials acting on behalf of the company, minority shareholders may have difficulties with proving such damages with the court and as a consequence their claims may be denied by the court. Although there have been several disputes in the past few years, Russian courts do not have a clear and consistent approach in regards to class action litigation. In addition, the issue of claims by shareholders against the company to compensate the shareholders for their losses is not clearly regulated by the current legislation.
Moreover, due to the adoption of Federal Law No. 55-FZ dated March 14, 2022, until December 31, 2022 shareholders holding alone or with other holders 5% or more of the voting shares have the right to appeal to the court with claims to challenge major and interested party transactions, as well as claims against a member of the Board of Directors or member of any executive body of the Company. Before the adoption of this Federal Law, shareholders holding alone or with other holders 1% or more of the voting shares had the right to file such lawsuits.
Accordingly, your ability to pursue legal redress against us may be limited, reducing the protections available to you as a holder of our shares.
In addition, Federal Law No. 55-FZ of 14.03.2022 temporarily (until December 31, 2023) raised the threshold from 1% to 5% of voting shares required for access to information provided for in paragraph 1 of Article 84, paragraphs 2 and 3 of Article 91 of the Federal Law "On Joint Stock Companies".
Also, the Decree of the Government of the Russian Federation No. 351 of March 12, 2022 (in the edition as of November 24, 2022) allows us not to disclose or disclose in a limited manner some information until July 1, 2023.
According to Russian legislation, shareholders/participants of Russian companies have an opportunity to demand either liquidation of a company in a judicial proceeding or exclusion of other shareholder/ participant (except for public joint stock companies) from the company.
According to the Civil Code of the Russian Federation, shareholders and participants of Russian companies have, inter alia, the following rights, which can be executed via judicial proceedings:
● | to demand the liquidation of a company in case of failure to achieve a corporate purpose for which it was created, including a case when an operation of a company becomes impossible or is substantially hampered; and |
● | to demand exclusion of a shareholder or a participant (except for the public joint stock companies, including MTS) whose actions/inactivity either cause significant harm or hampers the company’s operations. |
In this regard, we cannot rule out the possibility of such claims being filed against MTS or our subsidiaries which may have a negative impact on our business, financial condition and results of operations.
Shareholder liability under Russian legislation could cause us to become liable for both obligations of our subsidiaries and losses of the legal entities in which we have a practical possibility of determining actions.
The Civil Code of the Russian Federation, the Joint Stock Companies Law and the Federal Law “On Limited Liability Companies” generally provide that shareholders in a Russian joint stock company or members of a limited liability company are not liable for the obligations of the company and bear only the risk of loss of their investment. This may not be the case, however, when one entity is capable of determining decisions made by another entity. The entity capable of determining such decisions is deemed an “effective parent.” The entity whose decisions are capable of being so determined is deemed an “effective subsidiary.” The effective parent bears joint and several liability for transactions concluded by the effective subsidiary in carrying out its decisions or decisions made with its consent. However, joint and several responsibility of the effective parent is excluded in case of voting of the effective parent on the approval of the transaction at a general shareholders’ meeting of the effective subsidiary, as well as the approval of the transaction by the body of the effective parent, if the need for such approval is envisaged in the charter of the effective subsidiary and/or the effective parent. In addition, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt resulting from the action or failure to act of an effective parent. This is the case no matter how the effective parent’s ability to determine decisions of the effective subsidiary arises.
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Accordingly, we could be liable in some cases for debts of our subsidiaries and losses of the legal entities to the extent that we had any power of determining such subsidiaries’ actions that caused such losses. This liability could have a material adverse effect on our business, results of operations and financial condition.
Shareholder rights provisions under Russian law could impose additional obligations and costs on us, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Russian law provides that shareholders that vote against or did not participate in voting on certain matters have the right to sell their shares to the company at market value in accordance with Russian law. The decisions that trigger this right to sell shares include:
● | decisions with respect to a reorganization; |
● | the approval by shareholders of a “major transaction,” which involves property in excess of 50% of the balance sheet value of the company’s assets calculated according to Russian accounting standards, regardless of whether the transaction is actually consummated (including those which are simultaneously interested-party transactions), except for transactions undertaken in the ordinary course of business; |
● | the amendment of our charter in a manner that limits shareholder rights; |
● | the amendment of our charter in a manner that excludes reference to the entity’s public status, approved simultaneously with a decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities; and |
● | a decision on applying for delisting of shares and convertible securities from a stock exchange. |
See also “Item 16E—Purchases of Equity Securities by the Issuer and Affiliated Purchasers.” Our obligation to purchase shares in these circumstances, which is limited to 10% of the company’s net assets calculated in accordance with Russian accounting standards at the time the matter at issue is voted upon, could have a material adverse effect on our business, financial condition, results of operations and prospects. Under Russian law, if we are unable to sell the repurchased shares at a price equal to or exceeding the market price within one year of the date of repurchase, we will have to make a decision within a reasonable time period to reduce our charter capital accordingly.
The Strategic Foreign Investment Law imposes certain restrictions on us and our existing and potential foreign shareholders, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
On May 7, 2008, the Federal Law “On the Procedure for Foreign Investment in Commercial Organizations of Strategic Importance for the Defense and Security of the State,” or the Strategic Foreign Investment Law, came into force in Russia. This law sets forth certain restrictions relating to foreign investments in Russian companies of “strategic importance.” Among others, companies with a dominant position in the Russian telecommunications market are considered to be strategically important and foreign investments in such companies are subject to regulations and restrictions to these companies set out by the Strategic Foreign Investment Law. For purposes of the Strategic Foreign Investment Law, a mobile telecommunications provider is deemed to be dominant if its market share in the Russian market exceeds 25%, as may be determined by the FAS. In addition, a company may be considered to be strategically important due to our offering of services involving the use of cryptographic technologies.
Under the Strategic Foreign Investment Law, a foreign investor (including Russian citizens having foreign citizenship) seeking to obtain direct or indirect control over a strategically important company is required to have the respective transaction pre-approved by FAS. The law further stipulates that foreign investors are obliged to obtain prior approval of transactions envisaging the acquisition of right of ownership, possession or use of property classified as the fixed production assets of a strategic company and the value of which represents 25% or more of the balance sheet value of the assets of such company as of the last reporting date, according to accounts. In addition, foreign investors are required to notify this authorized governmental body about any transactions undertaken by them resulting in the acquisition of 5% or more of the charter capital of strategically important companies. Within 45 days from the effective date of the Strategic Foreign Investment Law, foreign investors having 5% or more of the charter capital of strategically important companies were required to notify the authorized governmental body about their current shareholding in such companies.
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A foreign investor is also obliged to notify the authorized governmental body about the fact of conducting the pre-approved transactions. Offshore companies (and companies under their control) are also prohibited from obtaining control over a strategically important company and are obliged to have any acquisition of 25% or more of right of ownership of voting shares pre-approved. Certain sanctions may be imposed in respect of such transactions conducted without notification, for example, a deprivation of the foreign investor of any voting rights at a shareholders’ meeting of strategically important companies through judicial proceedings brought by an authorized governmental body.
As we are classified as a strategically important company, our current and future foreign investors are subject to the notification requirements described above and our current and potential investors may be limited in their ability to acquire a controlling stake in, or otherwise gain control over, us. Such increase in governmental control or limitation on foreign investment could impair the value of your investment and could hinder our access to additional capital.
Regulatory changes in Russia as well as regulatory changes at the international level may have a material adverse effect on our financial condition and results of operations.
New laws or regulations or changes to the existing regulatory framework at the federal, local, or international level, such as those described below, could, among other things, change the ways in which we operate our businesses and provide our services, require additional costs, and impair revenue opportunities.
The Ministry of Digital Development, Communications and Mass Media is considering altering the approach to inter-carrier settlements in Russia and the subsequent lowering of the settlement rate, which could have a negative impact on our average monthly service revenues per subscriber and margins. Over the past few years the government has developed a number of new initiatives, however, it remains unclear whether all such initiatives will be implemented or whether those implemented initiatives will be enforced. For example, the enforcement of certain provisions of the agreement on the conditions of inter-carrier mutual settlements while delivering international communication services in CIS-countries, signed on October 30, 2015, may adversely affect our operation in terms of the execution of inter-carrier mutual settlements among CIS-operators, however, such agreement has not yet been implemented into law.
The supra-national antimonopoly body established by the Eurasian Economic Union is currently responsible for general competition and anti-trust rules, including powers to administer fines and other remedies. If violations with respect to companies operating on cross-border markets be identified, this might lead both, to imposition of fines in accordance with the legislation of the EEU and adoption of the decisions for compulsory execution.
Pursuant to the Federal Law No. 374 “On the Introduction of Amendments to Certain Legislative Acts of the Russian Federation with Respect to Setting up of Additional Counter-terrorism Measures and Public Security Enforcement” dated July 6, 2016, operators are obliged to store certain information, such as voice information and text messages (for a three-year period) and the contents of such communications (for up to six months). The Government regulation “On Rules, Terms and Volume of Voice Information, Text Messages, Images, Sounds, Video- and Other Messages of Telecommunications Services Users to be Stored” requires communication operators that render communication services such as intercity and international communication services to store voice information and text messages, for a period of six months from the moment of the end of their receipt, transfer, delivery and/or processing. Operators that render telematics services, as well as data transmission services (except for data transmission services for the purposes of transferring voice information) are also obliged to store telecommunication messages by using data storage technical equipment in the volume of electronic communication messages sent and received by the operator’s subscribers (the actual traffic) for 30 days. Moreover, the capacity of the data traffic storage system is required to be increased by 15% annually for 5 years from the date the data storage technical equipment was put into operation. Significant additional costs have been and will be required in order to comply with these requirements.
In 2019, new legislation regarding class actions in Russia was introduced (191-FZ dated July 18, 2019) giving consumers the right to file class action lawsuits with the courts of general jurisdiction. The law allows mass consumer claims where the amount of each individual claim is small, but the total amount of all claims is significant and expanded the list of persons who can advocate the interests of a group of persons.. These measures could increase the number and change the nature of class actions filed against us, which could have a material adverse effect on our business, financial condition and results of operations.
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In November 2019, the Federal Law No. 90 “On certain amendments to the Federal Law “On communications” and the Federal Law “On information, information technologies and information protection” dated May 1, 2019 (the “Sovereign Internet Law”) aimed at ensuring stable, secure and integral functioning of the Internet in the territory of the Russian Federation, came into force. Under the Sovereign Internet Law, operators, installed equipment on their networks, which could adversely affect the networks’ stability and the quality of provided communication services. Practical issues may require further subordinate legislation to be adopted further clarifying the provisions of the law. Furthermore, additional costs for maintenance and operation of this equipment were required from the operators.
On July 17, 2022 criminal liability and fines for non-compliance with rules of work with technical means of countering threats to stability, security and functional integrity of the Internet in the territory of the Russian Federation and the public communications network were increased and, from January 1, 2023, further administrative and criminal liability was introduced for non-compliance with requirements for traffic transmission via technical means of countering threats to stability, security and functional integrity of the Internet in the territory of the Russian Federation and the public communications network (Federal Law No. 259 dated 14.07.2022, Federal Law No. 260 dated 14.07.2022).
Amendments to the Law “On Communications”, effective from June 2021 (533-FZ dated December 30, 2020), clarify the contracting process with subscribers, including provisions, among others, on concluding contracts, rendering services for corporate clients and the responsibility of Roskomnadzor for developing an information system for monitoring the contracting process between operators and their subscribers. Federal Law No. 319 and the Order No. 1313 of the Russian Government dated 22.07.2022 determine information, which operators are obliged to transfer to Roskomnadzor, including information about subscribers (users), volume and period of providing telecommunication services etc.
Pursuant to Russian law (319-FZ dated July 2, 2021), free access must be granted to the websites of domestic socially significant Internet resources as determined by the Government Commission. In addition, rules (Decrees No.2531 dated December 29, 2021 and No.2469 dated December 25, 2021) have been adopted for maintaining a list of such resources and establishing a relevant Government Commission. The list includes the “Vkontakte” social networking system and the “Gosuslugi” Integrated Identification and Authentication System. As we provide free access to these resources on our mobile network, this could potentially have a material adverse effect on our business, financial condition and results of operations.
Russian law (319-FZ dated July 2, 2021 and 465-FZ dated December 30, 2021) also imposes a variety of related requirements for operators, including:
● | compliance with requirements established by Roskomnadzor for communication lines, crossing the Russian state border, and communication facilities, , and requirements to send a compliance notification to Roskomnadzor in order to include the relevant information in the register; |
● | obligations to connect and send/receive information through a system developed by the radio frequency service, used by operators to monitor compliance with the requirements of the Federal Law "On Communications"; |
● | obligations to transmit free SMS messages with a confirmation code to citizens and legal entities in case of their authentication through the Integrated Identification and Authentication System (IIAS) as well as in case of their significant actions using the IIAS; |
● | the extension of special features of providing communication services, connection services and traffic transmission services (for example, pricing) to certain other state bodies, local governments and organizations (customers), if they: conclude contracts for such services in accordance with the legislation of the Russian Federation on the contract system and; pay for them using the funds of the budget system of the Russian Federation; and |
● | prohibitions from suspending or terminating the provision of telecommunication services to the above-mentioned customers after the expiration of the contract. |
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On January 01, 2023 a law (480-FZ dated December 30, 2021) came into force establishing administrative sanctions for non-compliance with obligations related to the transfer of a subscriber number or a unique identification code and termination of rendering communication services or services for traffic transmission. It also established connection by operators to the system for ensuring their compliance with requirements for the provision of communication services and services for traffic transmission in the public communication network.
The Federal Law No. 625 dated December 29, 2022 introduces additional liability in the telecommunication sector, including certain prescribed matters for the formation and performance of contracts and verification procedures.
On September 1, 2022 amendments came into force that require advertising distributors to provide or ensure the provision of information about advertisements distributed on the Internet, including information about advertisers and advertising distributors, advertising system operator, to Roskomnadzor through the advertising data operator. This legislation lacks sufficient regulation, interpretations from the regulator and law enforcement practice, which may cause difficulties in interpreting these developments.
At the end of 2022 a law was approved banning, among other things, LGBTQ+ propaganda. MTS is monitoring the changes and law enforcement practice, however, it is currently unclear how the law could affect our business.
Currently, the Russian Civil Code undergone substantial revisions, such as Federal Law No.430 dated December 21, 2021 which came into force on March 1, 2023 and, among other things, supplements the Civil Code of the Russian Federation and regulates certain immovable things, land, buildings, structures, and premises. At present, the potential interpretation of these amendments and their impact on our activities is unknown.
Russian companies are obliged to pay various and significant taxes and other non-tax payments, including payments into Universal Service Fund which currently amounts to 1.2% of our annual revenue on telecommunications services. Furthermore, potential future regulatory changes , such as the introduction of new rules regulating MVNOs, and new rules concerning our pricing policy could weaken our competitive position in the mobile telecommunications market. Changes in tax laws and non-tax regulations may lead to the growth of our tax burden and increase of our costs and may, as a result, materially adversely affect our financial condition and results of operations.
The failure of our subsidiaries that are subject to regulations as natural monopolies to comply with the requirements of the Federal Law No. 223 “On Procurement Process,” inter alia, in case of collective tendering, could result in liabilities for subsidiaries.
One of our subsidiaries, MGTS, is categorized as a natural monopoly in the Moscow telecommunications market. According to the Federal Law No. 223 “On Procurement Process,” natural monopolies are obliged to conduct the procurement process in accordance with the principles of transparency and non-discrimination and unjustified limitation of competition. If our subsidiaries that are under additional regulations as natural monopolies are found failing to comply with the law on procurement process, inter alia in case of collective tendering with us, our subsidiaries could be subject to certain liability measures, according to Russian legislation. See also “—Risks Relating to Our Business— If we are found to have a dominant position in the markets where we operate and are determined to have abused this position and/or concluded anti-competitive agreements, or found to have committed concerted actions, the FAS may be entitled to impose fines as well as regulate our subscriber tariffs and impose certain restrictions on our operations.”
Russian and foreign legislation on personal data and information security in information systems and communication networks may turn out to be hard to implement and require significant resources. Inability to comply with the requirements may lead to sanctions.
Communication operator activity in the sphere of information security in the Russian Federation is governed by various federal laws and by-laws . The main risks posed by processing and providing security of personal data include the following:
● | ambiguity as to how regulation applies to different overlapping categories of data; |
● | responsibility of personal data operators for the actions of the third parties processing personal data on their behalf; |
● | requirements to follow prescribed compliance procedures and associated costs; |
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● | replacement of the existing means of information protection with the ones, certified by FSTEC and FSS of Russia, including certification measures; and |
● | in case of failure to comply with requirements for confirmation of licenses for the technical and cryptographic protection activity of confidential information by FSTEC of Russia or FSS of Russia, the company would not be able to provide the corresponding commercial services to the third parties. |
In addition, recent legislation (152-FZ) introduces new requirements for the content of requests to process personal data, including the need to describe the purposes of personal data processing, the list of personal data, actions (operations) performed with personal data and terms of their processing, including obligations to informed personal data operators and Roskomnadzor about data transfers and violations, among other measures.
These changes could materially affect our business, financial condition, results of operations, including through additional compliance measures, associated costs and potential sanctions for non-compliance.
On December 29, 2022 the Federal Law No. 572 came into force (excluding certain provisions) and governs identification or authentication of individuals with use of biometric personal data via the Unified Biometric System (“UBS”) or with use of the UBS vectors. The law prohibits processing of biometric personal data for identification or authentication in information systems of organizations excluding certain cases addressed the law. Adoption of this law and other regulations provided for by it could require additional expenses on means of information protection to provide secure integration with the Unified biometric system.
With effect from May 25, 2018, the General Data Protection Regulation came into force in the European Union which imposes various new data protection and privacy measures and remedies with which we must comply.
In case of non-compliance with information security and personal data protection legislation, we may be subject to penalties by regulatory bodies (including penalties based on our turnover), confiscation of uncertified means of information protection, suspension of business processes for 90 days as well as suspension or withdrawal of the license for the provision of communication services, technical and cryptographic protection of confidential information.
In addition, it is possible that subscribers will file legal claims, seeking reimbursement for tangible and moral damage in connection with the violation of the legislation requirements.
If the resources required to maintain, develop and implement data protection and information security systems meeting applicable legislative requirements are greater than expected, or we fail to comply with the data protection laws despite our best efforts to do so, our business, financial condition and results of operations could be materially adversely affected.
The Russian taxation system is underdeveloped and any imposition of significant additional tax liabilities could have a material adverse effect on our business, financial condition or results of operations.
In general, taxes payable by Russian companies are substantial and numerous. These taxes include, among others, corporate income tax, value added tax, property taxes, excise duties, payroll-related taxes and other taxes.
In addition, intercompany dividends are subject to a withholding tax of 0% or 13% (depending on whether the recipient of dividends qualifies for Russian participation exemption rules), if being distributed to Russian companies, and 15% (or lower, subject to benefits provided by relevant double tax treaties), if being distributed to foreign companies.
Lately the Russian government has taken measures aimed at revising the existing structure and practice of applying agreements on avoidance of double taxation in order to limit the taxpayer’s ability to apply reduced rate (exemptions) when paying dividends and interest in certain jurisdictions. The terms of the agreements have already been revised with a number of jurisdictions in order to increase tax rate on dividends and interest, and are being revised with other ones. Limitation of the taxpayer’s ability to apply reduced rate (exemptions) might lead to higher tax rates, and thus increase our costs.
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The Russian tax authorities may take a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may nonetheless be subject to challenges in the future. The foregoing factors raise the risk of the imposition of arbitrary or onerous taxes on us, which could adversely affect the value of our shares.
Current Russian tax legislation is, in general, based upon the formal manner in which transactions are documented, looking to form rather than substance. However, the Russian tax authorities are increasingly taking a “substance and form” approach, which may cause additional tax exposures to arise in the future. Moreover, the Russian Tax Code was amended with direct provisions which prohibit tax benefits, if achieved without real business activities, or the main aim of the transaction was tax benefits. Additional tax exposures could have a material adverse effect on our business, financial condition, results of operations and prospects.
It is expected that Russian tax legislation will become more sophisticated, which may result in the introduction of additional revenue raising measures. Although it is unclear how any new measures would operate, any such introduction may affect our overall tax efficiency and may result in significant additional taxes becoming payable. Additional tax exposures could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition to the usual tax burden imposed on Russian taxpayers, these conditions complicate tax planning and related business decisions. For example, tax laws are unclear with respect to deductibility of certain expenses. This uncertainty could possibly expose us to significant fines and penalties and to enforcement measures, despite our best efforts at compliance, and could result in a greater than expected tax burden.
See also “Item 8.Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Tax Audits and Claims.”
Lack of law enforcement practice of the Russian anti-offshore policy may have an adverse impact on our business, financial condition and results of operations.
In the past few years, the Russian Federation like a number of other countries in the world has been actively involved in a discussion of measures against tax evasion by the use of low tax jurisdictions as well as aggressive tax planning structures.
The rules of controlled foreign companies (CFC) came into force on January 1, 2015. The rules oblige Russian taxpayers being controlling persons of a foreign company to submit to the tax authorities both standard notifications on participation in CFC and tax declarations in certain cases. Profit generated commencing in 2015, including retained earnings, is subject to taxation in the Russian Federation. The innovations could impose additional tax on the undistributed profits of any foreign entity controlled by us (in proportion to such controlling stake) at the rate of 20%. These innovations caused amendments to the Tax Code providing for liability in case of non-disclosure or incomplete disclosure of information on CFCs and the non-payment or underpayment of relevant tax.
In addition, implementation of new concept of beneficial ownership, with regard to taxation of payment of passive income (dividends, royalty, interest, capital gain), may negatively affect possibility to apply benefits set by the double tax treaties, in case such payments pass through intermediary entities. This may potentially lead to increase of tax burden with regard to such payments.
Lack of law enforcement practice may cause difficulties in interpreting the above-mentioned laws by the Russian tax authorities. It is also currently unclear how the enacted laws could affect our counterparties, which may be registered in offshore jurisdictions.
In case the impact of legislative initiatives is significant for some of our counterparties it may also impact our results of operations.
Vaguely drafted Russian transfer pricing rules, and lack of reliable pricing information may impact our business and results of operations.
Updated transfer pricing rules became effective on January 1, 2012. The implementation of changed rules should have helped to align domestic rules with OECD principles. These rules considerably toughened the previously effective law by, among other things, effectively shifting the burden of proving market prices from the tax authorities to the taxpayer and obliging the taxpayer to keep specific documentation.
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Changed transfer pricing rules may increase the risk of transfer pricing adjustments being made by the tax authorities. In addition to the usual tax risks and tax burden imposed on Russian taxpayers, the uncertainties of the transfer pricing rules complicate tax planning and related business decisions. It also requires us to ensure compliance with the specific transfer pricing documentation requirements imposed in such rules. Tax authorities could impose additional tax liability as well as 40% penalties on the underpaid tax in case the prices or profitability are outside the market range and if the required transfer pricing documentation has not been prepared, which could have a material adverse effect on our results of operations and financial condition.
The regulatory environment for telecommunications in Russia and other countries where we operate or may operate in the future is uncertain and subject to political influence or manipulation, which may result in negative and arbitrary regulatory and other decisions against us on the basis of other than legal considerations and in preferential treatment for our competitors.
We operate in an uncertain regulatory environment. The legal framework with respect to the provision of telecommunications services in Russia and the other countries where we operate or may operate in the future is not well developed, and a number of conflicting laws, decrees and regulations apply to the telecommunications sector.
Moreover, regulation is conducted largely through the issuance of licenses and instructions, and governmental officials have a high degree of discretion. In this environment, political influence or manipulation could be used to affect regulatory, tax and other decisions against us on the basis of other than legal considerations. In addition, some of our competitors may receive preferential treatment from the government, potentially giving them an advantage over us.
We are subject to currency control regulations.
The Currency Control Law provides a framework and establishes general rules within which the government of Russia and the Bank of Russia are authorized to introduce certain measures of currency regulation, in connection with which there may be some uncertainty in the process of our implementation of foreign exchange operations when importing equipment.
The change in the currency regulation may negatively affect our performance of obligations under contracts previously concluded with Russian and foreign counterparties, requiring us to make payments on them in foreign currency and necessitating the conclusion of additional agreements in relation to the relevant contracts. As a result, we are exposed to the risks of changes in the currency regulation and foreign exchange control in Russia. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
The regulation of critical information infrastructure in the Russian Federation may lead to additional costs which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Federal Law No. 187 “On the Security of the Critical Information Infrastructure of the Russian Federation” which came into force on January 1, 2018 (the “Law on CII”) provides for the creation of a register of significant critical information infrastructure (CII) objects, to which the communication networks elements may be assigned (after the classification of CII objects). Both state-owned and non-state-owned organizations are classified as subjects of the CII.
The law envisages criminal penalties if the security requirements in respect of such significant CII objects are not met and damage is incurred. CII subjects, including communication operators, are required to, among other things:
● | categorize CII objects; |
● | sent the results of CII objects categorization with the authorized bodies; |
● | create a security system for significant CII objects and implement measures targeted at significant CII protection and protection of information, belonging to the corresponding category; |
● | set up and provide the operations of means for attacks search on the communication network with the transfer of management to the authorized body; and |
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● | organize transfer of information about computer incidents on the CII to the authorized body. |
The by-laws envisage measures aimed at CII objects protection, which are difficult to implement, especially as regards the implementation of information protection measures that are not provided by such communication standards as 3GPP, ETSI, etc., which may lead to incompliance with the regulatory requirements. The implementation of these requirements will require additional costs to be incurred. Requirements of Federal Service for Technology and Export Control of the Russian Federation and the Ministry of Communications (orders No. 239 and No. 582) restrict remote access to CII objects, which may affect possibility to provide warranty and technical support of communication infrastructure by foreign vendor agents.
The Decree of the President of the Russian Federation No. 166 «On economic measures to ensure technological independence and security of critical information infrastructure objects» dated March 30, 2022 provides an obligation of operators to use only Russian equipment and software at CII objects.
The Decree of the President of the Russian Federation No. 250 dated May 5, 2022 introduced personal liability of heads of the CII subjects in order to ensure the information security of organizations. Starting from 2025, CII subjects are prohibited to use information security means created in certain foreign states.
Compliance with the requirements of the laws and regulations or introduction of similar regulations may require additional costs to be incurred by us or otherwise negatively affect us and could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Relating to the Shares and ADSs and the Trading Market
ADS holders who have not yet converted their ADSs into shares may face difficulties (including a loss of value) in converting their ADSs into shares or may even be unable to do so.
The Federal Law No.114 dated April 16, 2022 “On Amendments to the Federal Law “On Joint Stock Companies” and certain legislative acts of the Russian Federation” requires termination of foreign depositary programs, under which the depositary receipts of such companies (including the Company) are listed on foreign stock exchanges programs. As a result of these legislative acts, on June 9, 2022 the Company terminated the Deposit Agreement with J.P. Morgan Bank International, who was the Russian depositary which accounted for the ADSs under the Company’s ADS program held by JPMorgan Chase Bank, N.A. In light of the Company’s termination of the Deposit Agreement, on July 13, 2022 the Company’s ADSs ceased trading and were subsequently delisted from the NYSE on August 8, 2022.
Pursuant to the unwinding of the ADS program, an automatic conversion process applied to Russian depositaries that accounted for ADSs where such ADSs were written off from the holders’ accounts and shares in the Company were credited instead. This process was commenced around August 16, 2022 and concluded about three weeks later. If the receipts are held on the holder's account with a foreign broker (custodian), with blocking sanctions imposed on the holder of the receipts, the broker (custodian) or the custodian in the chain of nominal holdings (in particular, NSD) the conversion was possible through a forced conversion mechanism. The deadline for submitting forced conversion applications expired on November 11, 2022. Under the terms of the Deposit Agreement, the period guaranteed for converting ADRs into ordinary shares ended on January 12, 2023 (inclusive), whereafter, as we understand, the depositary may continue to convert ADRs in ordinary shares and/or sell unconverted ordinary shares to distribute the proceeds of sale among ADRs holders. In all the types of conversion processes, ADSs were converted into shares at a ratio of 1 ADS to 2 shares. ADS holders who failed to convert their ADSs into shares by the deadline may now face difficulties (including a loss of value) in converting their ADSs into shares or may even be unable to do so. The ability to convert ADSs into shares and the allotment of the resulting shares to persons who hold the ADS depends on the structure through which the ADSs are held. For example, conversion may not be possible where blocking sanctions are imposed on the holder of the ADSs, the broker (custodian) or the custodian in the chain of nominal holdings. In particular, the chain of holding includes the NSD.
In addition, there may be other adverse implications arising from the conversion process. For example, when ADSs belonging to certain non-residents are converted into shares, the resulting shares are to be credited to a С-type depository account for which restrictions on transactions were imposed. ADS holders may also face challenges in seeking to claim unpaid dividends from July 13, 2022 and until the conversion of the ADSs into shares.
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Under the terms of the ADS unwinding program, after January 13, 2023, J.P. Morgan Bank International as depositary commenced a process pursuant to which it is currently endeavoring to sell any shares represented by the ADSs that have not been cancelled as a result of the conversion. The resulting proceeds from such sales shall be held for the benefit of the ADS holders (in proportion to the rights of each such holder and without liability to accrue interest). However, there are risks and challenges associated with this sales process. In particular, there is no guarantee that J.P. Morgan Bank International will be able to sell such shares for their full value and what the timing of such sale shall be. Accordingly, ADS holders who have not yet converted may not realize the full value of their underlying shares, for example, if J.P. Morgan Bank International needs to sell such shares at a discount. See also “Item 10. Additional Information – B. Charter and Certain Requirements of Russian Legislation – Registration and Transfer of Shares”. In addition, the current legislative measures of the Russian Federation contain certain restrictions on the sale of shares by depositaries. Accordingly, it is difficult for the Company to anticipate the exact consequences for those holders who failed to convert their ADSs by the deadline.
Finally, the Company is of the view that the regulatory landscape is highly volatile and legislative measures affecting the holders of ADSs and shares are rapidly changing in response to the current geopolitical environment. In addition, the specific circumstances of an ADS holder may impact the particular challenges faced by that ADS holder. Accordingly, there may be other implications or challenges facing ADS holders in addition to those mentioned in this document.
The market price of our shares has been and may continue to be volatile.
The market price of our shares has experienced, and may continue to experience, significant volatility. Volatility continued to increase over the past year, including as trading in our ADSs on NYSE was suspended on 28 February 2022, following the suspension of all trading on the Moscow Exchange on the same day. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
Numerous factors, including many over which we have no control, may have a significant impact on the market price of our shares, including, among other things:
● | geopolitical situation; |
● | periods of regional or global volatility, including macroeconomic volatility; |
● | announcements of technological or competitive developments; |
● | governmental policies and regulatory developments in our target markets affecting us, our customers or our competitors; |
● | actual or anticipated fluctuations in our quarterly operating results; |
● | changes in financial estimates or other material comments by securities analysts relating to us, our competitors or our industry in general; |
● | foreign exchange fluctuations; |
● | change of the key interest rates by world banks; |
● | announcements by other companies in our industry relating to their operations, strategic initiatives, financial condition or financial performance or to our industry in general; |
● | announcements of acquisitions or consolidations involving industry competitors or industry suppliers; |
● | sales or perceived sales of additional ordinary shares by us or our significant shareholders; and |
● | impact and development of any investigation or lawsuit, currently pending or threatened, or that may be instituted in the future. |
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In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our shares, regardless of our operating performance.
Shareholders may be unable to repatriate distributions made on the shares.
We anticipate that any dividends we may pay in the future on the shares will be declared and paid in rubles. See also “Item 10. Additional Information — B. Charter and Certain Requirements of Russian Legislation — Dividends.” A shareholder’s ability to convert rubles into U.S. dollars or other currencies is subject to the availability of U.S. dollars or such other currency in Russia’s currency markets.
Although there is an existing, albeit limited, market within Russia for the conversion of rubles into U.S. dollars and other currencies, including the interbank currency exchange and over-the-counter and currency futures markets, the further development of this market is uncertain. At present, there is a limited market for the conversion of rubles into foreign currencies outside of Russia and limited market in which to hedge ruble and ruble-denominated investments.
If we were classified as a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes, U.S. holders of our shares could be subject to adverse U.S. federal income tax consequences.
In general, we will be a PFIC for any taxable year in which either: (i) at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest, capital gains, rents, and royalties, other than rents or royalties derived in the active conduct of a trade or rental business); or (ii) at least 50% of the value of our assets (generally determined on the basis of a quarterly average) is attributable to assets that produce, or are held for the production of, passive income. Our PFIC status is an annual determination that can be made only after the end of each taxable year, and will depend on the composition of our income and assets and the value of our assets from time to time, including goodwill (which may be determined by reference to the market value of our shares, which may fluctuate), and the manner in which we operate our business. Recent volatility in the global capital markets could increase the risk that we might be classified as a PFIC in the current taxable year or in future taxable years. Accordingly, there can be no assurance that we will not be a PFIC for any taxable year.
If we were classified as a PFIC for any year in which a “U.S. Holder” (as defined under “Certain United States Federal Income Tax Consequences”) owns our shares, the U.S. Holder could be subject to adverse U.S. federal income tax consequences. For any year during which a U.S. Holder held the shares, we will continue to be treated as a PFIC with respect to that U.S. Holder for all succeeding years during which the U.S. Holder held the shares, unless we cease to be a PFIC and the U.S. Holder has made certain “purging” elections with respect to the shares. Each U.S. Holder of the shares should consult its tax advisor regarding the PFIC rules and should read the discussion below under “Certain United States Federal Income Tax Consequences — Passive Foreign Investment Company Considerations.”
Capital gain from the sale of shares may be subject to Russian income tax.
Income received by a foreign company from the sale, exchange or other disposal (assuming that such income is not related to a permanent establishment of a foreign company in Russia) of shares (participation interest) in an organization in which over 50% of the assets consist of immovable property located in Russia, as well as financial instruments derived from such shares, is treated as income derived from a source in the Russian Federation and is subject to withholding tax at a rate of 20%. However, gains arising from the disposition of the securities, which are traded on an organized stock exchange, are not treated as Russian-source income, and should not be subject to taxation in Russia.
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The amount of such income is typically determined as the sales price of shares (participation interest). However, if documentary support for the acquisition cost of the shares (participation interest) is available, the tax may instead be assessed on the basis of the difference between the sales price and the acquisition cost (including other related costs) if documentary evidence of such costs is submitted to the tax agent. The Russian Tax Code also establishes special rules for calculating the tax base for the purposes of transactions with securities. However, an exemption applies if immovable property located in Russia constitutes more than 50% of a company’s assets and the securities are traded on a foreign stock exchange. The determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an on-going basis and the relevant Russian legislation and regulations in this respect are not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia does not currently and will not constitute more than 50% of our assets as at the date of the sale of shares by non-residents.
Where the shares are sold by legal entities or organizations to persons other than a Russian company or a foreign company or an organization with a registered permanent establishment in Russia, even if the resulting capital gain is considered taxable in Russia, there is currently no mechanism under which the purchaser will be able to withhold the tax and remit it to the Russian budget.
Under the United States / Russia income tax treaty, capital gains from the sale of shares by eligible U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (the term “fixed assets” is used in the Russian version of the treaty) were to consist of immovable property located in Russia.
The taxation of income of non-resident individuals depends on whether this income is received from Russian or non-Russian sources. Russian tax law does not give a definition of how the “source of income” should be determined with respect to the sale of securities, other than that income from the sale of securities, which takes place “in Russia” should be considered as Russian source income. As there is no further definition of what should be considered to be a sale “in Russia,” the Russian tax authorities have a certain amount of freedom to conclude what transactions take place in or outside Russia, including looking at the place of the transaction, the place of the issuer of the shares, the location of the registrar recording the transfer of legal title to the relevant securities or other similar criteria.
Non-residents who are individuals are taxable on Russian-source income. Provided that gains arising from the disposition of the foregoing types of securities and derivatives outside of Russia by U.S. holders who are individuals not resident in Russia for tax purposes will not be considered Russian source income, then such income should not be taxable in Russia. However, gains arising from the disposition of the same securities and derivatives “in Russia” by U.S. holders who are individuals not resident in Russia for tax purposes may be subject to tax either at the source in Russia or based on an annual tax return, which they may be required to submit with the Russian tax authorities. See also “Item 10.Additional Information—E. Taxation.”
The lack of a central and rigorously regulated share registration system in Russia may result in improper record ownership of our shares.
Ownership of Russian joint-stock company shares (or, if the shares are held through a nominee or custodian, then the holding of such nominee or custodian) is determined by entries in a share register and is evidenced by extracts from that register. Currently, there is no single central registration system in Russia. Share registers can be maintained only by licensed registrars located throughout Russia. Regulations have been adopted regarding the licensing conditions for such registrars, as well as the procedures to be followed by licensed registrars when performing the functions of registrar. In practice, however, these regulations have not been strictly enforced, and registrars generally have relatively low levels of capitalization and inadequate insurance coverage. Moreover, registrars are not necessarily subject to effective governmental supervision. Due to the lack of a central and rigorously regulated share registration system in Russia, transactions in respect of a company’s shares could be improperly or inaccurately recorded, and share registration could be lost through fraud, negligence or oversight by registrars incapable of compensating shareholders for their misconduct. This creates risks of loss not normally associated with investments in other securities markets. See “Item 10. Additional Information — Charter and Certain Requirements of Russian Legislation — Registration and Transfer of Shares.” and “—ADS holders who have not yet converted their ADSs into shares may face difficulties (including a loss) in converting their ADSs into shares or may even be unable to do so.”
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Foreign judgments may not be enforceable against us.
Our presence outside the United States may limit your legal recourse against us. We are incorporated under the laws of the Russian Federation. Substantially all of our directors and executive officers named in this document reside outside the United States. All or a substantial portion of our assets and the assets of our officers and directors are located outside the United States. As a result, you may not be able to effect service of process within the United States on us or on our officers and directors. Similarly, you may not be able to obtain or enforce U.S. court judgments against us, our officers and directors, including actions based on the civil liability provisions of the U.S. securities laws.
In addition, it may be difficult for you to enforce, in original actions brought in courts in jurisdictions outside the United States, liabilities predicated upon U.S. securities laws.
There is no treaty between the United States and the Russian Federation providing for reciprocal recognition and enforcement of foreign court judgments in civil and commercial matters. These limitations may deprive you of effective legal recourse for claims related to your investment in our shares. The Russian Federation is a party to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, but it may be difficult to enforce arbitral awards in the Russian Federation due to a number of factors, including the inexperience of Russian courts in international commercial transactions, official and unofficial political resistance to enforcement of awards against Russian companies in favor of foreign investors and Russian courts’ inability to enforce such orders and corruption. Current geopolitical situation may increase the likelihood of these challenges when seeking to enforce foreign judgments.
Risks Relating to our Financial Condition
We may be adversely affected by the current economic environment.
Macroeconomic challenges, resulting from a number of reasons, including but not limited to, the geopolitical developments, the COVID-19 pandemic, credit market crisis (including uncertainties with respect to financial institutions and the global capital markets), volatility of prices for major export commodities (including oil and metals), microchip shortages and other factors, currently affecting many of the markets in which we operate, may negatively impact our clients’ disposable incomes and our vendors’ cash flows. See also “—Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of shares”.
Consequently, customers may modify or decrease their usage of our services and products or fail to pay the outstanding balances on their accounts, and vendors may significantly increase their prices, eliminate vendor financing, reduce their output, decrease quality or fail to supply equipment, subscriber devices and services on a timely basis.
We may also experience increases in accounts receivable and bad debt among corporate subscribers, some of whom may face liquidity problems and potential bankruptcy, as well as the potential bankruptcy of our corporate partners. The deterioration of economies in the countries of our operation may lead, inter alia, to insolvency of financial institutions, which in turn may affect our business and financial condition.
A decline in subscriber usage, an increase in bad debts, material changes in equipment pricing or financing terms or the potential bankruptcy of our corporate subscribers or partners may have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, a further deterioration in macroeconomic conditions could require us to reassess the value of goodwill on certain of our assets, recorded as a difference between the fair value of the assets of business acquired and its purchase price. This goodwill is subject to impairment tests on an ongoing basis. The weakening macroeconomic conditions in the countries in which we operate and/or a significant difference between the performance of an acquired company and the business case assumed at the time of acquisition could require us to write down the value of the goodwill or portion of such value. Future write-downs relating to the value of the goodwill or portion of such value could have a material adverse effect on our financial condition and results of operations. Likewise, the current geo-political situation might also have an impact on the value of our business goodwill. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
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Continued turmoil in the credit markets could cause our business, financial condition, results of operations and the value of our shares to suffer.
Sanctions introduced by the United States, European Union, Switzerland, United Kingdom and other countries with respect to the Russian Federation coupled with an economic downturn caused a significant capital outflow, ruble depreciation, a rise of credit rates in the domestic market and a lack of available financing.
In February 2022, the Bank of Russia raised the key rate from 8.5% to to 20%, and starting from April 2022 gradually reduced the rate down to 7.5% by September 2022. Growth of the key rate may negatively affect the cost of funding. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
A continuation or repetition of the downturn in the global or regional financial markets as well as a toughening or extension of international sanctions against Russia and the resulting volatility of the trading price of our shares may negatively impact our ability to obtain financing on commercially reasonable terms, either domestically or overseas, and could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our inability to generate sufficient free cash flow to satisfy our debt service obligations, or to refinance debt on commercially reasonable terms, could materially adversely affect our business, financial condition, results of operations and prospects.
We have an amount of outstanding indebtedness, primarily consisting of the obligations we entered into in connection with our notes and bank loans. Also see Note 28 to our audited consolidated financial statements. For information about our debt and finance cost, see “Item 5.Operating and Financial Review and Prospects—A. Operating Results.”
Our ability to service, repay and refinance our indebtedness and to fund planned capital expenditure will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, we may default under the terms of our financial indebtedness, and the holders of our indebtedness would be able to accelerate the maturity of such indebtedness, potentially causing cross-defaults under and acceleration of our other indebtedness. The existing debt servicing is becoming more difficult due to our dependence on floating interest rates in the financial markets.
We may not be able to generate sufficient cash flow or access domestic or international capital markets, or incur additional loans to enable us to service or repay our indebtedness or to fund our other liquidity needs. We may be required to refinance all or a portion of our indebtedness on or before maturity for a number of reasons. This, in turn, may force us to sell assets, reduce or delay capital expenditure or seek additional capital. Refinancing or additional financing may not be available on commercially reasonable terms or at all, and we may not be able to sell our assets or, if sold, the proceeds therefrom may not be sufficient to meet our debt service obligations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance debt on commercially reasonable terms, would materially adversely affect our business, financial condition, results of operations and prospects. See “Item 5.Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”
Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of shares.
Recent ruble volatility can be explained by external geopolitical factors, limited financial markets, change in oil prices, change in internal consumption and other factors.
As of December 31, 2020, ruble amounted to 73.88 per one U.S. dollar. As of December 31, 2021 and December 31, 2022, the ruble exchange rate was RUB 74.29 per 1 U.S. dollar and RUB 70.34 per 1 U.S. dollar, respectively. During 2022, the ruble hit a low of 120.38 per US dollar. See also “—Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries.” and “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
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See also “—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial results.”
The stability of the ruble will depend on many political and economic factors. These include the ability of the government to finance the deficit of the state budget without recourse to monetary emissions and to control the level of interest rates and inflation. Furthermore, changes in foreign currency regulation may affect our ability to fund payments denominated in foreign currency and result in us entering into supplementary agreements with our foreign counterparts.
A significant portion of our capital expenditure and liabilities are either denominated in or tightly linked to the U.S. dollar. Conversely, a majority of our revenues are denominated in rubles. As a result, devaluation of the ruble against the U.S. dollar can adversely affect us by increasing our costs in rubles, both in absolute terms and relative to our revenues, and make it more difficult to comply with the financial ratios contained in our various loan agreements or fund cash payments on our indebtedness on time. It also reduces the U.S. dollar value of tax savings arising from tax incentives for capital investment and the depreciation of our property, plant and equipment, since their basis for tax purposes is denominated in rubles at the time of the investment. Increased tax liability would also increase total expenses, which would have an adverse impact on our results.
We also anticipate that any dividends we may pay in the future will be declared and paid in rubles. See also “—Risks Relating to the Shares and ADSs and the Trading Market—Shareholders may be unable to repatriate distributions made on the shares”. Any further depreciation of the ruble against the U.S. dollar or other foreign currencies could therefore materially adversely affect our financial condition, results of operations and prospects and the value of our shares. See also “Item 11.Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial results.
Our expenditure, including capital expenditure, is denominated in, or closely linked to, the Ruble, the U.S. dollar, euro and/or yuan, while substantially all of our revenues are denominated in local currencies of the countries where we operate. The devaluation of local currencies against the Russian ruble can adversely affect our revenues reported in Russian rubles and increase our costs in terms of local currencies. In addition, local regulatory restrictions on the purchase of hard currency in the majority of countries where we operate may delay our ability to purchase equipment and services necessary for network expansion which, in turn, may cause difficulty in expanding our subscriber base in those countries. Further, a portion of our cash balances is held in jurisdictions outside Russia, and as a result of currency exchange controls in those jurisdictions, these cash balances may not always be readily available for our use.
In addition, a portion of our liabilities and borrowings (including our U.S. dollar denominated notes) are also either denominated in or tightly linked to the U.S. dollar or euro. A significant part of these is hedged through financial instruments with various banks, though the risk that such hedging is not fully effective remains.
The possible devaluation of the Belarusian ruble in the future may also adversely affect our revenues from this market.
See also “—Inflation could increase our costs and adversely affect our results of operations” and “Item 11.Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
If we are unable to obtain adequate capital, we may have to limit our operations substantially, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
We have to make significant capital expenditure, particularly in connection with the development, construction and maintenance of, and the purchasing of necessary software for, our mobile and fixed-line networks. For information about our capital expenditures, see “Item 4.Information on Our Company—A. History and Development—Capital Expenditure.” Further, the acquisition of 3G and 4G licenses and frequency allocations and the build-out of our 3G, 4G, 5G and broadband Internet networks will require additional capital expenditure.
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However, future financings and cash flow from our operations may not be sufficient to meet our planned needs in the event of various unanticipated potential developments, including the following:
● | a lack of external financing sources; |
● | changes in the terms of existing financing arrangements; |
● | construction of the wireless networks at a faster rate or higher capital cost than anticipated; |
● | pursuit of new business opportunities or investing in existing businesses that require significant investment; |
● | acquisitions or development of any additional wireless licenses; |
● | slower than anticipated subscriber growth; |
● | slower than anticipated revenue growth; |
● | regulatory developments; |
● | changes in existing interconnect arrangements; or |
● | a deterioration in the economies of the countries where we operate. |
International economic sanctions may also adversely affect our ability to gain external funding. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
Our indebtedness and the limits imposed by covenants in our debt obligations could limit our ability to obtain additional financing and thereby constrain our ability to invest in our business and place us at a possible competitive disadvantage. If we cannot obtain adequate funds to satisfy our capital requirements, we may need to limit our operations significantly, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Inflation could increase our costs and adversely affect our results of operations.
The Russian economy has been characterized by high rates of inflation, which over the past few years have been mainly driven by weakening of national currencies, restrictions on foreign trade and acceleration in food prices.
According to the Bank of Russia, the inflation rate in Russia reached 11.9% in 2022. On January 11, 2023, the Ministry of Finance announced the resumption of foreign currency sale as part of the budget rule mechanism. This resulted in weak pro-inflationary effects to occur due to the budget deficit. According to the forecast of the Bank of Russia, annual inflation may decline to 5.0-7.0% in 2023.
In 2022, the annual rise of consumer prices published by the National Bank of the Republic of Belarus amounted to 12.8%.
High rates of inflation in Russia and other countries of our operation could increase our costs and decrease our operating margins. See also “Item 5.Operating and Financial Review and Prospects—A. Operating Results—Certain Factors Affecting our Financial Position and Results of Operations—Inflation.” and “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
See also “—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial results” and “Item 11.Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
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Indentures relating to some of our notes contain, and some of our loan agreements contain, restrictive covenants, which limit our ability to incur debt and to engage in various activities.
Covenants in the loan agreement relating to MTS-23 Eurobonds (ISIN XS0921331509) due 2023 limit our ability to create liens on our properties, merge or consolidate with another person or convey our properties and assets to another person. Pursuant to the terms of the Extraordinary Resolution passed on December 13, 2022, amongst other things, Amended Payment Mechanics was introduced allowing for the coupon payment and repayment of Eurobonds principal amount to be made in Rubles at the Central Bank of Russia foreign exchange rate.
Some of our loan agreements contain similar and other covenants, including, in relation to the incurrence of indebtedness, creation of liens and disposal of assets. We may also incur additional credit obligations providing for similar covenants. Failure to comply with these covenants may cause a default and result in the debt becoming immediately due and payable, which would materially adversely affect our business, financial condition and results of operations.
A material adverse effect on our financial condition and results of operations could occur if redemption rights of our noteholders are invoked.
Under the terms of the notes, upon occurrence of the circumstances described below, noteholders will have the right to require us to redeem notes not previously called for redemption. The price upon such event will be 101% of the principal amount of the notes, plus interest accrued prior to the redemption date. Such redemption scenario could be triggered, with respect to the notes due 2023, if any person (with certain exceptions) acquires beneficial or legal ownership of, or control over, more than 50% of our issued shares, ownership of or control over more than 50% of the voting interests in our share capital or obtains the power to elect not less than half of our directors.
Some of our loan agreements contain similar redemption provisions triggered by occurrence of similar events. If such events occur, and our noteholders and other debt holders exercise their right to require us to redeem all of their notes or debt, such event could have a material adverse effect on our financial condition and results of operations.
In addition, under certain of our debt agreements, an event of default may be deemed to have occurred and/or we may be required to make a prepayment if Sistema disposes of its stake in our company and a third party takes a controlling position in our company. The occurrence of any such event of default or failure to make any required prepayment, which leads to an event of default, could trigger cross default / cross acceleration provisions under certain of our other debt agreements. In such event, our obligations under one or more of these agreements could become immediately due and payable, which would have a material adverse effect on our business and our shareholders’ equity.
However, until July 1, 2023, in accordance with Article 27 of Federal Law No. 519-FZ of 19.12.2022 "On Amendments to Certain Legislative Acts of the Russian Federation and Suspension of Certain Provisions of Legislative Acts of the Russian Federation" (hereinafter referred to as FZ of 19.12.2022 No. 519-FZ), the creditor cannot demand early repayment bonds in the event that:
● | the issuer of the bonds fulfills its obligations in accordance with the temporary procedure for fulfilling obligations to certain creditors; |
● | non-fulfillment or improper fulfillment of obligations by the issuer of bonds is caused by non-financial circumstances that could not be prevented by the issuer. |
The rules apply both to bonds issued under the law of the Russian Federation and under foreign law. Similar rules apply to loan obligations.
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Risks Relating to Business Operations in Emerging Markets
Emerging markets such as the Russian Federation and other CIS countries are subject to greater risks than more developed markets, including significant legal, economic, social, regulatory, tax and political risks.
Investors in emerging markets such as the Russian Federation, Armenia, Belarus and other CIS countries should be aware that these markets are subject to greater risk than more developed markets, including in some cases, significant legal, economic, social, regulatory, tax and political risks. Investors should also note that emerging economies such as the economies of the Russian Federation and other CIS countries are subject to rapid change and that the information set out herein may become outdated relatively quickly.
When conducting business in different CIS countries, we may face risks similar to those (and sometime even more substantial) we have in Russia.
There are a number of risks associated with investing in emerging markets, including the following:
● |
● | high volatility of national currencies (for more information, see “—Risks Relating to our Financial Condition”); |
● | possible geopolitical disputes (for more information, see “—Political and Social Risks”); and |
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● | possible liquidity constraints (for more information, see “—Risks Relating to Economic Risks in Our Countries of Operation” and “—Risks Relating to our Financial Condition”). |
For example, in September 2020, martial law was declared in Armenia due to escalation of the conflict in Nagorno-Karabakh. Continued tensions or further escalationAs of the conflictend of 2022, the situation in the region remained tense. Political environment could have a negative effect on the Armenian economy as well as our business, financial position and results of operations. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesGeopolitical situation and sanctions imposed as a result thereof,of current political environment, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.shares.”
Accordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to consult with their own legal and financial advisors before making an investment in our securities.
Risks Relating to Our Businessour Financial Condition
The telecommunicationsWe may be adversely affected by the current economic environment.
Macroeconomic challenges, resulting from a number of reasons, including but not limited to, the geopolitical developments, the COVID-19 pandemic, credit market crisis (including uncertainties with respect to financial institutions and digital services market is characterizedthe global capital markets), volatility of prices for major export commodities (including oil and metals), microchip shortages and other factors, currently affecting many of the markets in which we operate, may negatively impact our clients’ disposable incomes and our vendors’ cash flows. See also “—Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by rapid technological change, which could renderholders of shares”.
Consequently, customers may modify or decrease their usage of our services obsoleteand products or non-competitivefail to pay the outstanding balances on their accounts, and resultvendors may significantly increase their prices, eliminate vendor financing, reduce their output, decrease quality or fail to supply equipment, subscriber devices and services on a timely basis.
We may also experience increases in the lossaccounts receivable and bad debt among corporate subscribers, some of our market sharewhom may face liquidity problems and a decrease in our revenues.
The telecommunications industrypotential bankruptcy, as well as the digital services sector are subjectpotential bankruptcy of our corporate partners. The deterioration of economies in the countries of our operation may lead, inter alia, to rapidinsolvency of financial institutions, which in turn may affect our business and significantfinancial condition.
A decline in subscriber usage, an increase in bad debts, material changes in technology and are characterized byequipment pricing or financing terms or the continuous introductionpotential bankruptcy of new products and services. The mobile telecommunications and digital services industries in Russia are also experiencing significant technological change, as evidenced by the constant technological evolution of standards for radio telecommunications, such as Wi-Fi, Enhanced Data Rates for Global Evolution (“EDGE”), Universal Mobile Telecommunications System (“UMTS”), and Long Term Evolution (“LTE”), 5G, as well as ongoing improvements in the capacity and quality of communications, shorter development cycles for new products and enhancements and changes in customer requirements and preferences. Such continuing technological advances make it difficult to predict the extent of the future competition we may face and it is possible that existing, proposedour corporate subscribers or as yet undeveloped technologies will become dominant in the future and render the technologies we use less profitable or even obsolete. New products and services that are more commercially effective than our products and services may also be developed. Furthermore, we may not be successful in responding in a timely and cost-effective way to keep up with these developments. Changing our products or services in response to market demand may require the adoption of new technologies that could render many of the technologies that we are currently implementing less competitive or obsolete. To respond successfully to technological advances and emerging industry standards, we may require substantial capital expenditure and access to related or enabling technologies in order to integrate the new technology with our existing technology.
We face increasing competition in the markets where we operate, which may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing policies.
The telecommunication services markets (including the largest for MTS mobile communications market) and digital services markets where we operate, are highly competitive, particularly in Russia.
Competition is generally based on price, product functionality, range of service offerings and customer service.
Generally, increased levels of competition, including potential entry of new companies particularly new mobile operators, government-backed operators, mobile virtual network operators, operators of satellite TV and alternative fixed line operators in the markets where we operate, as well as the strengthening of existing companies, increased use of IP-telephony and other services, provided via the internet, may adversely affect our ability to keep the level of revenue which we receive from our operations on the telecom and other digital markets. This in turn could result in reduced operating margins and a loss of market share andpartners may have a material adverse effect on our business, financial condition, and results of our operations.
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Competition in the Russian market
Our principal wireless competitors in Russia are Public Joint Stock Company “Vimpel-Communications” (“VEON”), Public Joint Stock Company MegaFon (“MegaFon”), as well as the federal cellular operator established in 2014 by the combination of Tele2 Russiaoperations and the mobile assets of Public Joint Stock Company “Rostelecom” (“Rostelecom”). We also face competition from several regional operators.prospects.
In addition, we face competitiona further deterioration in macroeconomic conditions could require us to reassess the value of goodwill on certain of our assets, recorded as a difference between the fair value of the assets of business acquired and its purchase price. This goodwill is subject to impairment tests on an ongoing basis. The weakening macroeconomic conditions in the fixed line telecommunications business,countries in particular from Rostelecom. For instance, in 2018,which we operate and/or a significant difference between the Russian government made Rosetelecom the only providerperformance of Internet services for state and municipal medical institutions in 2018 and 2019.
In November 2019, the Board of Directors of Rostelecom approved a transaction to consolidate 100% of LLC “T2 RTK Holding”, which was completed in 2020 and resulted in increasing competition.
In the area of digital services we compete with technological companies, such as Yandex Group, Sber Group, Mail.ru Group and others, which are focused on developing digital services, as part of either new or existing core elements of their business. Despite the fact that in Russia, local technological companies are currently successfully competing with global leaders such as Google, Apple, Amazon and Alibaba Group, etc., further penetration of global players into local markets of digital services, including Russia, may intensify competition in these markets. Digital markets are growing strongly, driven both by a natural trendan acquired company and the additional impactbusiness case assumed at the time of acquisition could require us to write down the value of the COVID-19 pandemic, which has dramatically increased online consumption andgoodwill or portion of such value. Future write-downs relating to the importance of digital sales channels. Due to these market dynamics, current positions of market participants are subject to significant change in the near term.
See also “—If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices, which may diminish our market share and result in a loss of revenues and margins” below.
Competition in the foreign markets of our operation
In Belarus, our associate, MTS Belarus, while maintaining its leadership in the market in 2021, faces increasing competition and aggressive pricing from the main competitors – Best CJSC, a subsidiary of System Capital Management and Turkcell Iletisim Hizmetleri A.S. (“Turkcell”), which operates in Belarus under the “life:)” brand and A1 (a subsidiary of A1 Telekom Austria Group) which actively promotes convergent services. Additionally, in 2011, the governmentvalue of the Republicgoodwill or portion of Belarus announced its intention to hold a public tender to privatize a 51% stake in MTS Belarus with an opening price of approximately USD 1 billion. The public tender was scheduled to be held on December 23, 2011 but was cancelled due to a lack of bidders. The latest attempt to find an investor for the 51% stake in MTS Belarus took place in February 2014. However, it was unsuccessful for the same reason. A date for the next tender has not yet been specified. The terms of the share disposal have not yet been determined, although it may be conducted either through a public tender or by entering into a direct contract with a prospective purchaser. If we are unable to acquire this ownership interest at a commercially reasonable price, or if it is acquired by one of our competitors, it may impact our competitive position and results of operations in Belarus.
The change in ownership structure of Belarusian Cloud Technologies LLC (beCloud brand), which is the unified 4G infrastructure operator in Belarus, was effected at the end of 2021. The state acquired full control over the beCloud operation: Republican unitary enterprise “National traffic exchange center” increased its ownership up to 60%, the Republican Unitary Enterprise Beltelecom (owns 51% stake in Mobile TeleSystems JLLC) acquired a 40% stake. In January 2022, Beltelecom gained a license to provide mobile communications services, which will allow the company to compete in the mobile communications market.
We also face competition in Armenia. In October 2020, VEON telecommunications holding (Beeline trademark) reached an agreement to sell its business in Armenia to the local telecommunications company Team LLC. A possible sale of a Rostelecom subsidiary in Armenia, which provides fixed line service, was announced in January 2022. If one of the competitors buys this asset, itsuch value could have negativea material adverse effect on our business, financial condition and results of operations. Likewise, the current geo-political situation might also have an impact on the value of our business goodwill. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, in Armenia.prospects and the value of our shares.”
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We are subject to anti-corruption lawsContinued turmoil in the jurisdictions in which we operate, including anti-corruption laws of Russia and the US Foreign Corrupt Practices Act (the “FCPA”), and we may be subject to the UK Bribery Act 2010 (the “UK Bribery Act”). Our failure to comply therewithcredit markets could result in penalties which could harm our reputation and have a material adverse effect oncause our business, financial condition, and results of operations.operations and the value of our shares to suffer.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. We may also be subject to the UK Bribery Act. The UK Bribery Act is broader in scope than the FCPA in that it directly addresses commercial bribery in addition to bribery of public officials and it does not recognize certain exceptions, notably facilitation payments that are permittedSanctions introduced by the FCPA.
We operate primarily in RussiaUnited States, European Union, Switzerland, United Kingdom and other countries with respect to the Russian Federation coupled with an economic downturn caused a significant capital outflow, ruble depreciation, a rise of credit rates in the domestic market and a lack of available financing.
In February 2022, the Bank of Russia raised the key rate from 8.5% to to 20%, and starting from April 2022 gradually reduced the rate down to 7.5% by September 2022. Growth of the former Soviet Union, manykey rate may negatively affect the cost of which pose elevated risks of corruption violations. We and certain of our subsidiaries are in frequent contact with persons who may be considered “foreign public officials” under the FCPA and UK Bribery Act, and therefore, are subject to an increased risk of potential FCPA and UK Bribery Act violations. If we or any third party acting on our behalf or in our interests are not in compliance with the FCPA, the UK Bribery Act and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.
As disclosed in our public filings, in March 2014, we received requests for the provision of information from the United States Securities and Exchange Commission and the United States Department of Justice relating to an investigation of the Group’s former subsidiary in Uzbekistan. See also Note 34 to our audited consolidated financial statements. In February 2019, the Group reached a resolution with the SEC and the United States Department of Justice (“DOJ”) relating to the previously disclosed investigation of our former subsidiary in Uzbekistan.
We consented to the entry of an administrative cease-and-desist order (the “Order”) by the SEC.
The United States District Court for the Southern District of New York approved a deferred prosecution agreement (“DPA”) entered by the Group and a plea agreement entered into by our subsidiary in Uzbekistan. Under the agreements with the DOJ, we agreed to pay a total criminal penalty of USD 850 million (RUB 59.1 billion as of December 31, 2018) to the United States. We provided a provision of USD 850 million (RUB 55.8 billion as of the date of accrual), which was recognized as a part of discontinued operations in the consolidated statement of profit or loss for the year ended December 31, 2018.
funding. See also “—We have incurredPolitical and are continuing to incur costsSocial Risks—Geopolitical situation and related management oversight obligations in connection with our obligations under the DPA and the SEC Order,” “—We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Uzbekistan.”
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We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA and the SEC Order.
We are subject to the DPA with the DOJ and the SEC Order. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Uzbekistan” and Note 34 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. In conjunction with the DPA and pursuant to the SEC Order, we are required to retain, at our own expense, an independent compliance monitor. Pursuant to the DPA and the SEC Order, the monitorship was initially due to continue for a period of three years from the date of appointment and the term of the monitorship could be terminated early or extended depending on certain circumstances, as ultimately determined and approved by the DOJ and the SEC. We have not received notice from the SEC, the DOJ or the monitor of any breach of the terms of the DPA or SEC the Order. However, given a variety of factors, including the COVID-19 pandemic we have agreed to a one-year extension of the DPA and the monitorship with the DOJ and the SEC to (i) provide us with adequate time to implement necessary enhancements to certain critical components of our anti-corruption compliance and ethics program and (ii) allow the monitor sufficient time to be able to complete its review of our remedial efforts, including our implementation of the monitor’s recommendations and an assessment of the sustainability of our remedial actions. The term of the monitorship will continue until September 2023. The monitor assesses and monitors our compliance with the terms of the DPA and the SEC Order as well as reviews and evaluates the effectiveness of our policies, procedures, practices, internal accounting controls, record keeping and financial reporting as they relate to our current and ongoing compliance with the anti-bribery, books and records and internal accounting controls provisions of the FCPA and other applicable anti-corruption laws, and makes recommendations reasonably designed to improve the effectiveness of our internal accounting controls and FCPA corporate compliance. See also “—We are subject to anti-corruption laws in the jurisdictions in which we operate, including anti-corruption laws of Russia and the US Foreign Corrupt Practices Act (the “FCPA”), and we may be subject to the UK Bribery Act. Our failure to comply therewith could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.”
We have incurred significant costs in connection with the disposition of the matters covered in the DPA and SEC order, including retention of legal counsel and other advisors and other costs related to the investigations undertaken in connection with these matters. We currently cannot estimate additional costs that we are likely to incur in connection with compliance with the DPA and the SEC Order, including the ongoing obligations relating to the monitorship, our obligations to cooperate with the agencies regarding their investigations of other parties, and the costs of implementing the changes, if any, to our internal controls, policies and procedures required by the monitor. However, such costs could be significant. See also “—We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation.”
We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation.
Failure to comply with the terms of the DPA, whether such failure relates to alleged improper payments, internal controls failures, or other non-compliance, could result in criminal prosecution by the DOJ, including for the matters addressed in the DPA. Under such circumstance, the DOJ would be permitted to rely upon the admissions and the waiver of certain defenses we made in the DPA. Similarly, breach of the SEC Order could result in additional penalties against the Company.
Criminal prosecution by the DOJ as a result of a breach of the DPA or penaltiessanctions imposed as a result of noncompliance withcurrent political environment could materially adversely affect our business, financial condition, results of operations, prospects and the SEC Order could subject usvalue of our shares.”
A continuation or repetition of the downturn in the global or regional financial markets as well as a toughening or extension of international sanctions against Russia and the resulting volatility of the trading price of our shares may negatively impact our ability to penalties and other costsobtain financing on commercially reasonable terms, either domestically or overseas, and could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our inability to generate sufficient free cash flowsflow to satisfy our debt service obligations, or to refinance debt on commercially reasonable terms, could materially adversely affect our business, financial condition, results of operations and prospects.
We have an amount of outstanding indebtedness, primarily consisting of the obligations we entered into in connection with our notes and bank loans. Also see Note 28 to our audited consolidated financial statements. For information about our debt and finance cost, see “Item 5.Operating and Financial Review and Prospects—A. Operating Results.”
Our ability to service, repay and refinance our indebtedness and to fund planned capital expenditure will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, we may default under the terms of our financial indebtedness, and the holders of our indebtedness would be able to accelerate the maturity of such indebtedness, potentially causing cross-defaults under and acceleration of our other indebtedness. The existing debt servicing is becoming more difficult due to our dependence on floating interest rates in the financial markets.
We may not be able to generate sufficient cash flow or access domestic or international capital markets, or incur additional loans to enable us to service or repay our indebtedness or to fund our other liquidity needs. We may be required to refinance all or a portion of our indebtedness on or before maturity for a number of reasons. This, in turn, may force us to sell assets, reduce or delay capital expenditure or seek additional capital. Refinancing or additional financing may not be available on commercially reasonable terms or at all, and we may not be able to sell our assets or, if sold, the proceeds therefrom may not be sufficient to meet our debt service obligations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance debt on commercially reasonable terms, would materially adversely affect our business, financial condition, results of operations and prospects. See “Item 5.Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”
Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of shares.
Recent ruble volatility can be explained by external geopolitical factors, limited financial markets, change in oil prices, change in internal consumption and other factors.
As of December 31, 2020, ruble amounted to 73.88 per one U.S. dollar. As of December 31, 2021 and December 31, 2022, the ruble exchange rate was RUB 74.29 per 1 U.S. dollar and RUB 70.34 per 1 U.S. dollar, respectively. During 2022, the ruble hit a low of 120.38 per US dollar. See also “—Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries.” and “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
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We maySee also face other potentially negative consequences relating to“—Changes in the investigations by, and agreements with,exchange rate of local currencies in the DOJ, SEC, and other authorities. Nonecountries where we operate against the Russian ruble, as well as changes in the exchange rate of the DPARussian ruble and local currencies against the SEC Order prevents these U.S. dollar and/or any other authorities from carrying out certain additional investigations with respect to the facts not covered in the agreements or in other jurisdictions, or prevents authorities in other jurisdictions from carrying out investigations related or unrelated to the matters which being investigated. Additionally, on March 19, 2019, a proposed class action complaint, captioned Salim v. Mobile TeleSystems PJSC et al., case number 1:19-cv-01589, was filed in the United States District Court for the Eastern District of New York against us and certain ofeuro could adversely impact our managers. financial results.”
The complaint was filed by an individual securities holder on behalf of himself and all similarly situated securities holders alleging violations of Sections 10(b) and 20(a) and Rule 10b-5stability of the Exchange Act with respectruble will depend on many political and economic factors. These include the ability of the government to certain public disclosures made by us regardingfinance the deficit of the state budget without recourse to monetary emissions and to control the level of interest rates and inflation. Furthermore, changes in foreign currency regulation may affect our former businessability to fund payments denominated in Uzbekistan and investigations carried out by the SEC and DOJ related thereto. The complaint further alleged that such disclosure omissions led to a decline in the market value of our securities resulting in losses and damages to the plaintiff and other securities holders. The plaintiff was seeking damages in an unspecified amount, prejudgment and post-judgment interest and attorneys’ fees, expert fees and other costs and other and further relief. On March 1, 2021 the United States District Court of Eastern District of New York granted MTS’s motion to dismiss with prejudice and dismissed the complaint in full.
Any collateral investigations, litigation or other government or third party actions resulting from these, or other, matters could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects. In addition, any ongoing media and governmental interest in the investigations, the agreements and claims could impact the perception of usforeign currency and result in reputational harm.us entering into supplementary agreements with our foreign counterparts.
The outbreakA significant portion of COVID -19 may haveour capital expenditure and liabilities are either denominated in or tightly linked to the U.S. dollar. Conversely, a material adverse effectmajority of our revenues are denominated in rubles. As a result, devaluation of the ruble against the U.S. dollar can adversely affect us by increasing our costs in rubles, both in absolute terms and relative to our revenues, and make it more difficult to comply with the financial ratios contained in our various loan agreements or fund cash payments on our business,indebtedness on time. It also reduces the U.S. dollar value of tax savings arising from tax incentives for capital investment and the depreciation of our property, plant and equipment, since their basis for tax purposes is denominated in rubles at the time of the investment. Increased tax liability would also increase total expenses, which would have an adverse impact on our results.
We also anticipate that any dividends we may pay in the future will be declared and paid in rubles. See also “—Risks Relating to the Shares and ADSs and the Trading Market—Shareholders may be unable to repatriate distributions made on the shares”. Any further depreciation of the ruble against the U.S. dollar or other foreign currencies could therefore materially adversely affect our financial condition, results of operations and prospects
A novel strain of and the coronavirus, COVID-19, was discovered in Wuhan, China in December 2019 and on 11 March 2020, was declared by the World Health Organization to be a global pandemic. It has adversely affected and continues to affect the economies and financial markets of many countries, including Russia and CIS and has resulted in a series of measures implemented by governments around the world aimed at mitigating the further spread of the virus. These measures include restrictions on travel, closure of national borders, imposition of quarantines, introduction of import restrictions, prolonged closures of workplaces and curfews or other social distancing measures. The second and subsequent waves of the COVID-19 pandemic resulted in further growth of number of cases and death toll in Russia and other countries. There is still significant uncertainty regarding the impacts and duration of the COVID-19 pandemic. If the spread of COVID-19 persists for a significant period or the infection rates stagnate or increase, this could lead to renewed nationwide lockdowns, which could have a material negative impact on the global and Russian economies. For example, in Armenia the COVID-19 quarantine was extended until June 20, 2022. The continuation of quarantine measures imposed by the Armenian government due to the COVID-19 pandemic could negatively affect our financial results in that country.
The impact of COVID-19 on the Group is limited so far. However, due to the uncertainty of the duration and degree of impact of the COVID-19 pandemic, we continue to evaluate various scenarios and their potential impacts on Group financials. We have also carried out risk assessments for eachvalue of our business units, considering potential strategic, operationalshares. See also “Item 11.Quantitative and regulatory related impacts. We have incorporated COVID-19 commentary below, which gives an overviewQualitative Disclosures about Market Risk—Foreign Currency Risk.”
Changes in the exchange rate of local currencies in the related uncertainties and potential impacts oncountries where we operate against the Group.
Clients and counterparties
Global economic downturn caused by the novel coronavirus pandemic could affect customer spending habits, decrease of demand on our products and services,Russian ruble, as well as affectchanges in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial conditionresults.
Our expenditure, including capital expenditure, is denominated in, or closely linked to, the Ruble, the U.S. dollar, euro and/or yuan, while substantially all of our counterpartiesrevenues are denominated in local currencies of the countries where we operate. The devaluation of local currencies against the Russian ruble can adversely affect our revenues reported in Russian rubles and theirincrease our costs in terms of local currencies. In addition, local regulatory restrictions on the purchase of hard currency in the majority of countries where we operate may delay our ability to fulfill their obligations. purchase equipment and services necessary for network expansion which, in turn, may cause difficulty in expanding our subscriber base in those countries. Further, a portion of our cash balances is held in jurisdictions outside Russia, and as a result of currency exchange controls in those jurisdictions, these cash balances may not always be readily available for our use.
In addition, travel restrictions imposed by a numberportion of countriesour liabilities and voluntarily travel limitation may lead to a decreaseborrowings (including our U.S. dollar denominated notes) are also either denominated in roaming services provided and our roaming revenue from our subscribers. See also “—We may be adversely affected by the current economic environment.”
Development of Our Network Infrastructure
The lack or limited access to residential buildings, for example, due to COVID-19 impact, may affect projects for construction and modernization of fixed-line network. For more information, see “—We may be required to make significant investments beyond those that are currently planned to preserve our competitive advantage in responsetightly linked to the rapid evolutionU.S. dollar or euro. A significant part of fixed network technology.”these is hedged through financial instruments with various banks, though the risk that such hedging is not fully effective remains.
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Financial Stability of Our Subsidiaries, including MTS Bank
Uncertainty on the international financial market amid COVID-19 pandemic may have material adverse effect on the financial condition of MTS Bank and its customers, in particular, it may result in an increase of non-performing loans and loan provision charges, loan losses and write-offs, an increase in exchange rate risk and losses, etc. For more information, see “—MTS Bank’s business entails regulatory and operational risks.”
Personnel
If the COVID-19 pandemic adversely affects our businesses and liquidityBelarusian ruble in the future we may fail to retain employees and attract suitable talents to the company. The productivity of our employees may be reduced due to remote work. See also “—Our competitive position and future prospects depend on our senior managers and other key personnel and our inability to attract, retain and motivate qualified key personnel could have a material adverse effect on our business, financial condition and results of operations.”
Moreover, due to stricter safety standards, our cost of compliance with COVID-19 related safety requirements may increase.
IT Technology and Cyber Security
Despite the fast development of the pandemic and the extremely rapid transfer of our personnel to distant work, we managed to fully maintain operation of our information security units and ensure continuous monitoring of compliance with local regulations on information security. However, no assurance can be given that these measure will be sufficient in the future and no new challenges will emerge. If we are required to develop any additional measures to protect the company and its business processes, it may result in the significant increase in operating costs. See also “—Breach of information confidentiality, integrity and availability may lead to interruption of business critical processes, a loss of market share, and claims from subscribers, regulators, and partners, which could materially adversely affect our reputation, business, financial condition, results of operations and prospects.”
We have a significant shareholder, which may limit your ability to influence corporate matters and may give rise to conflicts of interest.revenues from this market.
Sistema, which is a public company, owns approximately 42% of the Company’s ordinary shares. As a result, Sistema exerts, and may continue to exert, influence over us and any action requiring the approval of the holders of our ordinary shares. Sistema can take actions that may conflict with the interests of other security holders. Furthermore, our international, credit, investment and other ratings, which determine, inter alia, peculiarities of our operations, terms of raising debt financing and our other activity could be affected by Sistema’s activity and (or) its ratings. See also “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources— Credit Rating Discussion.”
Sistema, as well as other our shareholders, have a right regulated by applicable law to receive dividends at the amount proportionate to the number of our shares belonging to a respective shareholder. For information about dividends see “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Requirements.” The indentures relating to our outstanding notes and other debt do not restrict our ability to pay dividends. As a result of paying dividends, our reliance on external sources of financing may“—Inflation could increase our credit rating may decrease, and our cash flow and ability to repay our debt obligations, or make capital expenditure, investments and acquisitions could be materially adversely affected.
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Difficulties with operational management of acquired businesses could hamper our continued growth and profitability.
Our continued growth depends, in part, on our ability to identify attractive opportunities in markets that will grow and on our ability to manage the operations of acquired or newly established businesses. Our acquisitions may occur in countries and regions that represent new operating environments for us. We therefore may have less control over their activities. We may also face uncertainties with respect to the operational and financial needs of those businesses and may, in the course of our acquisitions, incur additional debt to finance the acquisitions and/or take on substantial existing debt of the acquired companies. In addition, it is possible that our activities in the countries of our current presence and counties into which we may expand may be associated with greater political, economic, social and legal risks.
For example, see “—Legal Risks and Uncertainties—An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable” and “—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations.” Our failure to identify attractive opportunities for expansion into new markets and to manage the operations of acquired or newly established businesses in these markets could hamper our continued growth and profitability, and have a material adverse effect on our financial condition, results of operations and prospects.
Acquisitions and mergers may pose significant risks to our business.
We have expanded our business through a number of acquisitions. We will continue to evaluate opportunities to acquire, invest in or merge with other existing operators or license holders, as well as other complementary businesses. In 2017-2021, our acquisitions focused on various segments, including communication and software development companies, providers of cloud services, as well as management investment and other non-telecom companies.
These and other business combinations entail a number of risks that could materiallycosts and adversely affect our business, financial condition, results of operations and prospects, including the following:
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See also “—Legal Risks and Uncertainties—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations” and “—Risks Relating to our Financial Condition—We may be adversely affected by the current economic environment.”
In addition, companies that we acquire may not have internal policies, including accounting policies“Item 11.Quantitative and internal control procedures that are compatible, compliant or easily integrated with ours.
If any of our future business combinations is structured as a merger with another company, or we merge with or absorb a company subsequent to its acquisition by us, such a merger would be considered a corporate reorganization under Russian law. This would entitle our creditors to file a claim seeking to accelerate their claims or terminate the respective obligations and seek damages. The creditors would need to prove in court that we will not perform our obligations in due course and the amount of damages suffered. Secured creditors would also be required to prove that the security provided by our shareholders, any third parties or us is not sufficient to secure our obligations. Creditors whose claims are secured by pledges do not have the right to claim additional security.
As of December 31, 2017, we held a 26.61% stake in MTS Bank. In 2018, we acquired a 28.63% stake in MTS Bank from Sistema for RUB 8.27 billion, thus increasing our effective ownership in MTS Bank to 55.4%. In February 2019, we acquired a 39.48% stake in MTS Bank for RUB 11.4 billion, as a result of which our effective ownership in MTS Bank reached 94.97%. In December 2019, we increased our stake in MTS Bank up to 99.9% by acquiring it from Sistema. The increase of our share in MTS Bank is in line with our strategy to diversify the business, achieve synergies and develop innovative financial services.
In 2019-2021, we also acquired certain companies such as United Russian Studios JSC, JUST AI Limited, Zelenaya Tochka Group and others. See “Item 4—Information on Our Company—A. History and Development” for further information.
These acquisitions have allowed us to diversify our business. However, additional risks relating to acquired companies’ liabilities and non-achievement of initial financial and operational targets may arise in connection with these acquisitions. See also Note 5 to our audited consolidated financial statements.
We may also be involved in various litigation to protect our title or other rights related to acquired businesses and incur loss.
In addition, a merger or any corporate reorganization or business combination that constitutes a “major transaction” under Russian law would trigger the right of our shareholders who abstain from voting on or vote against such reorganization or transaction to sell, and our obligation to buy, their shares in an amount representing up to 10% of our net assets as calculated under Russian Accounting Standards. See “—Legal Risks and Uncertainties—Shareholder rights provisions under Russian law could impose additional obligations and costs on us, which could have a material adverse effect on our business, financial condition, results of operations and prospects.Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
If we cannot successfully develop our network or integrate the acquired companies, we will be unable to expand our subscriber base and maintain our profitability.
Our ability to increase our subscriber base depends upon the success of our network expansion (including fixed-line networks).
We have expended considerable amounts of resources to enable both organic expansion and expansion through acquisitions, and we plan to continue to do so. Limited information regarding the markets into which we have or are considering expanding, through either acquisitions or new licenses, complicates accurate forecasts of future revenues from those regions, increasing the risk that we may overestimate these revenues. In addition, we may not be able to integrate previous or future acquisitions successfully or operate them profitably. Any difficulties encountered in the transition and integration process and in the operation of acquired companies could have a material adverse effect on our results of operations.
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The build-out of our network is also subject to risks and uncertainties, which could delay the introduction of services in some areas and increase the cost of network construction, including difficulties in obtaining base station sites on commercially attractive terms. Further, telecommunications equipment used in Russia and other CIS countries is subject to governmental certification and periodic renewals of the same. We are also required to obtain permits and governmental certification for the operation of telecommunications equipment and/or permission for the import and export of certain network equipment, which can result in procurement delays and slower network development. The failure of any equipment we use to receive timely certification or re-certification, as applicable, could hinder our expansion plans. See also “—Risks Relating to our Financial Condition—If we are unable to obtain adequate capital, we may have to limit our operations substantially, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
We have to make significant capital expenditure, particularly in connection with the development, construction and maintenance of, and the purchasing of necessary software for, our mobile and fixed-line networks. For information about our capital expenditures, see “Item 4.Information on Our Company—A. History and Development—Capital Expenditure.” In particular, in 2019 considerable changes toFurther, the Federal law No. 412 “On Accreditation inacquisition of 3G and 4G licenses and frequency allocations and the National Accreditation System” dated December 28, 2013, which increased powers (authority) of Rosaccreditation relating to control over unfairly accredited persons, came into force. These changes introduced stricter requirements to accredited persons’ activities and accreditation experts and provide for additional basis for suspension and termination of accreditation. As a result, these changes may lead to an increased cost of certification services and increase time needed for acquiring certifications, which may affect delivery time of certified equipment in Russia.
For example, the import and export of products containing cryptographic hardware is subject to special documentation requirements and approvals. As telecommunications networks comprise various components with cryptographic hardware, we must comply with these requirements in order to import such components. Moreover, where imported equipment does not contain cryptographic hardware, the federal customs service requires manufacturers to provide written confirmation regarding the absence of such hardware. The range of goods requiring the provision of such “certificates of conformance” by suppliers and manufactures prior to their import into Russia has also been expanded to cover mostbuild-out of our key network components,3G, 4G, 5G and imported radioelectronic equipment is required to be licensed by the Russian Ministry of Industry and Trade.
Our inability to develop additional sources of revenue and competitive services could have a material adverse effect on our business, financial condition, results of operations and prospects.
Until recently, customer growth has been our principal source of revenue growth. Currently, however, increasing competition, market saturation and technological development lead to the increased importance of digital services based on mobilebroadband Internet smart home, artificial intelligence, cloud services, big data solutions , Internet of things and media services. As a result, wenetworks will need to focus on the development of new services based on the abovementioned technologies. We invest in new businesses, such as artificial intelligence, financial technologies, big data, IoT (in particular, we participate in realization of national program “Digital Economy of the Russian Federation”), cloud services and others. Decrease or absence of demand for new services, as well as competition increase on current markets, or new companies’ entries may lead to revenue decrease and necessity to revise our strategy regarding new businesses, which may require additional investments. Our inability to develop additional sources of revenue could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, in September 2021 our shareholders approved the separation of our passive infrastructure as well as a significant share of our active network and digital infrastructure into the wholly-owned subsidiaries. For more information, please see “Item 4. Information on Our Company—B. Business Overview—Business Strategy”. An inability to realize the anticipated benefits of this separation could have an adverse effect on our business, financial condition, results of operations and prospects.
If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices, which may diminish our market share and result in a loss of revenues and margins.
Our ability to provide commercially viable services depends on our ability to continue to interconnect cost-effectively with zonal, intercity and international fixed-line and mobile operators in Russia and other countries in which we operate. Interconnect fees are established by agreements with network operators and vary depending on the network used, the nature of the call and the call destination.
Although Russian legislation requires that operators of public switched telephone networks that are deemed to be “substantial position operators” cannot refuse to provide interconnect services or discriminate against one operator over another, we believe that, in practice, some operators attempt to impede wireless operators by delaying interconnect applications and establishing technical conditions for interconnecting that can be met only by certain operators.capital expenditure.
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Any difficulties or delays in interconnecting cost-effectively with other networks could hinderHowever, future financings and cash flow from our abilityoperations may not be sufficient to provide services at competitive prices, or at all, causing us to losemeet our market share and revenues, which would have a material adverse effect on our business and results of operations. See also “—If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.”
In addition, as part of the restructuring of Svyazinvest, a fourth national mobile operator in Russia was established by the combination of “Tele2 Russia” and the mobile assets of Rostelecom in 2014, which started its operations in 2015 under the “Tele2” brand. As Svyazinvest controlled regional fixed-line operators in all regions of Russia (other than Moscow), a mobile operator established as part of the Svyazinvest group (mobile assets were consolidated into LLC “T2 RTK Holding”) may receive preferential terms for interconnecting with these operators, which would allow it greater flexibility in setting tariffs and could put us at a competitive disadvantage. See also “—We face increasing competitionplanned needs in the markets where we operate, which may result in reduced operating margins and lossevent of market share, as well as different pricing, service or marketing policies.”
We may not realizevarious unanticipated potential developments, including the benefits we expect to receive from our investments in 4G and 5G wireless services and Internet of Things (IoT) technologies, which could have a material adverse effect on our business and results of operations.
In July 2012, the Federal Service for Supervision in the Area of Communications and Mass Media awarded MegaFon, VEON, Rostelecom (under Tele2 brand) and us a license to provide 4G services in the Russian Federation.
In December 2017, the State Commission for Radio Frequencies issued a decision allowing the use of frequency bands previously allocated for LTE mobile communications for NB-IoT technology. In the second half of 2018 and March 2020, State Commission for Radio frequencies awarded additional frequencies and determined the procedure for the use of radio electronic means, operating in the range of 800 MHz under LPWAN group of standards (Low-power Wide-area Network) relating to IoT technology. In March 2020, the Commission allowed indefinite range of persons and entities to use the 24.25-24.65 GHz frequency band under the 5G standard for radio electronic means. This decision allows the construction of local communication networks under the 5G/IMT-2020 standard, which could lead to increased competition in our certain business areas. In July 2020, we received the first license to provide 5G-based services in this frequency band. In November 2020, the State Commission for Radio frequencies clarified the terms regarding mandatory use of equipment of Russian origin in the 24.25-24.65 GHz frequency band, which may affect the possibility of using these frequencies.
In August 2021, the State Commission for Radio frequencies prolonged permits to use the frequencies of 700 MHz, 800 MHz, and 2600 MHz for LTE networks for another 10-year term. The main conditions for the prolongation includes:following:
● |
The aforementioned changes, on the one hand, allow operators to use the necessary radio frequency resources, and on the other hand, could require additional costs for network construction.The 4G wireless services provide faster, higher quality data transfer and/or streaming capabilities, as compared to 2G and 3G, and 5G wireless services pose a similar advantage over 4G. Historically, mobile operators that are developing 4G networks experienced various difficulties and challenges, including a limited supply of compatible handsets, limited international roaming capabilities, as well as various software and network related problems. We may experience similar problems or encounter new difficulties when developing our 4G and 5G networks (including NB-IoT) and may be unable to fully resolve them. For example, we cannot be certain that:
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● | changes in |
● | construction of the wireless networks at a faster rate or |
● | pursuit of new business opportunities or |
● | acquisitions or development of any additional wireless licenses; |
● | slower than anticipated subscriber growth; |
● | slower than anticipated revenue growth; |
● | regulatory developments; |
● | changes in existing interconnect arrangements; or |
● | a deterioration in the economies of the countries where we operate. |
See also “—If we cannot successfully develop our network or integrate the acquired companies, we will be unable to expand our subscriber base and maintain our profitability.”
In addition, Russian military and other authorities also use frequencies in the 4G and 5G spectrum, which may limit the availability of 4G and 5G frequencies for commercial use in certain areas. During the construction of our networks, there is also a risk that the frequencies assigned to us for commercial use may overlap with those used by the Russian military and other authorities. For example, conflicts over the availability of frequency reserved for military use in Moscow caused delay in the commercial launch of 3G services by all 3G license-holders in Moscow, despite the fact that some of these frequencies were cleared for commercial use in 2009. If a similar conflict were to occur, it could cause problems or delays in the development and operation of our 3G and 4G networks in Russia.
Potential competition from other 4Gand LPWAN providers, together with any problems relating to the rollout of our 4G and 5G networks and provision of 4G and 5G services in the future, could materially adversely affect our business, financial condition and results of operations.
In December 2013, July 2014 and in July 2017, the State Commission for Radio Frequencies introduced several modifications to the conditions of using the frequency band for mobile radio communication networks. These changes resulted in the implementation of the principle of technological neutrality for frequency bands 900 MHz (UMTS and LTE), 1800 MHz (LTE) and 2100 MHz (LTE), and included the imposition of certain additional obligations on network operators. Pursuant to these modifications, in case of using frequencies on the terms of technological neutrality principle, we are, inter alia, obliged to provide network coverage to settlements with lower subscriber numbers, where the commercial rationale for doing so may otherwise be limited. Such changes lead to additional costs for the construction of our 3G and 4G wireless networks and may therefore adversely affect our business, financial condition and results of operations. Moreover, the rules on the Russian-produced telecommunication equipment usage, which require to operate only equipment included in the Unified register of the Russian radio-electronic products, could affect implementation of the Internet of things (IoT) technology and 5G networks deployment.
If we are unable to successfully develop and/or deploy 4G and 5G wireless services in the countries in which we operate, or if any operators in those markets obtain a significant technological and/or commercial advantage over us in 4G and 5G wireless services, it may have a material adverse effect on our business and results of operations in the long term.
Currently, the ability to develop 4G/LTE and 5G networks is one of the key factors of the operator’s competitiveness in the market of mobile services in Russia and other countries where we operate. The cost of 4G/LTE and 5G network deployment and quality of services (including data speed and quality of radio coverage) depends on the band and the width of frequency range given to an operator.
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In 2012 outside of the auction process, the State Commission for Radio Frequencies granted Scartel (operating the “Yota” retail brand) a paired range of LTE frequencies (2x30 MHz) in the 2.5 2.7 GHz band for use in the entire territory of Russia. The remaining frequencies, 40 MHz of the 2.5 2.7 GHz band, were allocated evenly during the auction among four major market participants (VEON, MegaFon, Rostelecom and us). Initially, it was planned that all operators would receive equal access to the Scartel infrastructure, which would allow each operator to reduce its 4G/LTE network development costs.
On October 1, 2013, MegaFon acquired Maxiten Co Limited, which had acquired 100% of shares in Scartel and Yota Ltd. from Garsdale. The transaction was approved by a general shareholders’ meeting of MegaFon and by the Federal Antimonopoly Service (the “FAS”). As a result of this transaction, MegaFon obtained a competitive advantage in terms of LTE network development costs andInternational economic sanctions may also obtain an advantage in LTE network performance. In addition, as a result of this deal, MegaFon consolidated the financial and operational indicators of Scartel/Yota, which increased its formal market share in the mobile communications market.
Significant material resources for the introduction of such technologies may be required, which could have a material adverse effect on our business and results of operations. Furthermore, the limited number of available frequencies may prevent us from realizing the full benefits we expect to receive from the development of a 4G network, because our network capacity would be constrained and our ability to expand limited.
In 2019, Rosletelcom PJSC received a LTE frequency in the 2.3-2.4 GHz band outside of the auction process. In July 2020, the State Commission for Radio frequencies allowed Rostelecom PJSC to share this frequency band with T2 Mobile LLC (Tele2), which gave an advantage to these operators. However, in December 2020, the State Commission for Radio frequencies changed its decision relating to permission for the commercial use of this range. These developments reflect ongoing discussions on allocation frequencies in order to construct 5G network in Russia, deployment of which has been actively negotiated by operators and regulators since 2017. The greater part of frequency spectrum suitable for 5G network in Russia, is partially or fully occupied by other users (for example, satellite communication companies use the most suitable frequencies for 5G in 3.5 GHz band), including state-owned companies. Significant expenses and time may be required to clear frequencies, however the frequency conversion mechanism has not been fully defined yet and if it will be realized, there is no assurance that sufficient frequencies optimal for 5G deployment will be cleared in low- band spectrum (“sub-6”).
As a solution, the regulator is considering creation of a Single Infrastructure Operator, which will be assigned with the 5G frequencies, and, as one of the discussed variants, will construct a single 5G network in Russia mainly using equipment produced in Russia and will maintain this network. It is planned that the Single Infrastructure Operator will operate as a technological platform based on which independent market players will develop and provide a wide range of services to clients. According to market players and certain industry experts, this solution has variety of advantages as well as some disadvantages and risks as compared to traditional network deployment by operators on a free and non-discriminatory basis.
Final regulator decision on frequency allocation for 5G will significantly affect process of mobile communication market development and may lead to occurrence of certain difficulties, including extension of time needed for putting 5G network into operation, increase in capital and operating expenditures, failure to realize all 5G technological advantages caused by separation of 5G and earlier generation network infrastructure, realization of market advantages by certain players due to non-equal frequency allocation or obtaining of other technological advantages connected with frequency allocation. All of these factors mayadversely affect our ability to develop 5G network, which in turn may have a material adverse effect on our business.
Moreover, if we cannot develop a commercially viable 4G and 5G networks, and one of our competitors does, that competitor would have an advantage over us, which in turn may have a material adverse effect on our business.
Disruptions on our networks and information systems could lead to a loss of subscribers, damage to our reputation, violations of the terms of our licenses and subscriber contracts, penalties and have a material adverse effect on our business and financial condition.
We are able to maintain our operations only to the extent that our network infrastructure, information systems and data processed therein is protected from unlawful actions, including hacker and targeted attacks, technical malfunctions, power failures and natural disasters. Any failure, accident or network or information systems security breach, that causes interruptions in our operations could impair our ability to provide services to our customers or may influence other business processes, any of which could materially adversely affect our reputation, business and results of operations.
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In addition, to the extent that any disruption or network or elements of information systems security breach results in a loss of or damage to customers’ personal data, or inappropriate disclosure of confidential information, we may incur liability as a result, including costs to remedy the damage caused by these business-interruptions or elements of information systems security breaches.
While we maintain backup systems for our telecommunications and infrastructure equipment, network and data management, operations and maintenance systems, these systems may not ensure recovery in the event of a network or information systems failures. In particular, in the event of extensive software and/or hardware failures, significant disruptions to our systems could occur, leading to our inability to provide services in full. The quality of our services in roaming (including roaming between networks) also depends, inter alia, on the network quality of our roaming partners, which is out of our control. Disruptions in our provision of services could lead to a loss of subscribers, damage to our reputation, violations of the terms of our licenses and subscriber contracts and penalties.
Our computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, loss of power, telecommunications failures, physical or software break-ins, viruses and similar events. Although our computer and communications hardware is insured against fire, storm and flood, we do not have business interruption insurance to protect us in the event of a catastrophe, even though such an event could have a material adverse effect on our business.
Failure to fulfill the terms of our licenses could result in their suspension or termination, which could have a material adverse effect on our business and results of operations.
Each of our mobile licenses requires service to be offered by a specific date and some contain further requirements as to territorial coverage to be reached by specified dates.
In addition, all of our mobile licenses require us to comply with various telecommunications regulations relating to the use of radio frequencies and numbering capacity allocated to us, network construction, interconnect rules and technical requirements relating to compliance with law enforcement authorities’ requests, among others. If we fail to comply with the requirements of Russian or other applicable legislation or meet any terms of our licenses, our licenses and other authorizations necessary for our operations may be suspended or terminated, which could significantly limit our operations. In addition to the impact on our operations, the suspension or loss of certain licenses could also constitute an event of default under certain of our debt obligations and cause certain of our debt to be accelerated.
The Russian government enacted its Decree No. 2385 dated December 30, 2020, as amended, which came into force starting from January 1, 2021. (The validity of the document is limited to January 1, 2027.) It replaced the previously existing regulation on licensing activities in the communication services sector and introduced certain new mandatory licensing requirements and grounds for license termination.
A suspension or termination of our licenses or other necessary governmental authorizations, as well as regulatory changes of licensing requirements could therefore have a material adverse effect on our business and results of operations.
Failure to renew our licenses, or receive renewed or new licenses with similar terms to our existing licenses, could have a material adverse effect on our business and results of operations.
Our telecommunications licenses have their expiration dates in various years. For a list of the telecommunications licenses held by us, see “Item 4. Information on Our Company—B. Business Overview—Licenses.”
These licenses may be renewed upon application to the relevant governmental authorities. Government officials in Russia and the other countries in which we operate consider the compliance with license requirements and the conditions of using the allocated frequency range when deciding whether to renew a license.
Additionally, new mandatory conditions, which relate to the need for further development of the communication network in order to provide licensed communication services for potential users of the communication service in sparsely populated residential areas, may be introduced when deciding whether to renew a license. These new conditions will require additional investment. Moreover, we may be subject to penalties or our licenses may be suspended or terminated for non-compliance with any such new license requirements. The suspension or loss of certain licenses could significantly limit our operations and cause certain of our debt to be accelerated.
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If frequencies currently assigned to us are revoked, or if we fail to obtain renewals of our frequency allocations, our network capacity will be constrained and our ability to expand limited, resulting in a loss of market share and revenues.
There is a limited radio frequency spectrum available for wireless operators in each of the regions in which we operate or hold licenses to operate. We are dependent on access to adequate spectrum allocation in each market in which we operate in order to maintain and expand our subscriber base. If frequencies are not allocated to us in the future in the required quantities, with the geographic span and for time periods that would allow us to provide wireless services on a commercially feasible basis throughout all of our license areas, our business, financial condition, results of operations and prospects may be materially adversely affected.
According to the decision of the State Commission for Radio Frequencies No. 13-22-01 dated December 11, 2013, the terms of radio frequency bands usage by radio electronic facilities for mobile communication were supplemented with a requirement to provide the settlements of over 1,000 people with communication services within seven years (depending on the used frequency range and radio technology). If we are not able to fulfill these requirements, our authorizations for the use of radio frequency spectrum might be either terminated or not prolonged in extrajudicial procedure.
A loss of allocated spectrum, which is not replaced by other adequate allocations, could also have a substantial adverse impact on our network capacity. In addition, frequency allocations are often issued for periods that are shorter than the terms of the licenses, and such allocations may not be renewed in a timely manner, or at all. If our frequencies are revoked, or if we are unable to renew our frequency allocations, our network capacity would be constrained and our ability to expand limited, resulting in a loss of market share and revenues.
An increase in the fees for frequency spectrum usage could have a negative effect on our financial results.
The Russian and the CIS legislation requires us to make payments for frequency spectrum usage. A number of projects implemented by MTS in 2016 - 2018, as well as a number of normative acts previously adopted by the Ministry of Communications, resulted in expansion of the range of frequencies that have to be paid for.
The fees for frequency spectrum usage are calculated based on the total frequency band allocated to each operator in each region with such frequency spectrum usage determined with reference to the decision of the State Commission for Radio Frequencies, frequency allocation decisions or to the license conditions.
Fees are directly calculated according to the “Methodology of calculation of a single fee and annual fee for the use of the radio spectrum of the Russian Federation” approved by the order of the Ministry of Communications dated June 30, 2011 No. 164. The rates and coefficients of the aforementioned Methodology used for calculating fees for frequency spectrum, are subject to revision at least once every two years. The Ministry of Communications developed and circulated for discussion a draft order “On Amendments to the Methodology for establishing of single fee and annual fee for the use of radio frequency spectrum in the Russian Federation”. The order provides for, inter alia, imposition of payment for radio frequency spectrum usage for 5G technology. Currently, key coefficients, which define the payment amount for using 5G technology, have not been approved. In case of the exchange of radio frequency spectrum between operators in the ranges with high fragmentation (GSM 900/1800) operators are obliged to pay a one-time fee for the new assigned ranges of the radio frequency spectrum as well as change coefficients used for calculating the fee for the spectrum that may lead to significant additional expenses..
Any significant increase in the fees payable for the frequency channels that we use or additional frequency channels that we need in Russia or the CIS could have a negative effect on our financial results.
If we are unable to maintain our favorable brand image, we may be unable to attract new subscribers and retain existing subscribers, which may lead to a loss of market share and revenues.
Developing and maintaining awareness of our brands is critical to informing and educating the public about our current and future services and is an important element in attracting new subscribers.
We believe that the importance of brand recognition is increasing as our markets become more competitive. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful products and services at competitive prices. Brand promotion activities may not yield increased operating revenues and, even if they do, such operating revenues may not offset the operating expenses we incur in building our brands.
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Furthermore, our ability to attract new subscribers and retain existing subscribers depends, in part, on our ability to maintain what we believe to be our favorable brand image. Negative publicity or rumors regarding our company, our shareholders and affiliates or our services could negatively affect our brand image, which could lead to a loss of market share and revenues. Failure to successfully and efficiently promote and maintain our brands may limit our ability to attract new subscribers and retain our existing subscribers and materially adversely affect our business and results of operations.
MTS Bank’s business entails regulatory and operational risks.
MTS Bank’s operations are subject to regulation by various government and banking authorities in connection with obtaining and renewing various licenses and permits, as well as with ongoing compliance with existing laws and regulations and with the terms and conditions of MTS Bank’s licenses and permits. MTS Bank has the required license in connection with its banking activities issued by the CBR.
Requirements imposed by regulators, including capital adequacy requirements, which are designed to ensure the integrity of the financial markets and to protect customers and other third parties with whom MTS Bank deals, may limit MTS Bank’s activities, including its lending, and may increase MTS Bank’s costs of doing business, or require MTS Bank to seek additional capital in order to maintain CBR capital adequacy requirements or different varieties of funding to satisfy the CBR’s liquidity requirements. The CBR may also amend the capital adequacy requirements and increase the capital adequacy ratios applicable to Russian banks at any time and, in such circumstances, MTS Bank may be forced to seek additional capital or alternative sources of financing to comply with these requirements. Such additional capital or alternative sources of financing may not be available or may only be available on commercially unacceptable terms.
If MTS Bank’s capital position were to decline below the minimum statutorily required levels of capital adequacy, its banking licenses could be suspended or revoked and it could encounter difficulties in continuing to operate its business and obtaining funding, which could materially adversely affect its business, financial condition, results of operations and prospects. MTS Bank’s capital adequacy level may decrease organically with the growth of business or the payment of dividends. In addition, any breach of regulatory requirements in the Russian Federation could expose MTS Bank to potential liability and other sanctions, including the loss of general banking license. If the CBR were to suspend or revoke MTS Bank’s general banking license, then this would render MTS Bank unable to perform any banking operations and/or would lead to winding-up of its business. Our shareholding in MTS Bank may require us to make subsequent investments in the share capital of the bank in order to sustain growth of MTS Bank’s business as well as to comply with the capital adequacy requirements and relevant banking regulations.gain external funding. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesGeopolitical situation and sanctions imposed as a result thereof,of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our sharesshares.”
Our indebtedness and ADSs.”
Uncertaintythe limits imposed by covenants in the international financial markets, possible further tighteningour debt obligations could limit our ability to obtain additional financing and thereby constrain our ability to invest in credit conditions and contraction of the global economy and markets in which MTS Bank operates (including the impact of COVID-19), could adversely impact, should the market conditions continue to worsen, MTS Bank’sour business and operating results due to:
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Any of the factors discussed in the preceding paragraphs could adversely affect the financial condition of MTS Bank and its customers andplace us at a possible competitive disadvantage. If we cannot obtain adequate funds to satisfy our capital requirements, we may result, among other things, in a reduction in MTS Bank’s capital adequacy ratios and profits, pressure on credit risk concentration levels, an increase in exchange rate risk and losses, higher funding costs, a change in the strategy of MTS Bank or curtailment of some businessneed to limit our operations due to increased risks. Moreover, any of these factors may cause a decrease in customer funds, a reduction in the demand for loans, foreign currency, investment and other banking transaction services that customers carry out with MTS Bank, as well as a general deterioration in the quality of MTS Bank’s loan book and/or a reduction in the market values of securities or other assets held on MTS Bank’s balance sheet, leading to possible defaults of such loans and/or the need for increased loan provisions. Should any of this take place, this could materially adversely affect our business, financial condition and results of operations.
Failure to monitor, manage and prevent MTS Bank’s operational and technological risks, could have a material adverse effect on our business, financial condition and results of operations.
MTS Bank is exposed to technological risks as banking business requires the development of sufficient communication channels and software, the creation of large automated systems and considerable computer capacity located throughout the Russian Federation. MTS Bank invests considerable time and money in order to upgrade its technologies in a timely manner, centralize its information systems, create appropriate reserves and duplicate capacities, develop internal audit functions and control the operation of its hardware and software, however MTS Bank’s IT systems are significantly, less developed in certain respects than those of banks in more developed countries. The lack of immediately available consolidated financial and operating data may hinder the ability of MTS Bank’s management to make decisions, to react promptly to changes in market conditions and to detect fraud and non-compliance with internal procedures. In addition, insufficient integration of the IT system increases MTS Bank’s operational risks and the costs of further business development.
MTS Bank’s ability to operate its business depends on its ability to protect the computer systems and databases which MTS Bank operates and uses from the intrusion of third parties who may attempt to gain access to MTS Bank’s computer systems, networks or databases through the Internet or otherwise. In addition, MTS Bank is exposed to risk of fraud by employees or outsiders, mismanagement, unauthorized transactions by employees and operational errors, including clerical or record keeping errors or errors resulting from faulty computer or telecommunications systems. Given MTS Bank’s high volume of transactions, errors may be repeated or compounded before they are discovered or rectified. In addition, a number of transactions at MTS Bank are processed manually, which may further increase the risk that human error or employee tampering or manipulation will result in losses that are difficult to detect. There can be no assurance that MTS Bank will be able at all times to successfully monitor, prevent and manage its operational and technological risks in the future. Any failure to do so could materially adversely affect our business, financial condition and results of operations.
MTS may potentially enter into agreements with members of the Sistema group (i.e. related parties transactions) on terms which are different from those that would be obtainable on an arm’s length basis.
We have purchased interests in certain companies from Sistema, for example, United Russian Film Studios JSC and MTS Bank PJSC. We are entering into agreements with other companies within the Sistema group for supply of switching and subscriber network equipment, power supply devices, medical services, license agreements, agreements on providing access to the infrastructure for installation of communication equipment, leasing of non residential real estate, rent of cloud services and other services. According to the applicable Russian legislation, and notwithstanding MTS’s effective control procedures in respect of related parties transactions, such as verification whether such transactions comply with the terms on a market, including mandatory procedures with respect to consideration of related parties transactions with the companies within the Sistema group by the Audit Committee, a number of transactions with the companies within the Sistema group may potentially be concluded on terms, which are different from those that would be obtainable on an arm’s length basis.
See “Item 7—Major Shareholders and Related Party Transactions—B. Related Party Transactions” and Note 31 to our audited consolidated financial statements.
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In the event that our past or future interested party transactions are successfully challenged, our business, financial condition, results of operations and prospects could be materially adversely affected.
We own less than 100% of the equity interests in some of our subsidiaries. In addition, certain of our wholly owned subsidiaries have had other shareholders in the past. We and our subsidiaries in the past have entered into, and continue to enter into, transactions that may be considered to be “interested party transactions” for the purposes of Russian law, requiring in some cases consent or approval by disinterested directors, disinterested independent directors, disinterested shareholders or owners of voting shares, depending on the nature of the transaction and parties involved. The provisions of Russian law No. 208 “On Joint-Stock Companies” dated December 26, 1995, as amended (the “Joint Stock Companies Law”) relating to “interested party transactions” was amended in 2016 and may be subject to different interpretations taking into account, inter alia, the insufficiency of court practice in respect of the new amendments. As a result, it is possible that our and our subsidiaries’ interpretation and application of these provisions could be subject to challenge. Any such challenge, if successful, could result in the invalidation of transactions, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Moreover,Inflation could increase our costs and adversely affect our results of operations.
The Russian economy has been characterized by high rates of inflation, which over the past few years have been mainly driven by weakening of national currencies, restrictions on foreign trade and acceleration in food prices.
According to the Bank of Russia, the inflation rate in Russia reached 11.9% in 2022. On January 11, 2023, the Ministry of Finance announced the resumption of foreign currency sale as part of the budget rule mechanism. This resulted in weak pro-inflationary effects to occur due to the adoption of Federal Law No. 55-FZ dated March 14, 2022, until December 31, 2022 only shareholders holding alone or with other holders 5% or morebudget deficit. According to the forecast of the voting shares haveBank of Russia, annual inflation may decline to 5.0-7.0% in 2023.
In 2022, the right to appeal toannual rise of consumer prices published by the court with claims to challenge major and interested party transactions, as well as claims against a memberNational Bank of the BoardRepublic of Directors or a memberBelarus amounted to 12.8%.
High rates of any executive body of the Company. Before the adoption this Federal Law, shareholders holding alone or withinflation in Russia and other holders 1% or more of the voting shares had the right to file such lawsuits.
In the event that our minority shareholders or the minority shareholderscountries of our subsidiaries do not consent to or approve certain transactions or other matters requiring their consent or approval weoperation could be limited inincrease our operational flexibility,costs and decrease our operating margins. See also “Item 5.Operating and Financial Review and Prospects—A. Operating Results—Certain Factors Affecting our Financial Position and Results of Operations—Inflation.” and “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and prospects could be materially adversely affected.the value of our shares.”
Russian law requires a three-quarters majority vote of the holders of voting stock present at a shareholders’ meeting to consent to or approve certain transactions and other matters, including, for example, charter amendments, major transactions involving assets in excess of 50% of the total assets of the company, purchase of offered shares by the company and certain share issuances. In addition, a 95% or a unanimous vote is required to approve certain matters, for example, certain charter amendments regarding shareholders’ rights. A majority of disinterested shareholders participatingSee also “—Changes in the voting is required to consent to or approve an “interested party transaction”exchange rate of local currencies in certain cases. In the event that our minority shareholders or minority shareholders of our subsidiaries do not consent to or approve such transactions or other matters requiring their consent or approval, we could be limited in our operational flexibility, and our business, financial condition, results of operations and prospects could be materially adversely affected.
Our competitive position and future prospects depend on our senior managers and other key personnel and our inability to attract, retain and motivate qualified key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our ability to maintain our competitive position and to implement our business strategy is dependent to a large degree on the services of our senior management team and other key personnel.
Moreover, competition in Russia and in the other countries where we operate for personnel with relevant expertise is intense due toagainst the relatively small number of qualified individuals. The loss of any our senior management team members or an inability to attract, retain and motivate qualified key personnel could have a material adverse effect on our business, financial condition and results of operations. We structure our compensation packagesRussian ruble, as well as changes in a manner consistent with the evolving standardsexchange rate of the labor markets in these countries. We are not insuredRussian ruble and local currencies against the detrimental effects toU.S. dollar and/or euro could adversely impact our business resulting from the loss, dismissal, or unavailability of our key personnel, resulting from a number of reasons, including but not limited to COVID-19 (for more information see “—The outbreak of COVID-19 may have a material adverse effect on our business, financial condition, results of operationsresults” and prospects”). In addition, it is not common practice in Russia“Item 11.Quantitative and the other countries where we operate to purchase key-man insurance policies, and we do not carry such policies for our senior management and other key personnel.
The entry of mobile virtual network operators into the Russian mobile communications market could increase competition and subscriber churn, resulting in a possible loss of our market share and decreased revenue.
On December 29, 2008, the Ministry of Communications and Mass Media adopted an order establishing the requirements for mobile virtual network operators (“MVNOs”). In 2017, new requirements relating to services of mobile radio communication andQualitative Disclosures about Market Risk—Foreign Currency Risk.”
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telephone communications while using business modelsIndentures relating to some of mobile radio communicationour notes contain, and telephone communications virtual networks were adopted. MVNOs are companies that provide mobile communications services but do not ownsome of our loan agreements contain, restrictive covenants, which limit our ability to incur debt and to engage in various activities.
Covenants in the radio frequenciesloan agreement relating to MTS-23 Eurobonds (ISIN XS0921331509) due 2023 limit our ability to create liens on our properties, merge or consolidate with another person or convey our properties and in some cases, the network infrastructure requiredassets to do so. Accordinganother person. Pursuant to the order, MVNOs in Russia must be licensed,terms of the Extraordinary Resolution passed on December 13, 2022, amongst other things, Amended Payment Mechanics was introduced allowing for the coupon payment and their userepayment of frequencies and infrastructure and rendering of services isEurobonds principal amount to be done pursuantmade in Rubles at the Central Bank of Russia foreign exchange rate.
Some of our loan agreements contain similar and other covenants, including, in relation to agreements entered into between MVNOsthe incurrence of indebtedness, creation of liens and existing frequency holders. However, existing frequency holders are under no obligationdisposal of assets. We may also incur additional credit obligations providing for similar covenants. Failure to enter into such agreementscomply with the MVNOs.
By introducing this regime, the Ministry aims to increase competitionthese covenants may cause a default and result in the Russian mobile services market,debt becoming immediately due and payable, which is currently dominated by MTS, VEON and MegaFon. The existing frequency holders, including us, may receive revenues from MVNOs for the use of our frequencies and network infrastructure. However, in the event we lose either subscribers to MVNOs that lease their frequencies and infrastructure from other operators or MVNOs that lease their frequencies and infrastructure from us, we will be deprived of the revenue streams from both the subscribers and the MVNOs. The MVNOs may also establish aggressive tariffs, which could result in increased subscriber churn and/or driving down the tariffs of all mobile operators.
For example, Skartel (under the “Yota” brand), Rostelecom, Tinkoff Bank operate as MVNOs in the Russian mobile communications market.
It is currently unclear how the emergence of new MVNOs in the market or any of the foregoing trends mightwould materially adversely affect market competition and subscriber churn, but this could have a material adverse effect on our business, financial condition, results of operations and prospects.
A finding by the FAS that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operations.
Our businesses have grown substantially through the acquisition and formation of companies, many of which required the prior approval of, or subsequent notification to, the FAS or its predecessor agencies.
In part, relevant legislation in certain cases restricts the acquisition or formation of companies by groups of companies or individuals acting in concert without such prior the FAS approval. While we believe that we have complied with the applicable legislation for our acquisitions and formation of new companies, this legislation is sometimes vague and subject to varying interpretations. If the FAS were to conclude that our acquisition or formation of a new company was done in contravention of applicable antimonopoly legislation, which has led or may lead to restriction of competition, including emergence or strengthening of the company’s dominant position, or find prescriptions of the FAS, issued as part of the transaction approval, not fulfilled, it could file a claim to liquidate or reorganize in the form of separation or division of an acquired or established company. Moreover, the FAS may impose administrative sanctions for non-compliance with antimonopoly law when acquiring or creating a company. These could have a material adverse effect on our business, financial condition and results of operations.
In recent years, the FAS has been investigating mobile operators, including MTS, for suspected violations of antimonopoly laws. For example, see “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Antimonopoly Proceedings” and “—Changes to the rules and regulations involving roaming charges in Russia may adversely affect our financial condition and results of operations.”
If the FAS finds that we have violated or otherwise acted in contravention of antimonopoly legislation, this could have a material adverse effect on our business, financial condition, results of operations and prospects.
If we are found to have a dominant position in the markets where we operate and are determined to have abused this position, the FAS may be entitled to regulate our subscriber tariffs and impose certain restrictions on our operations.
Under Russian legislation, a company controlling over 35% of a market may be found by the FAS to hold a dominant position in such market. In case of collective dominance of legal entities and in certain instances provided by law, a company could be also categorized by the FAS as dominant under certain conditions even if its share of the corresponding market is less than 35%, but equals to or is higher than 8%. Current Russian legislation does not clearly define “market” in terms of the types of services or the geographic area. In 2016, as a result of certain amendments to the Federal Law No. 135 “On the Protection of Competition,” the register of business entities having more than 35% of a certain commodity market or otherwise occupying a dominant position in the markets in which they operate, which previously listed MTS as occupying a dominant position in certain markets, was repealed. At the
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same time, the FAS continues to conduct market analysis in order to identify entities holding a dominant position in the markets in which they operate.
Companies recognized as natural monopolies are also considered to have a dominant position in their respective markets. One of our subsidiaries, MGTS, is categorized as a natural monopoly in the Moscow telecommunications market. As a result, MGTS’ tariffs are now subject to regulation by the FAS. In addition, as a natural monopoly, MGTS is obliged to comply with the rules of non-discriminatory third party access to its infrastructure. See also “—Change of regulated tariffs may lag behind MGTS’ real expenses growth, which may negatively impact profitability of our business.”
In the event that we are found in the future to have a dominant position in the markets where we operate and are either determined to have abused the dominant position or found to have committed concerted actions in the market and/or concluded anti-competitive agreements, the FAS will have a right to impose certain restrictions on our operations in such markets. See “Item 4—Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation—Regulation in the Russian Federation—Competition, Interconnect and Pricing” for additional information.
If we are found to have violated antimonopoly legislation, an order requiring us to transfer any illegally obtained revenue to the federal budget may be issued in relation to such violations.
According to the Code of Administrative Offences of the Russian Federation, a company may be subject to either fixed penalty fine up to RUB 1 million or fine based on total turnover in the market where the violation is conducted, depending on the nature of violation of antimonopoly legislation. The level of fine ranges from 3% to 15% of revenue in the market where the violation is conducted for cartel agreements, from 1% to 15% of revenue for abuse of dominant position, from 1% to 5% of revenue for other anticompetitive agreements and from 1% to 3% of revenue for coordinated actions. Moreover, if the FAS finds actions of a company insufficient to rectify past violations of antimonopoly laws, it could file a claim for liquidation of this company or its reorganization in the form of division or separation.
If we or any of our subsidiaries were found by the competition authority to be business entities occupying a dominant market position, the competition authority would have a power to impose certain restrictions on our or our subsidiaries’ businesses. In particular, the authorities may impose on us tariffs at levels that could be competitively disadvantageous. If we or any of our subsidiaries were found by the FAS to be business entities occupying a dominant market position with a market share exceeding 70% and determined to abuse such dominant position, the Russian government would have a right to determine the rules of non-discriminatory access to goods or services offered by us. Additionally, geographic restrictions on our expansion could reduce our subscriber base and prevent us from fully implementing our business strategy, which may materially adversely affect our business, financial condition, results of operations and prospects.
If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have aA material adverse effect on our financial condition and results of operations.operations could occur if redemption rights of our noteholders are invoked.
In additionUnder the terms of the notes, upon occurrence of the circumstances described below, noteholders will have the right to require us to redeem notes not previously called for redemption. The price upon such event will be 101% of the principal amount of the notes, plus interest accrued prior to the regulationredemption date. Such redemption scenario could be triggered, with respect to the notes due 2023, if any person (with certain exceptions) acquires beneficial or legal ownership of, dominant operators byor control over, more than 50% of our issued shares, ownership of or control over more than 50% of the FAS,voting interests in our share capital or obtains the Federal Law on Communications provides for the special regulation of telecommunications operators occupying a “substantial position” (i.e., operators which, together with their affiliates, have 25% or more of installed capacity or capacitypower to carry out transmission ofelect not less than 25%half of traffic in a geographically defined zone within the Russian Federation). These regulations provide for governmental regulationour directors.
Some of the key termsour loan agreements contain similar redemption provisions triggered by occurrence of similar events. If such operators’ interconnect agreements, including the interconnect tariffs. In addition, such operators are requiredevents occur, and our noteholders and other debt holders exercise their right to develop standard key terms of interconnect agreements and publish them as a public offer maderequire us to redeem all operators who intend to interconnect to the networks of those operators. Refusal of such operators to conduct an interconnect agreement is prohibited, except in cases where such agreement would contradict the terms of their licensenotes or other regulatory acts in respect of the unified communications network in the Russian Federation.
For additional information, see “Item 4—Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation—Regulation in the Russian Federation.”
At present, the foregoing regulations apply only to fixed-line operators in Russia, including our fixed-line business. Draft legislation was introduced in 2008 that would extend the law to apply to mobile operators. Although the proposed law was not adopted, the risk that similar legislation will be proposed and adopted in the future remains. If any legislation that extends the
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foregoing regulations to mobile operators is adopted, and we and any of our mobile network operator subsidiaries operating in Russia are identified as operators occupying a “substantial position,” regulators may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our revenues, financial condition and results of operations.
In addition, MGTS is categorized as fixed-line operator occupying a substantial position in the Moscow telecommunications market and its interconnect tariffs are therefore subject to state regulation. In February 2013, Comstar-UTS was removed from the list of “substantial operators” in Moscow and MTS was not included therein. There is however a possibility that we could be categorized as fixed-line operator occupying a “substantial position” in Moscow due to our affiliation with MGTS and because of our integration with Comstar-UTS. As a result of the state regulation of the relevant interconnect rates, we, as “substantial operators,” may be unable to increase these in line with economic developments or any increases of our relevant costs, resulting in a material adverse effect on our financial condition and results of operations. See also “—Change of regulated tariffs may lag behind MGTS’ real expenses growth, which may negatively impact profitability of our business.”
Change of regulated tariffs may lag behind MGTS’ real expenses growth, which may negatively impact profitability of our business.
In addition to holding a “substantial position” in the Moscow telecommunications market, MGTS is included in the register of natural monopolies in the telecommunications market. Consequently, tariffs for basic services rendered to public switched telephone networks subscribers (fees for providing access to a local telecommunications network, monthly fees for granting subscriber line in a constant use and monthly fees for providing a local telephone connection) are subject to regulation.
Although MGTS is permitted to petition the FAS for increases in tariffs based ondebt, such criteria as inflation, increased costs and the need for network investments, it is possible that future requested increases may not be granted or that the FAS may not adequately take such factors into account in setting tariffs. If the permissible tariffs applicable to MGTS do not adequately compensate MGTS for the costs of providing services, our business and results of operations could be materially adversely affected. See also “—If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.”
Changes to the rules and regulations involving roaming charges in Russia may adversely affect our financial condition and results of operations.
In September 2018, the Board of sectoral ministries of communications of the Russian Federation and the Republic of Belarus approved a Roadmap aimed at reducing roaming charges between two countries. In December 2018, the Russian party drafted a new project of the Roadmap aimed at cancellation of international roaming in the territory of the Union State in 2019. Later, as a result of negotiations between Russia and Belarus a new project of Roadmap, which assumes cancellation of roaming charges in the territory of the Union State in 2020, was developed. In December 2019, a new version of Roadmap was approved, according to which, cancellation of roaming charges in the territory of the Union State will take place in September 2020. In order to implement the Roadmap, we significantly reduced roaming charges in November 2020. This affected our revenues from roaming charges in Belarus.
In July 2017, the FAS sent a warning to mobile operators, in which it demanded to cancel intra-network roaming. In March 2018, the FAS opened an antimonopoly case against VEON, MTS and MegaFon (in connection with the non-fulfilment of the warning). In August 2018, the FAS found MTS, VEON and MegaFon to have violated the antimonopoly legislation. In December 2018, the FAS imposed a fine in the amount of RUB 737,500 on each of MTS, VEON and MegaFon. As of September 30, 2018 MTS changed charging principles for communication services outside “home” region for all subscribers.
In August 2017, the FAS opened an antimonopoly case against VEON, MTS, MegaFon and T2 Mobile LLC on the grounds of establishing and maintenance of monopolistically high prices for communication services in national roaming and inter-operator roaming agreements. On February 22, 2018 the FAS rendered a decision and found MTS responsible for establishing monopolistically high prices for subscribers for communication services in national roaming. VEON, MegaFon and T2 Mobile were also found guilty for establishing monopolistically high prices for subscribers for communication services in national roaming. In September 2018, following the examination of the case, the FAS imposed administrative fines in respect of each of the operators. The case related to inter-operator roaming agreements against MTS was canceled due to the fact that there had been no violation. See also “—A finding by the FAS that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operations.”
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On December 27, 2018, the Federal Law No. 527 was adopted, under which the intra-network roaming is cancelled, and MTS is obliged to provide subscribers with communication services on its network under the same conditions, regardless of whether a subscriber is in or outside the bounds of his “home network” when moving across the country. In addition, this law excludes the possibility of charging subscribers for incoming calls in intra-network and national roaming. The law came into force on June 1, 2019 and affected our revenue from intra-network and national roaming charges. Any similar regulatory changes which could limit our ability to charge fees for the services provided could have material adverse effect on our business and financial condition.
An action plan to establish conditions necessary for setting fair tariffs for international roaming services on the territories of the Eurasian Economic Union states in the first quarter of 2025 was adopted by the Decree No.19 of the Eurasian Economic Commission Board dated October 29, 2021. Although it is currently unclear how the Decree and its implementation might affect our operations, it could have a material adverse effect on our business, financial condition, results of operations and prospects. Any material fines imposed on us or changes to the roaming charges may adversely affect our financial condition and result of operations.
Compliance with the new regulations on IMEI numbers may present us with technical difficulties and may lead to the expenditure of significant resources.
A draft law that provides obligatory registration of a user terminal on an International Mobile Equipment Identity (“IMEI”) numbers database was rejected in 2015.
If similar initiatives are proposed in the future, we may be required to develop a system to monitor IMEI numbers and may need to establish and maintain a database of IMEI numbers, which would necessitate the expenditure of significant technical and financial resources.
However, the Federal Law No. 533 dated December 30, 2020, which came into force starting from June 1, 2021, introduced amendments to the Law “On Communications”, including the IMEI concept. According to the law, the subscriber has a right to add information on his number and/or the IMEI in the Integrated Identification and Authentication System (IIAS). If the subscriber lost his device, he may report this to the operator through the IIAS. Subject to the confirmation of an IMEI number, the operator should stop providing services for such device.
Currently, there are no practical ways to confirm the uniqueness of the equipment identifier because an IMEI number may be used by several mobile manufacturers. It is currently unclear how these amendments might affect our activities, but this could have a material adverse effect on our business, financial condition and results of operations.
The accession of Russia to the World Trade Organization (the “WTO”) may lead to legislative and business changes.
On August 22, 2012, the Russian Federation became a member of the WTO. This may lead to potentially significant changes in Russian legislation including, among others, regulation of foreign investments in Russian companies, competition laws, telecommunications laws, changes in the taxation system and customs regulations in Russia. In addition, the implementation of the WTO rules may lead to increased competition in the markets where we operate. During the period of 2012 to 2021, Russia adopted certain changes to its legislation related to the accession to the WTO, for example, regarding intellectual property laws, tax legislation; however, it is still unclear if, and when, all necessary legislative changes related to the WTO accession will take place. If further new legislation is implemented in Russia as a result of its accession to the WTO, thisevent could have a material adverse effect on our financial condition and results of operations.
WeIn addition, under certain of our debt agreements, an event of default may be deemed to have occurred and/or we may be required to make significant investments beyond those that are currently planneda prepayment if Sistema disposes of its stake in our company and a third party takes a controlling position in our company. The occurrence of any such event of default or failure to preserve our competitive advantage in responsemake any required prepayment, which leads to the rapid evolutionan event of fixed network technology.
Onedefault, could trigger cross default / cross acceleration provisions under certain of our subsidiaries, MGTS, has devisedother debt agreements. In such event, our obligations under one or more of these agreements could become immediately due and payable, which would have a numbermaterial adverse effect on our business and our shareholders’ equity.
However, until July 1, 2023, in accordance with Article 27 of projects aimed at developing communications networksFederal Law No. 519-FZ of 19.12.2022 "On Amendments to Certain Legislative Acts of the Russian Federation and expanding availabilitySuspension of telecommunications services for customers. The likely shortageCertain Provisions of free cash flow duringLegislative Acts of the current economic downturn could halt such investment programs forRussian Federation" (hereinafter referred to as FZ of 19.12.2022 No. 519-FZ), the development of new products and services, and possibly lead to a decreasecreditor cannot demand early repayment bonds in the numberevent that:
● | the issuer of the bonds fulfills its obligations in accordance with the temporary procedure for fulfilling obligations to certain creditors; |
● | non-fulfillment or improper fulfillment of obligations by the issuer of bonds is caused by non-financial circumstances that could not be prevented by the issuer. |
The rules apply both to bonds issued under the law of projectsthe Russian Federation and cutbacks in development programs in the New Moscow and Moscow regions.under foreign law. Similar rules apply to loan obligations.
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The company completed its project on connectionRisks Relating to Business Operations in Emerging Markets
Emerging markets such as the Russian Federation and other CIS countries are subject to greater risks than more developed markets, including significant legal, economic, social, regulatory, tax and political risks.
Investors in emerging markets such as the Russian Federation, Armenia, Belarus and other CIS countries should be aware that these markets are subject to greater risk than more developed markets, including in some cases, significant legal, economic, social, regulatory, tax and political risks. Investors should also note that emerging economies such as the economies of its subscribersthe Russian Federation and other CIS countries are subject to broadband optical networks employingrapid change and that the Gigabit-capable Passive Optical Network (“GPON”) technologyinformation set out herein may become outdated relatively quickly.
There are a number of risks associated with investing in Moscow, however,emerging markets, including the network development still continuesfollowing:
● | volatility of emerging markets (for more information, see “—Risks Relating to Economic Risks in Our Countries of Operation” and “—Legal Risks and Uncertainties”); |
● | high volatility of national currencies (for more information, see “—Risks Relating to our Financial Condition”); |
● | possible geopolitical disputes (for more information, see “—Political and Social Risks”); and |
● | possible liquidity constraints (for more information, see “—Risks Relating to Economic Risks in Our Countries of Operation” and “—Risks Relating to our Financial Condition”). |
For example, in Moscow and Moscow region. In addition, transition to a single converged network and BRAS (Broadband Remote Access Server) expansion are being performed. See “Item 4—Information on Our Company—A. History and Development—Capital Expenditure” for further information. The lack or limited access to residential buildings, for example,September 2020, martial law was declared in Armenia due to COVID-19 impact, may affect these projects on construction and modernizationescalation of fixed-line network. For more information see “—The outbreakthe conflict in Nagorno-Karabakh. As of COVID-19 maythe end of 2022, the situation in the region remained tense. Political environment could have a material adversenegative effect on the Armenian economy as well as our business, financial condition,position and results of operationsoperations. See also “—Political and prospects.”
We engage contractors for the constructionSocial Risks—Geopolitical situation and upgrade of our network. Due to the currently unfavorable market conditions, some of our contractors may face a lack of own current assets and/or external finance sources, as well as other reasons, which may lead to the contractor’s inability to fulfill contract obligations or, in some cases, lead to bankruptcy. This may negatively affect the terms of our projects’ implementation and lead to higher costs. If we are not able to expand and upgrade our network infrastructure in a timely manner and offer new services, or if it is required to make significant investments beyond those that are currently planned, our business, financial condition, results of operations and prospects could be materially adversely affected.
Our intellectual property rights are costly and difficult to protect.
We regard our copyrights, trademarks, patents and similar intellectual property rights, including our rights to certain domain names, as essential to our continued success. We rely upon legislation on intellectual property, trade secret protection laws, as well as confidentiality and/or license agreements or contracts with our employees, customers, partners and others, to protect our proprietary rights. Nonetheless, intellectual property rights are particularly difficult to protect in the markets where we operate. In these markets, the regulatory agencies responsible for the protection of intellectual property rights are inadequately funded, legislation is underdeveloped, piracy and infringement are commonplace, and enforcement of court decisions is problematic.
Litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of rights of others, or to defend against claims of infringement. Any such litigation may result in substantial costs and diversion of resources and, if decided unfavorably to us, could have a material adverse effect on our business. We also may incur substantial acquisition or settlement costs to the extent that it would strengthen or expand our intellectual property rights or limit our exposure to intellectual property claims of third parties.
Breach of information confidentiality, integrity and availability may lead to interruption of business critical processes, a loss of market share and claims from subscribers, regulators, and partners which could materially adversely affect our reputation, business, financial condition, results of operations and prospects.
We ensure the security of restricted information processing in corporate information systems, including when working remotely (for example, distant work period). However, unauthorized actions of our employees and partners that violate information security policy, as well as illegal actions of third parties may lead to breach of information confidentiality, integrity and availability, including subscriber data leakage, and,sanctions imposed as a result to interruption of business-critical processes, a loss of market share, claims from subscribers, regulators, and partners whatcurrent political environment, could materially adversely affect our reputation, business, financial condition, results of operations and prospects.
Despite the measures taken, we cannot completely exclude the possibility of such incidents occurring in the future. See also “—Legal Risks and Uncertainties—Russian and foreign legislation on personal data and information security in information systems and communication networks may turn out to be hard to implement and require significant resources. Inability to comply with the requirements may lead to sanctions.”
Alleged medical risks of cellular technology may subject us to negative publicity or risk of litigation, decrease our access to base station sites, diminish subscriber usage and hinder access to additional financing.
Electromagnetic emissions from transmitter masts and mobile handsets may harm the health of individuals exposed for long periods of time to such emissions. The actual or perceived health risks of transmitter masts and mobile handsets could materially adversely affect us or our subsidiaries by reducing subscriber growth, reducing usage per subscriber, increasing the number of product liability lawsuits, increasing the difficulty of obtaining or maintaining sites for base stations and/or reducing the financing available to the wireless communications industry. Each of these potential risks may adversely affect our business, financial condition, results of operations, prospects and prospects.
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Tablethe value of Contentsour shares.”
EffectsAccordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of climate change may impose riskthose risks, their investment is appropriate. Generally, investment in emerging markets is suitable for sophisticated investors who fully appreciate the significance of damagethe risks involved and investors are urged to our infrastructure, our ability to provide services, additional costs and have a material adverse effect on our businessconsult with their own legal and financial condition.advisors before making an investment in our securities.
Extreme weather events precipitated by long-term climate change have the potential to directly damage network facilities or disrupt our ability to build and maintain portions of our network and could potentially disrupt suppliers’ ability to provide products and services required to provide reliable network coverage. Any such disruption could delay network deployment plans, interrupt service for our customers, increase our costs and have a negative effect on our operating results, financial condition and our business. The potential physical effects of climate change, such as increased frequency and severity of storms, floods, fires, freezing conditions, sea-level rise, and other climate-related events, could adversely affect our operations, infrastructure, and financial results. Operational impacts resulting from the potential physical effects of climate change, such as damage to our network infrastructure, could result in increased costs and loss of revenue. We could incur significant costs to improve the climate resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate such physical effects of climate change. We are not able to accurately predict the materiality of any potential losses or costs associated with the physical effects of climate change.
Effects of climate change may lead to regulatory changes and additional requirements from customers, investors and other stakeholders that may have a negative effect on our business, financial condition, results of operations and reputation.
Due to the nature of our operations, we may be impacted by regulatory developments related to climate change, including, for example, the introduction of national carbon regulation, and the revision of plans for the contract on the provision of renewable energy capacity, which may lead to an increase in the price of purchased electricity. In addition, the introduction of carbon pricing in various jurisdictions may lead to an increase in the prices of purchased equipment, and the lack of a public position regarding the setting of decarbonization goals and the development of appropriate action plans may lead to a deterioration of market positions and a decrease in the confidence of interested parties. In addition, in case of the lack of response to customer requirements regarding the company’s decarbonization goals and the availability of low carbon telecommunications solutions it may lead to a decrease in revenue.
Further, customers, consumers, investors and other stakeholders are increasingly focusing on environmental issues, including climate change, water use, deforestation, plastic waste, and other sustainability concerns. Concern over climate change or other environmental, social and governance (ESG) matters may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the environment and reduce the impact of our business on climate change. Further, climate change regulations may require us to alter our proposed business plans or increase our operating costs due to increased regulation or environmental considerations, and could adversely affect our business and reputation.
Political and Social Risks Relating to our Financial Condition
We may bePolitical and governmental volatility in Russia and other countries of our operations could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares.
The political and economic situation in Russia has been negatively affected by geopolitical events, the current economic environment.sanctions imposed by the United States, the European Union, Switzerland, the United Kingdom and other countries, the ongoing volatile economic conditions and other factors. Other countries where we operate may pose similar challenges. Current and possible future political changes in Russia and other countries where we operate, major policy shifts or a lack of consensus between the various branches of power and powerful economic groups could affect economic and regulatory reforms. This could, in turn, lead to political volatility or conflicts among powerful economic groups, which could have a material adverse effect on our business, financial condition, results of operations, prospects and the value of our shares. For example, after the presidential elections, which took place on August 9, 2020, protests began in Belarus. Moreover, the United States, the European Union, the United Kingdom and other countries have imposed additional sanctions on certain Belarusian persons and entities. Further volatility of the political and social situation can negatively affect our business, financial position and operations. A deterioration of the socio-political situation in Russia could also trigger an event of default under some of our loan agreements.
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On July 4, 2020, the Law of the Russian Federation on Amendment to the Constitution of the Russian Federation came into force which implemented a number of reasons, including but not limitedconstitutional reforms aimed at altering the balance of power between the legislative, executive and judicial branches and introducing certain other changes to the COVID-19 pandemic, creditConstitution of the Russian Federation. This Law, among other things, prioritizes the Constitution of the Russian Federation over international treaties and the decisions of international bodies, strengthens the Russian State Council as an advisory board to the Russian President and grants the Russian Federal Council with authority to terminate the powers of the judges of the Constitutional Court of Russia upon the recommendation of the Russian President. These amendments to the Constitution may have a significant impact on the Russian political landscape and regulatory environment and lead to other changes that are currently difficult to predict. See also “—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
Potential conflict between central and regional authorities could create an uncertain operating environment hindering our long-term planning ability.
The Russian Federation is a federation of units, consisting of republics, territories, regions, cities of federal importance and autonomous regions and districts. The delineation of authority and jurisdiction among the members of the Russian Federation and the federal government is, in many instances, unclear and remains contested. A lack of consensus between the federal government and local or regional authorities could result in the enactment of conflicting legislation at various levels and may lead to political volatility. In particular, conflicting laws have been enacted in the areas of privatization, land legislation and licensing. Some of these laws, as well as governmental and administrative decisions implementing them and certain transactions consummated pursuant to them, have in the past been challenged in the courts, and such challenges may occur in the future. This lack of consensus may hinder our long-term planning efforts and create uncertainties in our operating environment, both of which may prevent us from effectively and efficiently implementing our business strategy.
Additionally, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict, which can halt normal economic activity and disrupt the economies of neighboring regions. The intensification of violence, including terrorist attacks and suicide bombings, or its spread to other parts of Russia, could have significant political consequences, including the imposition of a state of emergency in some parts or the whole of Russia. Moreover, any terrorist attacks and the resulting heightened security measures are likely to cause disruptions to domestic commerce and exports from Russia. Any of these factors could materially adversely affect our business and the value of our shares.
Crime and corruption could disrupt our ability to conduct our business and thus materially adversely affect our operations.
Crime and corruption could result in negative publicity, disrupt our ability to conduct our business and could thus materially adversely affect our business, financial condition, results of operations and prospects. Additionally, some members of the media in the countries we operate in regularly publish disparaging articles in return for payment. Any actions which could result in a negative effect on investor confidence in Russia’s business and legal environment could have a further material adverse effect on the Russian securities market crisis (includingand prices of Russian securities or securities issued or backed by Russian entities, including the shares.
Actions of fraudsters aimed against subscribers cause additional risks for operators. Despite our efforts to detect and prevent fraud, some forms of rendering services (for example, offering payments via external Internet sources) might entail risks of fraudulent charge-offs from subscribers’ personal accounts. Such fraud actions could materially adversely affect our business, financial condition, results of operations and prospects as well as our reputation and lead to an increase in subscriber churn.
Legal Risks and Uncertainties
Weaknesses relating to the legal system and legislation in the countries where we operate create an uncertain environment for investment and business activity, which could have a material adverse effect on the value of our shares.
Each of the countries we operate in is still developing the legal framework required to support the market economy. The following risk factors relating to these legal systems create uncertainties with respect to financial institutionsthe legal and business decisions that we make, many of which do not exist in countries with more developed market economies:
● | inconsistencies between and among the constitution, federal and regional laws and subordinate legislation (presidential decrees and governmental, ministerial and local orders, decisions and resolutions) and other acts; |
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● | legislation ambiguities which do not allow to predict how these provisions should be followed and how an authorized body or a court will interpret these provisions; |
● | the lack of judicial and administrative guidance on interpreting certain legislation as well as conflicting interpretations of supreme general jurisdiction and arbitrazh courts; |
● | the lack of necessary legislation in the reality of digital economy and rapid developing of new technologies; |
● | the relative inexperience of judges and courts in interpreting certain aspects of legislation; |
● | the lack of an independent judiciary; |
● | a high degree of discretion on the part of governmental authorities, which could result in arbitrary actions such as suspension or termination of our licenses; and |
● | poorly developed bankruptcy and liquidation procedures and court practice that create possibilities of abuse. |
The recent nature of much of the legislation in the CIS countries, the lack of consensus about the scope, content and pace of economic and political reform and the global capital markets), instabilityrapid evolution of prices for major export commodities (including oilthese legal systems in ways that may not always coincide with market developments result in ambiguities, inconsistencies and metals)anomalies. In addition, legislation in these countries often contemplates implementing regulations that have not yet been promulgated, leaving substantial gaps in the regulatory infrastructure. All of these weaknesses could affect our ability to enforce our rights under our licenses and other factors, currently affecting manycontracts, or to defend ourselves against claims by others. Moreover, it is possible that regulators, judicial authorities or third parties may challenge our internal procedures and bylaws, as well as our compliance with applicable laws, decrees and regulations.
Any inability of our subsidiaries in the marketscountries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations.
If we are unable to protect our business entities in the countries in which we operate from the withdrawal or suspension of required permissions or unwarranted regulatory scrutiny, this may negatively impactadversely affect our clients’ disposable incomesbusiness, financial condition and results of operations.
An outcome of the proceedings relating to sustaining operations of our vendors’ cash flows. subsidiary in Turkmenistan is unpredictable.
MTS-Turkmenistan was compelled to suspend communication services in Turkmenistan from September 29, 2017, due to the actions of the Government of Turkmenistan, the Ministry of Communications of Turkmenistan, the state-owned telecommunications company, Turkmentelekom, and its wholly-owned subsidiary, Altyn Asyr, the state owned mobile operator in Turkmenistan. These actions resulted in the disconnection of international and long-distance zonal communication services and Internet access.
In July 2018, we filed a Request for Arbitration against the Sovereign State of Turkmenistan with the ICSID in order to protect its legal rights and investments in Turkmenistan. The Tribunal for these proceedings was constituted on December 18, 2018 and the Company subsequently filed its Memorial (statement of claim) with ICSID on March 29, 2019.
Unless resolved to our satisfaction, we intend to vigorously pursue our claims in arbitration and seek all available remedies.
In May 2022, the tribunal held the main hearing and we expect the final award to be rendered by the tribunal in 2023.
See also “—Ruble volatilityNote 33 to our audited consolidated financial statements and regulatory changes“Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Turkmenistan.”.
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Russian companies can be forced into liquidation on the basis of formal non-compliance with certain legal requirements.
Certain provisions of Russian law, including the general provisions of the Civil Code of the Russian Federation, may allow government authorities to seek a court order for the liquidation of a Russian legal entity on the basis of its formal non-compliance with certain requirements during formation, reorganization or during its operation.
For example, under Russian corporate law, if the net assets of a Russian joint stock company calculated on the basis of Russian accounting standards are lower than its charter capital as of the end of second reporting year or any subsequent reporting year, the company must either decrease its charter capital or be placed in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for usliquidation. If the company fails to comply with financial covenantsthese requirements, governmental or local authorities can seek the involuntary liquidation of such company in court.
Special rules are also provided for joint-stock companies. If, as of the end of the second reporting year or each subsequent reporting year, the company's net assets are lower than the amount of its charter capital:
● | the Board of Directors of the company, when preparing for the annual general meeting of shareholders, is obliged to include a section on the state of its net assets in the annual report of the company; |
● | the company is obliged to make one of the following decisions no later than 6 months after the end of the corresponding reporting year: |
o | to decrease its charter capital of the company to an amount not exceeding the value of its net assets; |
o | to liquidate the company. |
At the same time, if the company's net assets are less than its charter capital by more than 25 percent at the end of three, six, nine or twelve months of the reporting year following the second reporting year or each subsequent reporting year, at the end of which the company's net assets turned out to be less than its charter capital, the company twice with a periodicity of one once a month, it is obliged to place in the mass media, in which data on the state registration of legal entities are published, a notice of a decrease in the company's net assets.
The creditor of the company, if his rights of claim arose before the publication of the notice of the decrease in the company's net assets, no later than 30 days from the date of the last publication of such notice, has the right to demand from the company the early fulfillment of the corresponding obligation, and if its early fulfillment is impossible, the termination of the obligation and compensation for related losses.
If, at the end of the second reporting year or each subsequent reporting year, the company's net assets turns out to repay our debts and would affectbe less than the minimum charter capital specified in the Federal Law "On Joint Stock Companies", the company is obliged to make a decision on its liquidation no later than six months after the end of the reporting year.
However, pursuant to the Federal Law No. 46-FZ dated March 8, 2022 “On Amendments to Certain Legislative Acts of the Russian Federation,” (in the edition as of December 28, 2022) a reduction in the value of dividends received by holdersthe net assets of ADSs”.a Russian joint stock company below the size of its charter capital as of the end of 2022 and 2023 will not require:
● | when preparing for the annual general meeting of shareholders, the inclusion of a section on the state of net assets in the annual report; |
● | making a decision to reduce the charter capital to an amount not exceeding the value of its net assets, or to liquidate the company. |
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Consequently, customersThe existence of negative assets may modify or decrease their usage of our services and products or failnot accurately reflect the actual ability to pay the outstanding balancesdebts as they fall due. Many Russian companies have negative net assets due to very low historical asset values reflected on their accounts,Russian accounting standards balance sheets; however, their solvency, i.e., their ability to pay debts as they fall due, is not otherwise adversely affected by such negative net assets. Some Russian courts, in deciding whether or not to order the liquidation of a company for having negative net assets, have looked beyond the fact that the company failed to fully comply with all applicable legal requirements and vendors may significantly increase their prices, eliminate vendor financing, reduce their output or failhave taken into account other factors, such as the financial standing of the company and its ability to supply equipment, subscriber devices and services on a timely basis.
We may also experience increases in accounts receivable and bad debt among corporate subscribers, some of whom may face liquidity problems and potential bankruptcy,meet its tax obligations, as well as the potential bankruptcyeconomic and social consequences of its liquidation. Nonetheless, creditors have the right to accelerate claims, and file damages claims, and governmental or local authorities may seek the liquidation of a company with negative net assets.
Courts have, on rare occasions, ordered the involuntary liquidation of a company for having net assets less than the minimum charter capital required by law, even if the company had continued to fulfill its obligations and had net assets in excess of the minimum charter capital at the time of liquidation.
The amount of net assets in accordance with the local accounting standards of some of our corporate partners. subsidiaries is less than the minimum charter capital required by law. Although these subsidiaries continue to meet all of their obligations to creditors, there is a minimal risk of their liquidation while the net assets remain below the minimum legal requirements.
There have also been cases in the past in which formal deficiencies in the establishment process of a Russian legal entity or non-compliance with provisions of Russian law have been used as a basis to seek the liquidation of a legal entity. Weaknesses in the Russian legal system create an uncertain legal environment, which makes the decisions of a Russian court or a governmental authority difficult, if not impossible, to predict. If involuntary liquidation were to occur, such liquidation could lead to significant negative consequences for our group.
Nevertheless, according to sub-paragraphs 1 and 2 of paragraph 1 of Article 17 of Federal Law No. 46-FZ dated 08.03.2022 "On Amendments to Certain Legislative Acts of the Russian Federation" (in the edition as of December 28, 2022) a decrease in the value of net assets in subsidiaries of MTS PJSC below the size of subsidiaries’ charter capital as of the end of 2022 and 2023 will not require the company to make a decision on reducing the charter capital to an amount not exceeding the value of its net assets or liquidation of the company.
Insufficient adherence to the independence and competitiveness of the judicial process, the difficulty of enforcing court decisions and governmental discretion in enforcing claims could prevent us or holders of our securities from obtaining effective redress in a court proceeding.
The deterioration of economiesjudicial bodies in the countries where we operate are not always completely independent or immune from economic and political influences, and are often understaffed and underfunded. Judges and courts are often inexperienced in the area of business, corporate and industry (telecommunications) law. Judicial precedents generally have no binding effect on subsequent decisions, and not all court decisions are readily available to the public or organized in a manner that facilitates understanding. The judicial systems in these countries can also be slow or unjustifiably swift.
Enforcement of court orders can, in practice, be very difficult to achieve. All of these factors make judicial decisions in these countries difficult to predict and effective redress uncertain. Additionally, court claims are often used in furtherance of political and commercial aims or infighting. We may be subject to such claims and may not be able to receive a fair hearing. Additionally, court orders are not always enforced or followed by law enforcement agencies. Furthermore, recognition and enforcement of arbitral awards in countries where we operate is subject to compliance with corresponding rules of civil procedure and applicable laws, and courts in the countries where we operate may interpret applicable regulations in a manner which would result in denial of such recognition and enforcement.
These uncertainties also extend to property rights. For example, during Russia’s transformation from centrally planned economy to market economy, legislation has been enacted in the country to protect private property against uncompensated expropriation and nationalization. However, there is a risk that due to the lack of experience in enforcing these provisions and due to political factors, these protections would not be enforced in the event of an attempted expropriation or nationalization. Expropriation or nationalization of any of our operation may lead, inter alia, to insolvency of financial institutions, which in turn may affect our business and financial condition.
A decline in subscriber usage, an increase in bad debts, material changes in equipment pricingentities, their assets or financing terms or the potential bankruptcy of our corporate subscribers or partners mayportions thereof, potentially without adequate compensation, would have a material adverse effect on our business, financial condition, results of operations and prospects.
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Failure to comply with existing laws and regulations as well as requirements of international and regional standards or to obtain all approvals, authorizations and permits required to transmit television channels or operate telecommunications equipment, or the findings of government inspections or increased governmental regulation of our operations, could result in a disruption in our business and substantial additional compliance costs and sanctions.
Our operations and properties are subject to regulation by various government entities and agencies in connection with obtaining and renewing various licenses, approvals, authorizations and permits, as well as with ongoing compliance with existing laws, regulations and standards. Regulatory authorities exercise considerable discretion in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licenses, approvals, authorizations and permits and in monitoring licensees’ compliance with the terms thereof. Russian authorities have the right to, and frequently do, conduct periodic inspections (planned and unscheduled) of our operations and properties throughout the year. Any such future inspections may conclude that we or our subsidiaries have violated laws, decrees or regulations, and we may be unable to refute such conclusions or remedy the violations. See also “—The regulatory environment for telecommunications in Russia and other countries where we operate or may operate in the future is uncertain and subject to political influence or manipulation, which may result in negative and arbitrary regulatory and other decisions against us on the basis of other than legal considerations and in preferential treatment for our competitors.”
Primarily due to delays in the issuance of permits, approvals and authorizations by regulatory authorities, it is frequently not possible to procure all of the permits for each of our base stations or other aspects of our network before we put the base stations into commercial operation or to amend or maintain all of the permits when we make changes to the location or technical specifications of our base stations.
We are constantly in the process of registration and re-registration of ownership over certain infrastructure facilities. For example, MGTS carries out measures aimed at registration of ownership rights to the cable line structures (CLS). At the same time, MGTS is not insured against the risks of challenging the ownership rights by third parties. MGTS performs legal registration of its ownership rights to minimize the risk. In case of receiving reasonable claims, MGTS reconciles cable line objects to distinguish the ownership rights. MGTS is ready to assert its rights to CLS in court when necessary.
In addition, we may be unable to transmit certain television channels if entities that provide television content to us do not possess the requisite licenses. In case such providers of television content do not obtain the required licenses, or have their existing licenses suspended or terminated, our selection of potential television channels for transmission could be significantly limited. The inability of operators to comply with requirements on sequence of channels, sound and image quality and signal reception points of national mandatory free television channels (pursuant to the Federal Law dated July 13, 2015 No. 257, Order dated July 31, 2020 No. 369, Order dated September 03, 2021 No. 921) may lead to suspension or termination of a license.
Furthermore, we could be subject to fines and other penalties, including forced suspension of our cable network operators’ activity for up to 90 days. In some cases of our service provision (for example, those employing GPON technology) power failures in subscribers’ households may lead to non-compliance with rules regulating local telephony communication services. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.
On June 1, 2018, Federal Law No. 245 “On Amendments to the Federal Law” On Communications” entered into force and is aimed at further deteriorationaligning the process of entering into a contract for the provision of mobile radiotelephone communication services without appropriate identification of a subscriber (i.e., a user) of communication services. Operators may be subject to penalties and other sanctions, including the suspension of an operator’s activity for up to 90 days, for non-compliance with the Law.
Our failure to comply with existing laws and regulations of the countries where we operate as well as requirements of international and regional standards or to obtain all approvals, authorizations and permits required to operate telecommunications equipment, or the findings of government inspections including the State Labor Inspection Service may result in macroeconomic conditionsthe imposition of fines or penalties or more severe sanctions including the suspension, amendment or termination of our licenses, approvals, authorizations and permits, or in requirements that we cease certain of our business activities, or in criminal and administrative penalties applicable to our officers. We have also engaged in certain disputes, which could require us to reassesspay damages or settlements. We may incur expenses in defending these lawsuits. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation”.
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Moreover, an agreement or transaction entered into in violation of law may be invalidated and/or unwound by a court decision. Any such decisions, requirements or sanctions, or any increase in governmental regulation of our operations, could result in a disruption of our business and substantial additional compliance costs and could materially adversely affect our business, financial condition, results of operations and prospects. In addition, we may assume risks of potential claims from subscribers and regulating authorities regarding former activities of the acquired or merged businesses.
Generally, communication networks are vulnerable to physical or software break-ins, viruses, unauthorized interferences and similar events. Should such events occur with respect to our network elements, we may become subject for additional inspection by the regulatory authorities. Although we obtain all necessary permissions and certificates for the operation of our equipment and provide measures to protect confidential information, our failure to fully comply with all legislation requirements could result in the imposition of fines or penalties, additional government regulations, substantial additional compliance costs, disruption of our business including its suspension or termination, and other adverse effects.
We provide certain common contractual protections to the purchaser under the VF Ukraine Sale Agreement and are subject to certain post-closing obligations.
In December 2019, we sold our telecommunication business in Ukraine under an agreement entered into with Telco Solutions and Investments LLC, as purchaser, an entity affiliated with telecommunication company Bakcell LLC, which is a part of the NEQSOL Holding international group of companies (the “Sale Agreement”), see “Item 4.Information on our Company—A. History and Development” and Note 10 to our audited consolidated financial statements for details of the transaction. We provide certain common contractual protections to the purchaser and are subject to certain post-closing obligations under the Sale Agreement. Further, the Sale Agreement contains a post-completion price adjustment mechanism. As a result of applying this mechanism, the purchase price was adjusted in our favor so we were not required to pay any sum to the purchaser.
Although we do not anticipate any further material price adjustments or other liability under the Sale Agreement, there can be no assurance that a liability will not emerge in the future, in which case it could have an adverse effect on our financial position and results of operations.
According to the terms of the Sale Agreement, an additional consideration based on the performance of the discounted operations in Ukraine was receivable. The group received the first part of the additional contingent consideration in March 2021. In 2022 following uncertainty over the receipt of the consideration and economic volatility and sanctions in Russia, the group created expected credit allowance for the total amount of receivable and its value decreased to nil. See also Note 10 to our audited consolidated financial statements.
There is insufficient minority shareholder protection in Russia.
Minority shareholder protection under Russian law principally derives from (a) supermajority shareholder approval requirements for certain corporate actions, (b) the ability of a shareholder to demand that the company purchase the shares held by that shareholder if that shareholder voted against or did not participate in voting on certain types of actions, (c) the ability of a shareholder to sell his shares at a fair price when the control is changed, the company is acquired at a price determined in accordance with the requirements of the current legislation, (d) shareholders’ right to challenge decisions of the company’s management bodies in certain circumstances, and (e) shareholders’ right to challenge transactions which caused company’s loss. Companies are also required under Russian law to obtain the approval of disinterested shareholders for certain transactions with interested parties. In practice, enforcement of these protections has not always been effective. Shareholders of some companies have suffered as a result of fraudulent bankruptcies initiated by hostile creditors.
The supermajority shareholder approval requirement is met by a vote of 75% of all voting shares that are present at a shareholders’ meeting. Thus, controlling shareholders owning slightly less than 75% of outstanding shares of a company may have a 75% or more voting power if certain minority shareholders are not present at the meeting. In situations where controlling shareholders effectively have 75% or more of the voting power at a shareholders’ meeting, they are in a position to approve amendments to the charter of the company or significant transactions including asset transfers, which could be prejudicial to the interests of minority shareholders. It is possible that our controlling shareholder in the future may not operate us and our subsidiaries for the benefit of minority shareholders, and this could have a material adverse effect on the value of goodwillour shares.
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While the Federal Law on Joint Stock Companies provides that shareholders owning not less than 1% of the company’s outstanding common stock may bring an action for damages caused to a company by its CEO, member of the Board of Directors or its Management Board and certain other officials acting on behalf of the company, minority shareholders may have difficulties with proving such damages with the court and as a consequence their claims may be denied by the court. Although there have been several disputes in the past few years, Russian courts do not have a clear and consistent approach in regards to class action litigation. In addition, the issue of claims by shareholders against the company to compensate the shareholders for their losses is not clearly regulated by the current legislation.
Moreover, due to the adoption of Federal Law No. 55-FZ dated March 14, 2022, until December 31, 2022 shareholders holding alone or with other holders 5% or more of the voting shares have the right to appeal to the court with claims to challenge major and interested party transactions, as well as claims against a member of the Board of Directors or member of any executive body of the Company. Before the adoption of this Federal Law, shareholders holding alone or with other holders 1% or more of the voting shares had the right to file such lawsuits.
Accordingly, your ability to pursue legal redress against us may be limited, reducing the protections available to you as a holder of our shares.
In addition, Federal Law No. 55-FZ of 14.03.2022 temporarily (until December 31, 2023) raised the threshold from 1% to 5% of voting shares required for access to information provided for in paragraph 1 of Article 84, paragraphs 2 and 3 of Article 91 of the Federal Law "On Joint Stock Companies".
Also, the Decree of the Government of the Russian Federation No. 351 of March 12, 2022 (in the edition as of November 24, 2022) allows us not to disclose or disclose in a limited manner some information until July 1, 2023.
According to Russian legislation, shareholders/participants of Russian companies have an opportunity to demand either liquidation of a company in a judicial proceeding or exclusion of other shareholder/ participant (except for public joint stock companies) from the company.
According to the Civil Code of the Russian Federation, shareholders and participants of Russian companies have, inter alia, the following rights, which can be executed via judicial proceedings:
● | to demand the liquidation of a company in case of failure to achieve a corporate purpose for which it was created, including a case when an operation of a company becomes impossible or is substantially hampered; and |
● | to demand exclusion of a shareholder or a participant (except for the public joint stock companies, including MTS) whose actions/inactivity either cause significant harm or hampers the company’s operations. |
In this regard, we cannot rule out the possibility of such claims being filed against MTS or our subsidiaries which may have a negative impact on our business, financial condition and results of operations.
Shareholder liability under Russian legislation could cause us to become liable for both obligations of our subsidiaries and losses of the legal entities in which we have a practical possibility of determining actions.
The Civil Code of the Russian Federation, the Joint Stock Companies Law and the Federal Law “On Limited Liability Companies” generally provide that shareholders in a Russian joint stock company or members of a limited liability company are not liable for the obligations of the company and bear only the risk of loss of their investment. This may not be the case, however, when one entity is capable of determining decisions made by another entity. The entity capable of determining such decisions is deemed an “effective parent.” The entity whose decisions are capable of being so determined is deemed an “effective subsidiary.” The effective parent bears joint and several liability for transactions concluded by the effective subsidiary in carrying out its decisions or decisions made with its consent. However, joint and several responsibility of the effective parent is excluded in case of voting of the effective parent on the approval of the transaction at a general shareholders’ meeting of the effective subsidiary, as well as the approval of the transaction by the body of the effective parent, if the need for such approval is envisaged in the charter of the effective subsidiary and/or the effective parent. In addition, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt resulting from the action or failure to act of an effective parent. This is the case no matter how the effective parent’s ability to determine decisions of the effective subsidiary arises.
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Accordingly, we could be liable in some cases for debts of our subsidiaries and losses of the legal entities to the extent that we had any power of determining such subsidiaries’ actions that caused such losses. This liability could have a material adverse effect on our business, results of operations and financial condition.
Shareholder rights provisions under Russian law could impose additional obligations and costs on us, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Russian law provides that shareholders that vote against or did not participate in voting on certain matters have the right to sell their shares to the company at market value in accordance with Russian law. The decisions that trigger this right to sell shares include:
● | decisions with respect to a reorganization; |
● | the approval by shareholders of a “major transaction,” which involves property in excess of 50% of the balance sheet value of the company’s assets calculated according to Russian accounting standards, regardless of whether the transaction is actually consummated (including those which are simultaneously interested-party transactions), except for transactions undertaken in the ordinary course of business; |
● | the amendment of our charter in a manner that limits shareholder rights; |
● | the amendment of our charter in a manner that excludes reference to the entity’s public status, approved simultaneously with a decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities; and |
● | a decision on applying for delisting of shares and convertible securities from a stock exchange. |
See also “Item 16E—Purchases of Equity Securities by the Issuer and Affiliated Purchasers.” Our obligation to purchase shares in these circumstances, which is limited to 10% of the company’s net assets calculated in accordance with Russian accounting standards at the time the matter at issue is voted upon, could have a material adverse effect on our business, financial condition, results of operations and prospects. Under Russian law, if we are unable to sell the repurchased shares at a price equal to or exceeding the market price within one year of the date of repurchase, we will have to make a decision within a reasonable time period to reduce our charter capital accordingly.
The Strategic Foreign Investment Law imposes certain restrictions on us and our existing and potential foreign shareholders, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
On May 7, 2008, the Federal Law “On the Procedure for Foreign Investment in Commercial Organizations of Strategic Importance for the Defense and Security of the State,” or the Strategic Foreign Investment Law, came into force in Russia. This law sets forth certain restrictions relating to foreign investments in Russian companies of “strategic importance.” Among others, companies with a dominant position in the Russian telecommunications market are considered to be strategically important and foreign investments in such companies are subject to regulations and restrictions to these companies set out by the Strategic Foreign Investment Law. For purposes of the Strategic Foreign Investment Law, a mobile telecommunications provider is deemed to be dominant if its market share in the Russian market exceeds 25%, as may be determined by the FAS. In addition, a company may be considered to be strategically important due to our offering of services involving the use of cryptographic technologies.
Under the Strategic Foreign Investment Law, a foreign investor (including Russian citizens having foreign citizenship) seeking to obtain direct or indirect control over a strategically important company is required to have the respective transaction pre-approved by FAS. The law further stipulates that foreign investors are obliged to obtain prior approval of transactions envisaging the acquisition of right of ownership, possession or use of property classified as the fixed production assets recorded asof a difference betweenstrategic company and the fairvalue of which represents 25% or more of the balance sheet value of the assets of business acquiredsuch company as of the last reporting date, according to accounts. In addition, foreign investors are required to notify this authorized governmental body about any transactions undertaken by them resulting in the acquisition of 5% or more of the charter capital of strategically important companies. Within 45 days from the effective date of the Strategic Foreign Investment Law, foreign investors having 5% or more of the charter capital of strategically important companies were required to notify the authorized governmental body about their current shareholding in such companies.
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A foreign investor is also obliged to notify the authorized governmental body about the fact of conducting the pre-approved transactions. Offshore companies (and companies under their control) are also prohibited from obtaining control over a strategically important company and its purchase price. This goodwill isare obliged to have any acquisition of 25% or more of right of ownership of voting shares pre-approved. Certain sanctions may be imposed in respect of such transactions conducted without notification, for example, a deprivation of the foreign investor of any voting rights at a shareholders’ meeting of strategically important companies through judicial proceedings brought by an authorized governmental body.
As we are classified as a strategically important company, our current and future foreign investors are subject to impairment teststhe notification requirements described above and our current and potential investors may be limited in their ability to acquire a controlling stake in, or otherwise gain control over, us. Such increase in governmental control or limitation on an ongoing basis. The weakening macroeconomic conditions in the countries in which we operate and/or a significant difference between the performance of an acquired company and the business case assumed at the time of acquisitionforeign investment could require us to write downimpair the value of your investment and could hinder our access to additional capital.
Regulatory changes in Russia as well as regulatory changes at the goodwill or portion of such value. Future write-downs relating to the value of the goodwill or portion of such value couldinternational level may have a material adverse effect on our financial condition and results of operations. Likewise,
New laws or regulations or changes to the current geo-political situationexisting regulatory framework at the federal, local, or international level, such as those described below, could, among other things, change the ways in which we operate our businesses and provide our services, require additional costs, and impair revenue opportunities.
The Ministry of Digital Development, Communications and Mass Media is considering altering the approach to inter-carrier settlements in Russia and Ukrainethe subsequent lowering of the settlement rate, which could have a negative impact on our average monthly service revenues per subscriber and margins. Over the past few years the government has developed a number of new initiatives, however, it remains unclear whether all such initiatives will be implemented or whether those implemented initiatives will be enforced. For example, the enforcement of certain provisions of the agreement on the conditions of inter-carrier mutual settlements while delivering international communication services in CIS-countries, signed on October 30, 2015, may adversely affect our operation in terms of the execution of inter-carrier mutual settlements among CIS-operators, however, such agreement has not yet been implemented into law.
The supra-national antimonopoly body established by the Eurasian Economic Union is currently responsible for general competition and anti-trust rules, including powers to administer fines and other remedies. If violations with respect to companies operating on cross-border markets be identified, this might lead both, to imposition of fines in accordance with the legislation of the EEU and adoption of the decisions for compulsory execution.
Pursuant to the Federal Law No. 374 “On the Introduction of Amendments to Certain Legislative Acts of the Russian Federation with Respect to Setting up of Additional Counter-terrorism Measures and Public Security Enforcement” dated July 6, 2016, operators are obliged to store certain information, such as voice information and text messages (for a three-year period) and the contents of such communications (for up to six months). The Government regulation “On Rules, Terms and Volume of Voice Information, Text Messages, Images, Sounds, Video- and Other Messages of Telecommunications Services Users to be Stored” requires communication operators that render communication services such as intercity and international communication services to store voice information and text messages, for a period of six months from the moment of the end of their receipt, transfer, delivery and/or processing. Operators that render telematics services, as well as data transmission services (except for data transmission services for the purposes of transferring voice information) are also obliged to store telecommunication messages by using data storage technical equipment in the volume of electronic communication messages sent and received by the operator’s subscribers (the actual traffic) for 30 days. Moreover, the capacity of the data traffic storage system is required to be increased by 15% annually for 5 years from the date the data storage technical equipment was put into operation. Significant additional costs have been and will be required in order to comply with these requirements.
In 2019, new legislation regarding class actions in Russia was introduced (191-FZ dated July 18, 2019) giving consumers the right to file class action lawsuits with the courts of general jurisdiction. The law allows mass consumer claims where the amount of each individual claim is small, but the total amount of all claims is significant and expanded the list of persons who can advocate the interests of a group of persons.. These measures could increase the number and change the nature of class actions filed against us, which could have a material adverse effect on our business, financial condition and results of operations.
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In November 2019, the Federal Law No. 90 “On certain amendments to the Federal Law “On communications” and the Federal Law “On information, information technologies and information protection” dated May 1, 2019 (the “Sovereign Internet Law”) aimed at ensuring stable, secure and integral functioning of the Internet in the territory of the Russian Federation, came into force. Under the Sovereign Internet Law, operators, installed equipment on their networks, which could adversely affect the networks’ stability and the quality of provided communication services. Practical issues may require further subordinate legislation to be adopted further clarifying the provisions of the law. Furthermore, additional costs for maintenance and operation of this equipment were required from the operators.
On July 17, 2022 criminal liability and fines for non-compliance with rules of work with technical means of countering threats to stability, security and functional integrity of the Internet in the territory of the Russian Federation and the public communications network were increased and, from January 1, 2023, further administrative and criminal liability was introduced for non-compliance with requirements for traffic transmission via technical means of countering threats to stability, security and functional integrity of the Internet in the territory of the Russian Federation and the public communications network (Federal Law No. 259 dated 14.07.2022, Federal Law No. 260 dated 14.07.2022).
Amendments to the Law “On Communications”, effective from June 2021 (533-FZ dated December 30, 2020), clarify the contracting process with subscribers, including provisions, among others, on concluding contracts, rendering services for corporate clients and the responsibility of Roskomnadzor for developing an information system for monitoring the contracting process between operators and their subscribers. Federal Law No. 319 and the Order No. 1313 of the Russian Government dated 22.07.2022 determine information, which operators are obliged to transfer to Roskomnadzor, including information about subscribers (users), volume and period of providing telecommunication services etc.
Pursuant to Russian law (319-FZ dated July 2, 2021), free access must be granted to the websites of domestic socially significant Internet resources as determined by the Government Commission. In addition, rules (Decrees No.2531 dated December 29, 2021 and No.2469 dated December 25, 2021) have been adopted for maintaining a list of such resources and establishing a relevant Government Commission. The list includes the “Vkontakte” social networking system and the “Gosuslugi” Integrated Identification and Authentication System. As we provide free access to these resources on our mobile network, this could potentially have a material adverse effect on our business, financial condition and results of operations.
Russian law (319-FZ dated July 2, 2021 and 465-FZ dated December 30, 2021) also imposes a variety of related requirements for operators, including:
● | compliance with requirements established by Roskomnadzor for communication lines, crossing the Russian state border, and communication facilities, , and requirements to send a compliance notification to Roskomnadzor in order to include the relevant information in the register; |
● | obligations to connect and send/receive information through a system developed by the radio frequency service, used by operators to monitor compliance with the requirements of the Federal Law "On Communications"; |
● | obligations to transmit free SMS messages with a confirmation code to citizens and legal entities in case of their authentication through the Integrated Identification and Authentication System (IIAS) as well as in case of their significant actions using the IIAS; |
● | the extension of special features of providing communication services, connection services and traffic transmission services (for example, pricing) to certain other state bodies, local governments and organizations (customers), if they: conclude contracts for such services in accordance with the legislation of the Russian Federation on the contract system and; pay for them using the funds of the budget system of the Russian Federation; and |
● | prohibitions from suspending or terminating the provision of telecommunication services to the above-mentioned customers after the expiration of the contract. |
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On January 01, 2023 a law (480-FZ dated December 30, 2021) came into force establishing administrative sanctions for non-compliance with obligations related to the transfer of a subscriber number or a unique identification code and termination of rendering communication services or services for traffic transmission. It also established connection by operators to the system for ensuring their compliance with requirements for the provision of communication services and services for traffic transmission in the public communication network.
The Federal Law No. 625 dated December 29, 2022 introduces additional liability in the telecommunication sector, including certain prescribed matters for the formation and performance of contracts and verification procedures.
On September 1, 2022 amendments came into force that require advertising distributors to provide or ensure the provision of information about advertisements distributed on the Internet, including information about advertisers and advertising distributors, advertising system operator, to Roskomnadzor through the advertising data operator. This legislation lacks sufficient regulation, interpretations from the regulator and law enforcement practice, which may cause difficulties in interpreting these developments.
At the end of 2022 a law was approved banning, among other things, LGBTQ+ propaganda. MTS is monitoring the changes and law enforcement practice, however, it is currently unclear how the law could affect our business.
Currently, the Russian Civil Code undergone substantial revisions, such as Federal Law No.430 dated December 21, 2021 which came into force on March 1, 2023 and, among other things, supplements the Civil Code of the Russian Federation and regulates certain immovable things, land, buildings, structures, and premises. At present, the potential interpretation of these amendments and their impact on our activities is unknown.
Russian companies are obliged to pay various and significant taxes and other non-tax payments, including payments into Universal Service Fund which currently amounts to 1.2% of our annual revenue on telecommunications services. Furthermore, potential future regulatory changes , such as the introduction of new rules regulating MVNOs, and new rules concerning our pricing policy could weaken our competitive position in the mobile telecommunications market. Changes in tax laws and non-tax regulations may lead to the growth of our tax burden and increase of our costs and may, as a result, materially adversely affect our financial condition and results of operations.
The failure of our subsidiaries that are subject to regulations as natural monopolies to comply with the requirements of the Federal Law No. 223 “On Procurement Process,” inter alia, in case of collective tendering, could result in liabilities for subsidiaries.
One of our subsidiaries, MGTS, is categorized as a natural monopoly in the Moscow telecommunications market. According to the Federal Law No. 223 “On Procurement Process,” natural monopolies are obliged to conduct the procurement process in accordance with the principles of transparency and non-discrimination and unjustified limitation of competition. If our subsidiaries that are under additional regulations as natural monopolies are found failing to comply with the law on procurement process, inter alia in case of collective tendering with us, our subsidiaries could be subject to certain liability measures, according to Russian legislation. See also “—Risks Relating to Our Business— If we are found to have a dominant position in the markets where we operate and are determined to have abused this position and/or concluded anti-competitive agreements, or found to have committed concerted actions, the FAS may be entitled to impose fines as well as regulate our subscriber tariffs and impose certain restrictions on our operations.”
Russian and foreign legislation on personal data and information security in information systems and communication networks may turn out to be hard to implement and require significant resources. Inability to comply with the requirements may lead to sanctions.
Communication operator activity in the sphere of information security in the Russian Federation is governed by various federal laws and by-laws . The main risks posed by processing and providing security of personal data include the following:
● | ambiguity as to how regulation applies to different overlapping categories of data; |
● | responsibility of personal data operators for the actions of the third parties processing personal data on their behalf; |
● | requirements to follow prescribed compliance procedures and associated costs; |
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● | replacement of the existing means of information protection with the ones, certified by FSTEC and FSS of Russia, including certification measures; and |
● | in case of failure to comply with requirements for confirmation of licenses for the technical and cryptographic protection activity of confidential information by FSTEC of Russia or FSS of Russia, the company would not be able to provide the corresponding commercial services to the third parties. |
In addition, recent legislation (152-FZ) introduces new requirements for the content of requests to process personal data, including the need to describe the purposes of personal data processing, the list of personal data, actions (operations) performed with personal data and terms of their processing, including obligations to informed personal data operators and Roskomnadzor about data transfers and violations, among other measures.
These changes could materially affect our business, financial condition, results of operations, including through additional compliance measures, associated costs and potential sanctions for non-compliance.
On December 29, 2022 the Federal Law No. 572 came into force (excluding certain provisions) and governs identification or authentication of individuals with use of biometric personal data via the Unified Biometric System (“UBS”) or with use of the UBS vectors. The law prohibits processing of biometric personal data for identification or authentication in information systems of organizations excluding certain cases addressed the law. Adoption of this law and other regulations provided for by it could require additional expenses on means of information protection to provide secure integration with the Unified biometric system.
With effect from May 25, 2018, the General Data Protection Regulation came into force in the European Union which imposes various new data protection and privacy measures and remedies with which we must comply.
In case of non-compliance with information security and personal data protection legislation, we may be subject to penalties by regulatory bodies (including penalties based on our turnover), confiscation of uncertified means of information protection, suspension of business processes for 90 days as well as suspension or withdrawal of the license for the provision of communication services, technical and cryptographic protection of confidential information.
In addition, it is possible that subscribers will file legal claims, seeking reimbursement for tangible and moral damage in connection with the violation of the legislation requirements.
If the resources required to maintain, develop and implement data protection and information security systems meeting applicable legislative requirements are greater than expected, or we fail to comply with the data protection laws despite our best efforts to do so, our business, financial condition and results of operations could be materially adversely affected.
The Russian taxation system is underdeveloped and any imposition of significant additional tax liabilities could have a material adverse effect on our business, financial condition or results of operations.
In general, taxes payable by Russian companies are substantial and numerous. These taxes include, among others, corporate income tax, value added tax, property taxes, excise duties, payroll-related taxes and other taxes.
In addition, intercompany dividends are subject to a withholding tax of 0% or 13% (depending on whether the recipient of dividends qualifies for Russian participation exemption rules), if being distributed to Russian companies, and 15% (or lower, subject to benefits provided by relevant double tax treaties), if being distributed to foreign companies.
Lately the Russian government has taken measures aimed at revising the existing structure and practice of applying agreements on avoidance of double taxation in order to limit the taxpayer’s ability to apply reduced rate (exemptions) when paying dividends and interest in certain jurisdictions. The terms of the agreements have already been revised with a number of jurisdictions in order to increase tax rate on dividends and interest, and are being revised with other ones. Limitation of the taxpayer’s ability to apply reduced rate (exemptions) might lead to higher tax rates, and thus increase our costs.
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The Russian tax authorities may take a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may nonetheless be subject to challenges in the future. The foregoing factors raise the risk of the imposition of arbitrary or onerous taxes on us, which could adversely affect the value of our shares.
Current Russian tax legislation is, in general, based upon the formal manner in which transactions are documented, looking to form rather than substance. However, the Russian tax authorities are increasingly taking a “substance and form” approach, which may cause additional tax exposures to arise in the future. Moreover, the Russian Tax Code was amended with direct provisions which prohibit tax benefits, if achieved without real business goodwill.activities, or the main aim of the transaction was tax benefits. Additional tax exposures could have a material adverse effect on our business, financial condition, results of operations and prospects.
It is expected that Russian tax legislation will become more sophisticated, which may result in the introduction of additional revenue raising measures. Although it is unclear how any new measures would operate, any such introduction may affect our overall tax efficiency and may result in significant additional taxes becoming payable. Additional tax exposures could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition to the usual tax burden imposed on Russian taxpayers, these conditions complicate tax planning and related business decisions. For example, tax laws are unclear with respect to deductibility of certain expenses. This uncertainty could possibly expose us to significant fines and penalties and to enforcement measures, despite our best efforts at compliance, and could result in a greater than expected tax burden.
See also “Item 8.Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Tax Audits and Claims.”
Lack of law enforcement practice of the Russian anti-offshore policy may have an adverse impact on our business, financial condition and results of operations.
In the past few years, the Russian Federation like a number of other countries in the world has been actively involved in a discussion of measures against tax evasion by the use of low tax jurisdictions as well as aggressive tax planning structures.
The rules of controlled foreign companies (CFC) came into force on January 1, 2015. The rules oblige Russian taxpayers being controlling persons of a foreign company to submit to the tax authorities both standard notifications on participation in CFC and tax declarations in certain cases. Profit generated commencing in 2015, including retained earnings, is subject to taxation in the Russian Federation. The innovations could impose additional tax on the undistributed profits of any foreign entity controlled by us (in proportion to such controlling stake) at the rate of 20%. These innovations caused amendments to the Tax Code providing for liability in case of non-disclosure or incomplete disclosure of information on CFCs and the non-payment or underpayment of relevant tax.
In addition, implementation of new concept of beneficial ownership, with regard to taxation of payment of passive income (dividends, royalty, interest, capital gain), may negatively affect possibility to apply benefits set by the double tax treaties, in case such payments pass through intermediary entities. This may potentially lead to increase of tax burden with regard to such payments.
Lack of law enforcement practice may cause difficulties in interpreting the above-mentioned laws by the Russian tax authorities. It is also currently unclear how the enacted laws could affect our counterparties, which may be registered in offshore jurisdictions.
In case the impact of legislative initiatives is significant for some of our counterparties it may also impact our results of operations.
Vaguely drafted Russian transfer pricing rules, and lack of reliable pricing information may impact our business and results of operations.
Updated transfer pricing rules became effective on January 1, 2012. The implementation of changed rules should have helped to align domestic rules with OECD principles. These rules considerably toughened the previously effective law by, among other things, effectively shifting the burden of proving market prices from the tax authorities to the taxpayer and obliging the taxpayer to keep specific documentation.
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Changed transfer pricing rules may increase the risk of transfer pricing adjustments being made by the tax authorities. In addition to the usual tax risks and tax burden imposed on Russian taxpayers, the uncertainties of the transfer pricing rules complicate tax planning and related business decisions. It also requires us to ensure compliance with the specific transfer pricing documentation requirements imposed in such rules. Tax authorities could impose additional tax liability as well as 40% penalties on the underpaid tax in case the prices or profitability are outside the market range and if the required transfer pricing documentation has not been prepared, which could have a material adverse effect on our results of operations and financial condition.
The regulatory environment for telecommunications in Russia and other countries where we operate or may operate in the future is uncertain and subject to political influence or manipulation, which may result in negative and arbitrary regulatory and other decisions against us on the basis of other than legal considerations and in preferential treatment for our competitors.
We operate in an uncertain regulatory environment. The legal framework with respect to the provision of telecommunications services in Russia and the other countries where we operate or may operate in the future is not well developed, and a number of conflicting laws, decrees and regulations apply to the telecommunications sector.
Moreover, regulation is conducted largely through the issuance of licenses and instructions, and governmental officials have a high degree of discretion. In this environment, political influence or manipulation could be used to affect regulatory, tax and other decisions against us on the basis of other than legal considerations. In addition, some of our competitors may receive preferential treatment from the government, potentially giving them an advantage over us.
We are subject to currency control regulations.
The Currency Control Law provides a framework and establishes general rules within which the government of Russia and the Bank of Russia are authorized to introduce certain measures of currency regulation, in connection with which there may be some uncertainty in the process of our implementation of foreign exchange operations when importing equipment.
The change in the currency regulation may negatively affect our performance of obligations under contracts previously concluded with Russian and foreign counterparties, requiring us to make payments on them in foreign currency and necessitating the conclusion of additional agreements in relation to the relevant contracts. As a result, we are exposed to the risks of changes in the currency regulation and foreign exchange control in Russia. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesGeopolitical situation and sanctions imposed as a result thereof,of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.shares.”
Continued turmoilThe regulation of critical information infrastructure in the credit marketsRussian Federation may lead to additional costs which could causehave a material adverse effect on our business, financial condition, results of operations and the value of our shares and ADSs to suffer.prospects.
Sanctions introducedFederal Law No. 187 “On the Security of the Critical Information Infrastructure of the Russian Federation” which came into force on January 1, 2018 (the “Law on CII”) provides for the creation of a register of significant critical information infrastructure (CII) objects, to which the communication networks elements may be assigned (after the classification of CII objects). Both state-owned and non-state-owned organizations are classified as subjects of the CII.
The law envisages criminal penalties if the security requirements in respect of such significant CII objects are not met and damage is incurred. CII subjects, including communication operators, are required to, among other things:
● | categorize CII objects; |
● | sent the results of CII objects categorization with the authorized bodies; |
● | create a security system for significant CII objects and implement measures targeted at significant CII protection and protection of information, belonging to the corresponding category; |
● | set up and provide the operations of means for attacks search on the communication network with the transfer of management to the authorized body; and |
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● | organize transfer of information about computer incidents on the CII to the authorized body. |
The by-laws envisage measures aimed at CII objects protection, which are difficult to implement, especially as regards the implementation of information protection measures that are not provided by such communication standards as 3GPP, ETSI, etc., which may lead to incompliance with the United States, European Union, United Kingdomregulatory requirements. The implementation of these requirements will require additional costs to be incurred. Requirements of Federal Service for Technology and other countries with respect toExport Control of the Russian Federation coupled with an economic downturn caused a significant capital outflow, ruble depreciation, a riseand the Ministry of credit rates in the domestic marketCommunications (orders No. 239 and a lackNo. 582) restrict remote access to CII objects, which may affect possibility to provide warranty and technical support of available financing.communication infrastructure by foreign vendor agents.
In June 2019 the Central Bank of Russia decided to decrease the key rate by 0.25 p.p. (down to 7.5%), and taking into account decrease of inflation rate key rate decrease continued and in July 2020 reached 4.25%. During 2021 the key rate grew up several times and in December 2021 it reached 8.5%. In February 2022, the Bank of Russia raised the key rate up to 9.5%, and later – up to 20%. Further growthThe Decree of the key ratePresident of the Russian Federation No. 166 «On economic measures to ensure technological independence and security of critical information infrastructure objects» dated March 30, 2022 provides an obligation of operators to use only Russian equipment and software at CII objects.
The Decree of the President of the Russian Federation No. 250 dated May 5, 2022 introduced personal liability of heads of the CII subjects in order to ensure the information security of organizations. Starting from 2025, CII subjects are prohibited to use information security means created in certain foreign states.
Compliance with the requirements of the laws and regulations or introduction of similar regulations may require additional costs to be incurred by us or otherwise negatively affect the cost of funding. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
A continuation or repetition of the downturn in the global financial markets as well as a toughening or extension of international sanctions against Russia and the resulting volatility of the trading price of our shares and ADSs may negatively impact our ability to obtain financing on commercially reasonable terms, either domestically or overseas,us and could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our inabilityRisks Relating to generate sufficient free cash flowthe Shares and ADSs and the Trading Market
ADS holders who have not yet converted their ADSs into shares may face difficulties (including a loss of value) in converting their ADSs into shares or may even be unable to satisfy our debt service obligations ordo so.
The Federal Law No.114 dated April 16, 2022 “On Amendments to refinance debt on commercially reasonable terms, could materially adversely affect our business, financial condition, results of operationsthe Federal Law “On Joint Stock Companies” and prospects.
We have an amount of outstanding indebtedness, primarily consistingcertain legislative acts of the obligations we entered into in connectionRussian Federation” requires termination of foreign depositary programs, under which the depositary receipts of such companies (including the Company) are listed on foreign stock exchanges programs. As a result of these legislative acts, on June 9, 2022 the Company terminated the Deposit Agreement with our notesJ.P. Morgan Bank International, who was the Russian depositary which accounted for the ADSs under the Company’s ADS program held by JPMorgan Chase Bank, N.A. In light of the Company’s termination of the Deposit Agreement, on July 13, 2022 the Company’s ADSs ceased trading and bank loans. For information about our debtwere subsequently delisted from the NYSE on August 8, 2022.
Pursuant to the unwinding of the ADS program, an automatic conversion process applied to Russian depositaries that accounted for ADSs where such ADSs were written off from the holders’ accounts and finance cost, see “Item 5—Operating and Financial Review and Prospects—A. Operating Results.”
Our ability to service, repay and refinance our indebtedness and to fund planned capital expenditure will depend on our ability to generate cashshares in the future.Company were credited instead. This toprocess was commenced around August 16, 2022 and concluded about three weeks later. If the receipts are held on the holder's account with a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to generate sufficient cash flowforeign broker (custodian), with blocking sanctions imposed on the holder of the receipts, the broker (custodian) or otherwise obtain funds necessary to make required payments, we may default underthe custodian in the chain of nominal holdings (in particular, NSD) the conversion was possible through a forced conversion mechanism. The deadline for submitting forced conversion applications expired on November 11, 2022. Under the terms of our financial indebtedness,the Deposit Agreement, the period guaranteed for converting ADRs into ordinary shares ended on January 12, 2023 (inclusive), whereafter, as we understand, the depositary may continue to convert ADRs in ordinary shares and/or sell unconverted ordinary shares to distribute the proceeds of sale among ADRs holders. In all the types of conversion processes, ADSs were converted into shares at a ratio of 1 ADS to 2 shares. ADS holders who failed to convert their ADSs into shares by the deadline may now face difficulties (including a loss of value) in converting their ADSs into shares or may even be unable to do so. The ability to convert ADSs into shares and the holdersallotment of our indebtedness wouldthe resulting shares to persons who hold the ADS depends on the structure through which the ADSs are held. For example, conversion may not be able to acceleratepossible where blocking sanctions are imposed on the maturityholder of such indebtedness, potentially causing cross-defaults under and acceleration of our other indebtedness. The existing debt servicing is becoming more difficult due to our dependence on floating interest ratesthe ADSs, the broker (custodian) or the custodian in the financial markets.chain of nominal holdings. In particular, the chain of holding includes the NSD.
In addition, there may be other adverse implications arising from the conversion process. For example, when ADSs belonging to certain non-residents are converted into shares, the resulting shares are to be credited to a С-type depository account for which restrictions on transactions were imposed. ADS holders may also face challenges in seeking to claim unpaid dividends from July 13, 2022 and until the conversion of the ADSs into shares.
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We may not be ableUnder the terms of the ADS unwinding program, after January 13, 2023, J.P. Morgan Bank International as depositary commenced a process pursuant to generate sufficient cash flow or access domestic or international capital markets, or incur additional loans to enable us to service or repay our indebtedness or to fund our other liquidity needs. We may be required to refinance all or a portion of our indebtedness on or before maturity for a number of reasons. This, in turn, may force uswhich it is currently endeavoring to sell assets, reduce or delay capital expenditure or seek additional capital. Refinancing or additional financing mayany shares represented by the ADSs that have not been cancelled as a result of the conversion. The resulting proceeds from such sales shall be available on commercially reasonable terms or at all,held for the benefit of the ADS holders (in proportion to the rights of each such holder and we may notwithout liability to accrue interest). However, there are risks and challenges associated with this sales process. In particular, there is no guarantee that J.P. Morgan Bank International will be able to sell our assets or, if sold,such shares for their full value and what the proceeds therefromtiming of such sale shall be. Accordingly, ADS holders who have not yet converted may not be sufficientrealize the full value of their underlying shares, for example, if J.P. Morgan Bank International needs to meet our debt service obligations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance debtsell such shares at a discount. See also “Item 10. Additional Information – B. Charter and Certain Requirements of Russian Legislation – Registration and Transfer of Shares”. In addition, the current legislative measures of the Russian Federation contain certain restrictions on commercially reasonable terms, would materially adversely affect our business, financial condition, resultsthe sale of operations and prospects. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”
Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or makeshares by depositaries. Accordingly, it moreis difficult for usthe Company to comply with financial covenantsanticipate the exact consequences for those holders who failed to convert their ADSs by the deadline.
Finally, the Company is of the view that the regulatory landscape is highly volatile and to repay our debts and would affectlegislative measures affecting the value of dividends received by holders of ADSs.ADSs and shares are rapidly changing in response to the current geopolitical environment. In addition, the specific circumstances of an ADS holder may impact the particular challenges faced by that ADS holder. Accordingly, there may be other implications or challenges facing ADS holders in addition to those mentioned in this document.
The market price of our shares has been and may continue to be volatile.
The ruble volatility can be explained by external geopolitical factors, limited financial markets, changemarket price of our shares has experienced, and may continue to experience, significant volatility. Volatility continued to increase over the past year, including as trading in oil prices, change in internal consumption and other factors.
Asour ADSs on NYSE was suspended on 28 February 2022, following the suspension of December 31, 2019, ruble amounted to 61.91 per one U.S. dollar. As of December 31, 2020 and December 31, 2021,all trading on the ruble exchange rate was RUB 73.88 per 1 US dollar and RUB 74.29 per 1 US dollar, respectively. As of April 2, 2022,Moscow Exchange on the ruble has dropped down to RUB 83.43 per 1 US dollar.same day. See also “—Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries.” and “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesGeopolitical situation and sanctions imposed as a result thereof,of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.shares.”
See also “—Changes inNumerous factors, including many over which we have no control, may have a significant impact on the exchange rate of local currencies in the countries where we operate against the Russian ruble, as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial results.”
The stability of the ruble will depend on many political and economic factors. These include the ability of the government to finance the deficit of the state budget without recourse to monetary emissions and to control the level of interest rates and inflation. Furthermore, changes in foreign currency regulation may affect our ability to fund payments denominated in foreign currency and result in us entering into supplementary agreements with our foreign counterparts.
A significant portionmarket price of our capital expenditureshares, including, among other things:
● | geopolitical situation; |
● | periods of regional or global volatility, including macroeconomic volatility; |
● | announcements of technological or competitive developments; |
● | governmental policies and regulatory developments in our target markets affecting us, our customers or our competitors; |
● | actual or anticipated fluctuations in our quarterly operating results; |
● | changes in financial estimates or other material comments by securities analysts relating to us, our competitors or our industry in general; |
● | foreign exchange fluctuations; |
● | change of the key interest rates by world banks; |
● | announcements by other companies in our industry relating to their operations, strategic initiatives, financial condition or financial performance or to our industry in general; |
● | announcements of acquisitions or consolidations involving industry competitors or industry suppliers; |
● | sales or perceived sales of additional ordinary shares by us or our significant shareholders; and |
● | impact and development of any investigation or lawsuit, currently pending or threatened, or that may be instituted in the future. |
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In addition, the stock market in recent years has experienced extreme price and liabilities are either denominated intrading volume fluctuations that often have been unrelated or tightly linkeddisproportionate to the U.S. dollar. Conversely, a majorityoperating performance of individual companies. These broad market fluctuations may adversely affect the price of our revenues are denominated in rubles. As a result, devaluation of the ruble against the U.S. dollar can adversely affect us by increasing our costs in rubles, both in absolute terms and relative to our revenues, and make it more difficult to comply with the financial ratios contained in our various loan agreements or fund cash payments on our indebtedness on time. It also reduces the U.S. dollar value of tax savings arising from tax incentives for capital investment and the depreciationshares, regardless of our property, plant and equipment, since their basis for tax purposes is denominated in rubles atoperating performance.
Shareholders may be unable to repatriate distributions made on the time of the investment. Increased tax liability would also increase total expenses, which would have an adverse impact on our results.shares.
We also anticipate that any dividends we may pay in the future on the shares represented by the ADSs will be declared and paid in rubles. See also “Item 10. Additional Information — B. Charter and Certain Requirements of Russian Legislation — Dividends.” A shareholder’s ability to the depositary inconvert rubles and will be converted into U.S. dollars byor other currencies is subject to the depositaryavailability of U.S. dollars or such other currency in Russia’s currency markets.
Although there is an existing, albeit limited, market within Russia for the conversion of rubles into U.S. dollars and distributedother currencies, including the interbank currency exchange and over-the-counter and currency futures markets, the further development of this market is uncertain. At present, there is a limited market for the conversion of rubles into foreign currencies outside of Russia and limited market in which to hedge ruble and ruble-denominated investments.
If we were classified as a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes, U.S. holders of our shares could be subject to adverse U.S. federal income tax consequences.
In general, we will be a PFIC for any taxable year in which either: (i) at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest, capital gains, rents, and royalties, other than rents or royalties derived in the ADSs. Accordingly,active conduct of a trade or rental business); or (ii) at least 50% of the value of dividends received by holdersour assets (generally determined on the basis of ADSsa quarterly average) is attributable to assets that produce, or are held for the production of, passive income. Our PFIC status is an annual determination that can be made only after the end of each taxable year, and will be subject to fluctuations independ on the exchange rate between the rublecomposition of our income and the U.S. dollar. Any further depreciation of the ruble against the U.S. dollar could therefore materially adversely affect our financial condition, results of operations and prospectsassets and the value of our ADSs.assets from time to time, including goodwill (which may be determined by reference to the market value of our shares, which may fluctuate), and the manner in which we operate our business. Recent volatility in the global capital markets could increase the risk that we might be classified as a PFIC in the current taxable year or in future taxable years. Accordingly, there can be no assurance that we will not be a PFIC for any taxable year.
If we were classified as a PFIC for any year in which a “U.S. Holder” (as defined under “Certain United States Federal Income Tax Consequences”) owns our shares, the U.S. Holder could be subject to adverse U.S. federal income tax consequences. For any year during which a U.S. Holder held the shares, we will continue to be treated as a PFIC with respect to that U.S. Holder for all succeeding years during which the U.S. Holder held the shares, unless we cease to be a PFIC and the U.S. Holder has made certain “purging” elections with respect to the shares. Each U.S. Holder of the shares should consult its tax advisor regarding the PFIC rules and should read the discussion below under “Certain United States Federal Income Tax Consequences — Passive Foreign Investment Company Considerations.”
Capital gain from the sale of shares may be subject to Russian income tax.
Income received by a foreign company from the sale, exchange or other disposal (assuming that such income is not related to a permanent establishment of a foreign company in Russia) of shares (participation interest) in an organization in which over 50% of the assets consist of immovable property located in Russia, as well as financial instruments derived from such shares, is treated as income derived from a source in the Russian Federation and is subject to withholding tax at a rate of 20%. However, gains arising from the disposition of the securities, which are traded on an organized stock exchange, are not treated as Russian-source income, and should not be subject to taxation in Russia.
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The amount of such income is typically determined as the sales price of shares (participation interest). However, if documentary support for the acquisition cost of the shares (participation interest) is available, the tax may instead be assessed on the basis of the difference between the sales price and the acquisition cost (including other related costs) if documentary evidence of such costs is submitted to the tax agent. The Russian Tax Code also establishes special rules for calculating the tax base for the purposes of transactions with securities. However, an exemption applies if immovable property located in Russia constitutes more than 50% of a company’s assets and the securities are traded on a foreign stock exchange. The determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an on-going basis and the relevant Russian legislation and regulations in this respect are not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia does not currently and will not constitute more than 50% of our assets as at the date of the sale of shares by non-residents.
Where the shares are sold by legal entities or organizations to persons other than a Russian company or a foreign company or an organization with a registered permanent establishment in Russia, even if the resulting capital gain is considered taxable in Russia, there is currently no mechanism under which the purchaser will be able to withhold the tax and remit it to the Russian budget.
Under the United States / Russia income tax treaty, capital gains from the sale of shares by eligible U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (the term “fixed assets” is used in the Russian version of the treaty) were to consist of immovable property located in Russia.
The taxation of income of non-resident individuals depends on whether this income is received from Russian or non-Russian sources. Russian tax law does not give a definition of how the “source of income” should be determined with respect to the sale of securities, other than that income from the sale of securities, which takes place “in Russia” should be considered as Russian source income. As there is no further definition of what should be considered to be a sale “in Russia,” the Russian tax authorities have a certain amount of freedom to conclude what transactions take place in or outside Russia, including looking at the place of the transaction, the place of the issuer of the shares, the location of the registrar recording the transfer of legal title to the relevant securities or other similar criteria.
Non-residents who are individuals are taxable on Russian-source income. Provided that gains arising from the disposition of the foregoing types of securities and derivatives outside of Russia by U.S. holders who are individuals not resident in Russia for tax purposes will not be considered Russian source income, then such income should not be taxable in Russia. However, gains arising from the disposition of the same securities and derivatives “in Russia” by U.S. holders who are individuals not resident in Russia for tax purposes may be subject to tax either at the source in Russia or based on an annual tax return, which they may be required to submit with the Russian tax authorities. See also “Item 11—Quantitative10.Additional Information—E. Taxation.”
The lack of a central and Qualitative Disclosures about Market Risk—Foreign Currency Risk.rigorously regulated share registration system in Russia may result in improper record ownership of our shares.
Ownership of Russian joint-stock company shares (or, if the shares are held through a nominee or custodian, then the holding of such nominee or custodian) is determined by entries in a share register and is evidenced by extracts from that register. Currently, there is no single central registration system in Russia. Share registers can be maintained only by licensed registrars located throughout Russia. Regulations have been adopted regarding the licensing conditions for such registrars, as well as the procedures to be followed by licensed registrars when performing the functions of registrar. In practice, however, these regulations have not been strictly enforced, and registrars generally have relatively low levels of capitalization and inadequate insurance coverage. Moreover, registrars are not necessarily subject to effective governmental supervision. Due to the lack of a central and rigorously regulated share registration system in Russia, transactions in respect of a company’s shares could be improperly or inaccurately recorded, and share registration could be lost through fraud, negligence or oversight by registrars incapable of compensating shareholders for their misconduct. This creates risks of loss not normally associated with investments in other securities markets. See “Item 10. Additional Information — Charter and Certain Requirements of Russian Legislation — Registration and Transfer of Shares.” and “—ADS holders who have not yet converted their ADSs into shares may face difficulties (including a loss) in converting their ADSs into shares or may even be unable to do so.”
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Changes inForeign judgments may not be enforceable against us.
Our presence outside the exchange rate of local currencies inUnited States may limit your legal recourse against us. We are incorporated under the countries where we operate against the Russian ruble, as well as changes in the exchange ratelaws of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial results.
Our expenditure, including capital expenditure, is denominated in, or closely linked to, the Ruble, the U.S.dollar, euro and/or yuan, while substantiallyFederation. Substantially all of our revenues are denominateddirectors and executive officers named in local currencies ofthis document reside outside the countries where we operate. The devaluation of local currencies against the Russian ruble can adversely affect our revenues reported in Russian rubles and increase our costs in terms of local currencies. In addition, local regulatory restrictions on the purchase of hard currency in the majority of countries where we operate may delay our ability to purchase equipment and services necessary for network expansion which, in turn, may cause difficulty in expanding our subscriber base in those countries. Further,United States. All or a substantial portion of our cash balances is heldassets and the assets of our officers and directors are located outside the United States. As a result, you may not be able to effect service of process within the United States on us or on our officers and directors. Similarly, you may not be able to obtain or enforce U.S. court judgments against us, our officers and directors, including actions based on the civil liability provisions of the U.S. securities laws.
In addition, it may be difficult for you to enforce, in original actions brought in courts in jurisdictions outside Russia, and as a result of currency exchange controls in those jurisdictions, these cash balances may not always be readily available for our use.the United States, liabilities predicated upon U.S. securities laws.
In addition, a portion of our liabilities and borrowings (including our U.S. dollar denominated notes) are also either denominated in or tightly linked to the U.S. dollar or euro. A significant part of theseThere is hedged through financial instruments with various banks, though the risk that such hedging is not fully effective remains.
On July 1, 2016, Belarus redenominated its currency on a scale of 10,000:1. As of December 31, 2019 and December 31, 2020, the official exchange rate published by the National Bank of the Republic of Belarus amounted to 2.10 and 2.58 Belarusian rubles per one U.S. dollar, respectively. As of December 31, 2021, the official exchange rate was 2.55 Belarusian rubles per 1 U.S. dollar. As of April 5, 2022, the exchange rate reached 2.95 Belarusian rubles per 1 US dollar. The possible devaluation of the Belarusian ruble in the future may adversely affect our revenues from this market.
See also “—Inflation could increase our costs and adversely affect our results of operations” and “Item 11—Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
If we are unable to obtain adequate capital, we may have to limit our operations substantially, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
We have to make significant capital expenditure, particularly in connection with the development, construction and maintenance of, and the purchasing of necessary software for, our mobile and fixed-line networks. For information about our capital expenditures, see “Item 4—Information on Our Company—A. History and Development—Capital Expenditure.” Further, the acquisition of 3G and 4G licenses and frequency allocations and the build-out of our 3G, 4G and broadband Internet networks will require additional capital expenditure.
However, future financings and cash flow from our operations may not be sufficient to meet our planned needs in the event of various unanticipated potential developments, including the following:
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During the period from 2014 to 2022,no treaty between the United States and the European Union announced sanctions applyingRussian Federation providing for reciprocal recognition and enforcement of foreign court judgments in civil and commercial matters. These limitations may deprive you of effective legal recourse for claims related to your investment in our shares. The Russian Federation is a party to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, but it may be difficult to enforce arbitral awards in the Russian Federation due to a number of factors, including the inexperience of Russian courts in international commercial transactions, official and Ukrainian individualsunofficial political resistance to enforcement of awards against Russian companies in favor of foreign investors and associated institutions. The sanctionsRussian courts’ inability to enforce such orders and corruption. Current geopolitical situation may be extended and our ability to gain external funding may be affected. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects andincrease the value of our shares and ADSs.”
Our indebtedness and the limits imposed by covenants in our debt obligations could limit our ability to obtain additional financing and thereby constrain our ability to invest in our business and place us at a possible competitive disadvantage. If we cannot obtain adequate funds to satisfy our capital requirements, we may need to limit our operations significantly, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Inflation could increase our costs and adversely affect our results of operations.
The Russian economy has been characterized by high rates of inflation, which over the past few years have been mainly driven by weakening of national currencies, restrictions on foreign trade and acceleration in food prices.
In 2014, the Bank of Russia implemented an inflation targeting program. As a result of this, inflation in Russia reached 3.0% in 2019 and 4.9% in 2020. In 2021, there was a significant increase in inflation in the US and the Eurozone, covering a wide range of goods, increased inflationary pressure due to rising costs in the global economy. In Russia, this factor also fueled inflationary expectations and hampered the transition to a steady slowdown in inflation. As a result, inflation in Russia reached 8.39% in 2021.
According to the March macroeconomic survey of the Bank of Russia the inflation in Russia may reach 20% in 2022.
At the end of 2019 and 2020, inflation in Belarus amounted to 4.7% and 7.4%, respectively. For the year ended 31 December 2021, the annual rise of consumer prices published by the National Bank of the Republic of Belarus amounted to 9.8%.
High rates of inflation in Russia and other countries of our operation could increase our costs and decrease our operating margins. See also “Item 5—Operating and Financial Review and Prospects—A. Operating Results—Certain Factors Affecting our Financial Position and Results of Operations—Inflation.” and “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
See also “—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial results” and “Item 11—Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
Indentures relating to some of our notes contain, and some of our loan agreements contain, restrictive covenants, which limit our ability to incur debt and to engage in various activities.
Covenants in the agreement relating to our Eurobonds due 2023 limit our ability to create liens on our properties, merge or consolidate with another person or convey our properties and assets to another person.
Some of our loan agreements contain similar and other covenants, including, in relation to the incurrence of indebtedness, creation of liens and disposal of assets. We may also incur additional credit obligations providing for similar covenants. Failure to comply with these covenants may cause a default and result in the debt becoming immediately due and payable, which would materially adversely affect our business, financial condition and results of operations.
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A material adverse effect on our financial condition and results of operations could occur if redemption rights of our noteholders are invoked.
Under the terms of our outstanding notes, upon occurrence of the circumstances described below, our noteholders will have the right to require us to redeem notes not previously called for redemption. The price we will be required to pay upon such event will be 101% of the principal amount of the notes, plus interest accrued prior to the redemption date. Such redemption scenario could be triggered in any of the following circumstances:
Some of our loan agreements contain similar redemption provisions triggered by occurrence of similar events. If such events occur, and our noteholders and other debt holders exercise their right to require us to redeem all of their notes or debt, such event could have a material adverse effect on our financial condition and results of operations.
In addition, under certain of our debt agreements, an event of default may be deemed to have occurred and/or we may be required to make a prepayment if Sistema disposes of its stake in our company and a third party takes a controlling position in our company. The occurrence of any such event of default or failure to make any required prepayment, which leads to an event of default, could trigger cross default / cross acceleration provisions under certain of our other debt agreements. In such event, our obligations under one or morelikelihood of these agreements could become immediately due and payable, which would have a material adverse effect on our business and our shareholders’ equity. If Sistema werechallenges when seeking to dispose of its stake in us, our company may be deprived of the benefits and resources that it derives from Sistema, which could harm our business.enforce foreign judgments.
Risks Relating to Economic Risks in Our Countries of Operation
Economic instability in the countries where we operate could adversely affect our business.
Since the dissolution of the Soviet Union in 1991, the economies of Russia and other countries where we operate have experienced periods of considerable instability. For example, GDP level significantly impacted basic commodity prices as was detected during the crisis in 2008 and 2009.
The Federal State Statistics Service estimated that the Russian economy grew by 2.2% in 2019. However, the Russian GDP decreased by 2.7% in 2020 due to COVID-19 outbreak as well as a drop in global demand for energy resources. In 2021 Russian GDP grew by 4.7%. According to the March macroeconomic survey of the Bank of Russia, the GDP may decrease by 8% in 2022. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
Any future economic downturns in Russia or the other countries where we operate, could lead to a decrease in demand for our services and, consequently, in our revenues, and negatively affect our liquidity position and ability to obtain further debt financing, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
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The Russian banking system remains underdeveloped, the number of creditworthy banks in Russia is limited and another banking crisis could place severe liquidity constraints on our business.
Russia’s banking and financial services systems are less developed or regulated as compared to other countries, and Russian legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent application. The August 1998 financial crisis resulted in the bankruptcy and liquidation of many Russian banks and almost entirely eliminated the developing market for commercial bank loans at that time. Many Russian banks currently do not meet international banking standards, and the transparency of the Russian banking sector in some respects still lags far behind internationally accepted norms. Aided by inadequate supervision by the regulators, certain banks do not follow existing CBR regulations with respect to lending criteria, credit quality, loan loss reserves or diversification of exposure. Furthermore, in Russia, bank deposits made by corporate entities are generally not insured.
In recent years, there has been a rapid increase in lending by Russian banks, which has been accompanied by a deterioration in the credit quality of the borrowers. In addition, a robust domestic corporate debt market is leading Russian banks (including the banks with which we conduct banking transactions) to hold increasingly large amounts of Russian corporate ruble bonds in their portfolios, which is further deteriorating the risk profile of Russian bank assets. The serious deficiencies in the Russian banking sector, combined with the deterioration in the credit portfolios of Russian banks, may result in the banking sector being more susceptible to market downturns or economic slowdowns, including due to Russian corporate defaults that may occur during any such market downturn or economic slowdown. In addition, the CBR has from time to time revoked the licenses of certain Russian banks, which resulted in market rumors about additional bank closures and many depositors withdrawing their savings. Recently, a number of banks and credit institutions have lost their licenses due to the deficiency of capital and failure to meet the CBR requirements. In 2014-2018, for instance, the CBR revoked the licenses of a number of Russian banks for reasons associated with implementing high-risk lending policies, loss of liquidity and non-compliance with anti-money laundering legislation. A combination of these factors may result in a significant deterioration in the financial fundamentals of Russian banks, notably liquidity, asset quality and profitability. In addition, the Russian banking sector may experience instability and weaker financial results due to the ongoing volatility in the global financial and commodity markets, as well as any decline in the Russian economy as a result of COVID-19 and the decline in oil prices.
There is currently a limited number of sufficiently creditworthy Russian banks and few ruble denominated financial instruments in which we can invest our excess ruble cash. We hold the bulk of our excess ruble and foreign currency cash in Russian banks, including subsidiaries of foreign banks.
In the event of a banking crisis, Russian companies may be subject to severe liquidity constraints due to the limited supply of domestic savings and the withdrawal of foreign funding sources that may occur during such crisis. Another banking crisis or the bankruptcy or insolvency of the banks from which we receive or with which we hold our funds could result in the loss of our deposits or affect our ability to complete banking transactions in Russia, which could have a material adverse effect on our business, financial condition and results of operations. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
The physical infrastructure in Russia and the other countries where we operate is generally in poor condition, which could disrupt our normal business activities and adversely impact our results.
The physical infrastructure in Russia and the other countries where we operate does not always meet modern technical requirements, has not been always funded and maintained over the past years.
Particularly affected are the rail and road networks, power generation and transmission systems, communication systems and building stock. For example, in August 2009, a major accident occurred at Russia’s largest power plant, the Sayano-Shushenskaya hydroelectric power station, resulting in flooding of the engine and turbine rooms and the death of 75 people. Power generation from the station ceased completely following the incident, which led to a major power outage in the nearby residential areas and at certain industrial facilities as well as pollution of the rivers and soil as a result of an oil spill from the transformer.
In addition, the road conditions throughout our countries of operation may be poor with many roads not meeting minimum quality and safety standards, causing disruptions and delays in the transportation of goods to and within these countries. The governments of the countries where we operate are actively considering plans to reorganize their national rail, electricity and
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communications systems. Any such reorganization may lead to additional costs and increased tariffs while failing to generate the anticipated capital investment needed to repair, maintain and improve these systems. The deterioration or insufficient renewal of the physical infrastructure in the countries where we operate harms the national economies, adds costs to doing business in these countries and impedes companies to operate effectively. These difficulties can impact us directly; for example, we keep portable electrical generators to help us maintain base station operations in the event of power outages. Further deterioration of the physical infrastructure in Russia and the other countries where we operate could have a material adverse effect on our business, financial condition and results of operations. In addition, the increased charges and tariffs that may result from the government reorganization may also have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries.
The economies of the countries where we operate are vulnerable to market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in Russia and the other countries where we operate, and businesses in these countries could consequently face severe liquidity constraints. Additionally, as Russia produces and exports large amounts of oil and gas, the Russian economy is especially vulnerable to the price of oil and gas on the world market and a decline in the price of oil and gas could negatively impact its economy. See also “—Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of ADSs”. In addition, recent military conflicts and international terrorist activity have significantly impacted the oil and gas prices globally, and pose additional risks to the Russian economy. Russia is also a major producer and exporter of metal products and its economy is vulnerable to world commodity prices and the imposition of tariffs and/or anti-dumping measures by the United States, the European Union or other principal export markets.
Although our results have not been materially affected by the pandemic to date, there can be no assurance that our business could be materially affected. For more information see “—The outbreak of COVID-19 may have a material adverse effect on our business, financial condition, results of operations and prospects.”
The disruptions recently experienced in the domestic and international capital markets have led to reduced liquidity and increased credit risk premiums for certain market participants and have resulted in a reduction of available financing. Companies located in emerging markets, including us, may be particularly susceptible to these disruptions and reductions in the availability of credit or increases in financing costs. To the extent that the current market downturn continues or worsens, it may lead to constraints on our liquidity and ability to obtain debt financing, which may have a material adverse effect on our business, financial conditions and results of operations. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
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Political and Social Risks
Political and governmental instabilityvolatility in Russia and other countries of our operations could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs.shares.
The political and economic situation in Russia has been negatively affected by the global financial crisis,geopolitical events, the economic sanctions imposed by the United States, the European Union, Great BritainSwitzerland, the United Kingdom and other countries, the ongoing volatile economic conditions as well as the continuing impact of COVID-19 pandemic.and other factors. Other countries where we operate may pose similar challenges. Current and possible future political changes in Russia and other countries where we operate, major policy shifts or a lack of consensus between the various branches of power and powerful economic groups could disrupt or reverseaffect economic and regulatory reforms. This could, in turn, lead to further political instabilityvolatility or conflicts among powerful economic groups, which could have a material adverse effect on our business, financial condition, results of operations, prospects and the value of our shares and ADSs.shares. For example, after the presidential elections, which took place on August 9, 2020, protests began in Belarus. Moreover, the United States, the European Union, Great Britainthe United Kingdom and other countries have imposed additional sanctions on certain Belarusian persons and entities. Further destabilizationvolatility of the political and social situation can negatively affect our business, financial position and operations. A deterioration of the socio-political situation in Russia could also trigger an event of default under some of our loan agreements.
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On July 4, 2020, the Law of the Russian Federation on Amendment to the Constitution of the Russian Federation came into force which implemented a number of constitutional reforms aimed at altering the balance of power between the legislative, executive and judicial branches and introducing certain other changes to the Constitution of the Russian Federation. This Law, among other things, prioritizes the Constitution of the Russian Federation over international treaties and the decisions of international bodies, strengthens the Russian State Council as an advisory board to the Russian President and grants the Russian Federal Council with authority to terminate the powers of the judges of the Constitutional Court of Russia upon the recommendation of the Russian President. These amendments to the Constitution may have a significant impact on the Russian political landscape and regulatory environment and lead to other changes that are currently difficult to predict. See also “—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesGeopolitical situation and sanctions imposed as a result thereof,of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.shares.”
Potential conflict between central and regional authorities could create an uncertain operating environment hindering our long-term planning ability.
The Russian Federation is a federation of units, consisting of republics, territories, regions, cities of federal importance and autonomous regions and districts. The delineation of authority and jurisdiction among the members of the Russian Federation and the federal government is, in many instances, unclear and remains contested. A lack of consensus between the federal government and local or regional authorities could result in the enactment of conflicting legislation at various levels and may lead to political instability.volatility. In particular, conflicting laws have been enacted in the areas of privatization, land legislation and licensing. Some of these laws, as well as governmental and administrative decisions implementing them and certain transactions consummated pursuant to them, have in the past been challenged in the courts, and such challenges may occur in the future. This lack of consensus may hinder our long-term planning efforts and create uncertainties in our operating environment, both of which may prevent us from effectively and efficiently implementing our business strategy.
Additionally, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict, which can halt normal economic activity and disrupt the economies of neighboring regions. The further intensification of violence, including terrorist attacks and suicide bombings, or its spread to other parts of Russia, could have significant political consequences, including the imposition of a state of emergency in some parts or the whole of Russia. Moreover, any terrorist attacks and the resulting heightened security measures are likely to cause disruptions to domestic commerce and exports from Russia. Any of these factors could materially adversely affect our business and the value of our shares and ADSs.
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Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.
In February and March 2022, as a result of the ongoing geopolitical conflict in Ukraine, the EU, the U.S., the UK and certain other countries have imposed new significant sanctions and export controls on Russia, particular sectors of Russian economy, and some Russian and Belarusian persons and entities. The continuation or expansion of such restrictions as well as uncertainty due to changes in the regulatory environment in Russia may raise additional compliance and operational challenges for the Company and adversely affect the business of the Company and its customers. In addition, a number of western companies and exchanges have taken further action suspending, stopping, or restricting their operations in Russia by their own initiative. On February 28, 2022, trading on the Moscow Exchange in all equity securities was suspended (including the Company’s ordinary shares), which was later suspended until the limited resumption of stock trading on MOEX on March 24, 2022, and the full resumption of stock trading on MOEX on March 28, 2022. Also, on February 28, 2022, the New York Stock Exchange halted trading in the Company’s ADRs and stocks of certain other Russian companies.
In addition, on February 24, 2022, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) issued a final rule imposing enhanced export controls on Russia, and a license generally is now required for the export, reexport or transfer (in country) of a number of items subject to the Export Administration Regulations (“EAR”) to Russia, including electronics, computers, telecommunications and information security, sensors and lasers, navigation and avionics, marine, and aerospace and propulsion. Most export license applications for Russia will now be subject to a policy of denial, and applications may be reviewed on a case-by-case basis if they relate to flight safety, maritime safety, humanitarian needs, civil telecommunications infrastructure, government space cooperation and government-to-government activities. On March 2, 2022, BIS issued additional export controls relating to Belarus and further expanding the scope of certain export controls relating to Russia.
On February 25, 2022, the European Union published a package of export control measures against Russia, and the package, inter alia, imposes further restrictions on the export of dual-use goods and technology to Russia and other goods and technology which might contribute to Russia’s technological enhancement of its defense and security sector. These measures cover equipment related to the manufacturing of electronic components and materials and other specially designed components and accessories, with certain limited exceptions.
On February 28, 2022, the UK removed Russia as a permitted destination from numerous open general export licenses, and suspended the approval of new export licenses for dual-use items to Russia. On March 1, 2022, a number of further amendments were made, expanding the scope of the existing ban on the export, supply and delivery, making available and transfer of military goods and technology to and for use in Russia, to include certain electronics, computers, telecommunications equipment and information security, sensors and lasers, marine-related items and aerospace and propulsion-related items, with certain exceptions.
In addition, the U.S., the EU, the UK, and other countries have imposed a number of sanctions relating to Russia and Russian parties, including: (i) sanctions that block the property of certain Russian entities and individuals, including a number of financial institutions; (ii) targeted sanctions that prohibit certain debt and/or equity or other transactions with identified companies (including those operating in the Russian financial, energy, and defense sectors); (iii) restrictions on transactions with the Russian Central Bank, National Wealth Fund, Ministry of Finance, and (iv) territorial sanctions restricting investment in and trade with Crimea, Donetsk, and Luhansk. In addition, a number of Russian financial institutions have been removed from the SWIFT messaging system.
Moreover, the restrictions introduced by the U.S., the EU, the UK and other countries may impact supply chain and cost of delivery of equipment and other products, and our business and financial condition.
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In particular, pursuant to Decrees of the President of the Russian Federation, Orders of the Russian Government and acts of the Central Bank of Russia a special procedure is established for the execution by residents of certain contracts with foreign legal entities and individuals, including foreign legal entities and individuals from the U.S., the EU, the UK and other countries, that committed unfriendly actions against Russia and Russian persons (hereinafter referred to as foreign persons). In particular, transactions for the provision of credits and loans to foreign persons, as well as transactions that concern the ownership title to securities and real estate are subject to restrictions. Such transactions may be carried out subject to permits issued by the special Government Commission.
Furthermore, a special procedure has been established for the fulfillment by residents (debtors) of their obligations in excess of 10 million rubles (or equivalent of this amount in foreign currency) per month on credits, loans and financial instruments (including payment of bond coupons and dividends) to foreign persons (creditors). These obligations are fulfilled by the debtor with the permission of the Central Bank of Russia (for credit organizations), the Finance Ministry of the Russian Federation (for other debtors) or in rubles through special accounts of type "S". In addition, the Central Bank of Russia is authorized to set limits on the amount of funds for transfers by non-residents from their accounts opened in the Russian Federation to the accounts of other non-residents, as well as for the purchase by non-residents of foreign currency in the foreign exchange market of Russia. Additionally, a ban on transfers by non-resident individuals and legal entities from states that have imposed restrictive measures against Russia (with certain exceptions) of funds held on their accounts opened in Russia to any accounts opened outside the Russian Federation was introduced on April 1, 2022 until September 30, 2022. As a result, any foreign individuals and entities that are the holders of ADRs as of the relevant record date for payment of dividends may be ineligible to receive such dividends in foreign currency. These developments could materially adversely affect the liquidity in, and the value of, our ADRs.
In addition, on March 29, 2022, it was reported that the Ministry of Economic Development of the Russian Federation has proposed a draft law requiring Russian companies to terminate foreign depositary programs, under which the depositary receipts of such companies (including the Company) are listed on foreign stock exchanges. The termination of our depositary program would result in the cancellation of our ADRs, with the underlying shares represented by those ADRs being distributed to shareholders, and the delisting of our ADSs from the NYSE. The underlying shares would continue to be listed on MOEX, which would remain the sole listing venue of our equity securities. The mechanics and timing relating to how the ADRs will be converted into the underlying shares and how such underlying shares are to be traded following their withdrawal from our depositary program remains uncertain. Recipients of such underlying shares may also be subject to restrictions on holding these (either as a matter of applicable law or their own policies). The adoption of this legislation could materially adversely affect the liquidity in, and the trading price of, our ADSs and ordinary shares.
Moreover, on April 3, 2022 certain deputies of the State Duma and members of the Federation Council of the Federal Assembly of the Russian Federation announced amendments to the Criminal Code of the Russian Federation that would establish criminal liability for complying with foreign sanctions on the territory of the Russian Federation. If such amendments were adopted, they could limit MTS’s access to foreign supplies of materials and equipment, as foreign counterparties may be unable to work with MTS, which could have a material adverse effect on our business, financial condition, results of operations, prospects and the value of our shares and ADSs.
In addition, the operations of MTS Bank, the MTS Group’s subsidiary, are susceptible to the risks, including those resulting from sanctions and other regulatory measures, that may affect the MTS Group’s borrowers’ ability to repay amounts due to the MTS Group, which may be impacted by the overall macroeconomic environment and business climate. Adverse changes in economic conditions may result in deterioration in the value of collateral held against loans and other obligations.
The aforementioned geopolitical events, and any continuation of tensions, has had and may continue to have a negative impact on the volatility and trading price of the Group’s shares and ADRs. Developments relating to these matters are highly unpredictable, occur swiftly and often with little notice, and are mostly outside the control of the MTS Group. The risk that any MTS Group member, or individuals holding positions within the MTS Group as well as its counterparties, may be affected by future sanctions designations cannot be excluded. Current and future risks to the MTS Group include, among others, the risk of reduced or blocked access to capital markets and ability to obtain financing on commercially reasonable terms (or at all), the risk of restrictions on the import of certain equipment and software, as well as the risk of further depreciation of the Russian ruble against other currencies (which has already occurred to a certain extent), which may adversely impact the Company’s investment process as a significant portion of its capital expenditures are denominated in or linked to foreign currencies. In addition, rate hikes by the Central Bank of Russia, which has increased its key rate to 20% on February 28, 2022, will and may continue to increase the Company’s financing costs due to the impact on floating-rate credit facilities.
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Moreover, operations of MTS Belarus, that is also a part of MTS Group, are also susceptible to risks described above, as well as to specific sanctions risks arising from the EU, the U.S., the UK and certain other countries’ sanctions and export controls regimes imposed at Belarus in February and March 2022.
Crime and corruption could disrupt our ability to conduct our business and thus materially adversely affect our operations.
The politicalCrime and economic changes in recent years in the countries where we operate have resulted in significant dislocations of authority. In addition, the local and international press have reported high levels of corruption including the bribing of officials for the purpose of initiating investigations by government agencies. Press reports have also described instances in which government officials engaged in selective investigations and prosecutions to further the commercial interests of certain government officials or certain companies or individuals. Additionally, some members of the media in the countries we operate in regularly publish disparaging articles in return for payment. The depredations of organized or other crime or demands of dishonest officials could result in negative publicity, disrupt our ability to conduct our business and could thus materially adversely affect our business, financial condition, results of operations and prospects. Additionally, some members of the media in the countries we operate in regularly publish disparaging articles in return for payment. Any actions which could result in a negative effect on investor confidence in Russia’s business and legal environment could have a further material adverse effect on the Russian securities market and prices of Russian securities or securities issued or backed by Russian entities, including the shares.
Actions of fraudsters aimed against subscribers cause additional risks for operators. Despite our efforts to detect and prevent fraud, some forms of rendering services (for example, offering payments via external Internet sources) might entail risks of fraudulent charge-offs from subscribers’ personal accounts. Such fraud actions could negatively affect our reputation and lead to an increase in subscriber churn, which could materially adversely affect our business, financial condition, results of operations and prospects.
Social instability could increase support for renewed centralized authority, nationalism or violence and thus materially adversely affectprospects as well as our operations.
The failure of the government and many private enterprises to pay full salaries on a regular basis and the failure of salaries and benefits generally to keep pace with the rapidly increasing cost of living have led in the past, and could lead in the future, to labor and social unrest. Labor and social unrest may have political, social and economic consequences, such as increased support for a renewal of centralized authority; increased nationalism, including restrictions on foreign involvement in the economies of the countries where we have operations; and increased violence. An occurrence of any of the foregoing events could restrict our operationsreputation and lead to the loss of revenues, materially adversely affecting our operations.an increase in subscriber churn.
Legal Risks and Uncertainties
Weaknesses relating to the legal system and legislation in the countries where we operate create an uncertain environment for investment and business activity, which could have a material adverse effect on the value of our shares and ADSs.shares.
Each of the countries we operate in is still developing the legal framework required to support the market economy. The following risk factors relating to these legal systems create uncertainties with respect to the legal and business decisions that we make, many of which do not exist in countries with more developed market economies:
● | inconsistencies between and among the constitution, federal and regional laws and subordinate legislation (presidential decrees and governmental, ministerial and local orders, decisions and resolutions) and other acts; |
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● | legislation ambiguities which do not allow to predict how these provisions should be followed and how an authorized body or a court will interpret these provisions; |
● | the lack of judicial and administrative guidance on interpreting certain legislation as well as conflicting interpretations of supreme general jurisdiction and arbitrazh courts; |
● | the lack of necessary legislation in the reality of digital economy and rapid developing of new technologies; |
● | the relative inexperience of judges and courts in interpreting certain aspects of legislation; |
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● | the lack of an independent judiciary; |
● | a high degree of discretion on the part of governmental authorities, which could result in arbitrary actions such as suspension or termination of our licenses; and |
● | poorly developed bankruptcy and liquidation procedures and court practice that create possibilities of abuse. |
The recent nature of much of the legislation in the CIS countries, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of these legal systems in ways that may not always coincide with market developments place the enforceability and underlying constitutionality of laws in doubt and result in ambiguities, inconsistencies and anomalies. In addition, legislation in these countries often contemplates implementing regulations that have not yet been promulgated, leaving substantial gaps in the regulatory infrastructure. All of these weaknesses could affect our ability to enforce our rights under our licenses and contracts, or to defend ourselves against claims by others. Moreover, it is possible that regulators, judicial authorities or third parties may challenge our internal procedures and bylaws, as well as our compliance with applicable laws, decrees and regulations.
TheAny inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations.
If we are unable to protect our business entities in the countries in which we operate from the withdrawal or suspension of required permissions or unwarranted regulatory scrutiny, this may adversely affect our business, financial condition and results of operations. For example, in June 2012, the authorities of the Republic of Uzbekistan began audits of the financial and operating activities of our wholly owned subsidiary, Uzdunrobita. Further various claims for violation of tax, antimonopoly and industry legislation were made against Uzdunrobita, which resulted in significant amounts of fines and penalties, revocation of all licenses and suspension of services. Total amount of damages was calculated and determined on the basis of all the aforementioned claims against Uzdunrobita and amounted to approximately RUB 18,375 million payable in equal installments over eight months.
Uzdunrobita paid two scheduled installments in November and December 2012 totaling approximately RUB 4,583.4 million. On January 14, 2013, further to its partial payment of the third installment due in January 2013 totaling approximately RUB 481 million and constituting the remaining amount of cash held in its bank accounts, Uzdunrobita filed a petition for voluntary bankruptcy to the Tashkent Economic Court on the grounds of its inability to meet further obligations.
On April 22, 2013, the Tashkent Economic Court declared Uzdunrobita bankrupt and initiated a liquidation process. Uzdunrobita was later liquidated. In 2012, we filed a claim against the Republic of Uzbekistan in the International Center for Settlement of Investment Disputes (“ICSID”), part of the World Bank Group, in Washington, D.C.
On July 31, 2014, we and the Republic of Uzbekistan signed a settlement agreement (the “Settlement Agreement”) and MTS agreed to reenter the Uzbekistan market through a joint enterprise with MTS holding a 50.01% in the charter capital of the joint enterprise, while the remaining 49.99% belongs to a state-owned unitary enterprise established and managed by the State Committee for Communications, Development of Information Systems and Telecommunications Technologies of the Republic of Uzbekistan. The Settlement Agreement is governed by English law and provides for the resolution of any disputes arising out of the Settlement Agreement in the International Court of Arbitration under International Chamber of Commerce in Paris.
On September 24, 2014, in accordance with the Settlement Agreement, the authorities of the Republic of Uzbekistan granted the joint enterprise 2G, 3G and LTE licenses, provided necessary frequencies and numbering capacity, fostered entrance into lease agreements for communication channels and issued all permissions required to the joint enterprise so it could operate and offer full telecommunications services throughout Uzbekistan. The joint enterprise has also received guaranties for investment protection and return of investments in accordance with the laws of the Republic of Uzbekistan.
In November 2014, ICSID discontinued international arbitration proceedings between MTS and the Republic of Uzbekistan following the submission of a joint application by both parties.
On December 1, 2014, the joint enterprise, named UMS, launched sales of SIM cards through its proprietary network of 20 stores and through another 230 independent locations throughout Uzbekistan and started provision of 2G/3G telecommunications services on the entire territory of Uzbekistan. On August 5, 2016, we sold our 50.01% stake in UMS to the State Unitary Enterprise
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Centre of Radio Communication Radio Broadcasting and Television of the Ministry of Development of Information Technologies and Communications of the Republic of Uzbekistan. The loss on disposal of investment in Uzbekistan was recorded in the financial report for the third quarter of 2016.
See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”.
An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable.
In December 2010, the Group suspended its operations in Turkmenistan following notification by the Ministry of Communications of Turkmenistan of a decision to suspend licenses held by BCTI, the Group’s wholly owned subsidiary in Turkmenistan, initially for a period of one month starting from December 21, 2010, and then permanently.
On May 24, 2012, we concluded an agreement with the state-owned telecom operator Turkmentelekom relating to our terms of operations in Turkmenistan, which resulted from negotiations between the Turkmenistan government and ministries. The agreement had a five-year term and could be extended for the following five years, provided certain terms and conditions are satisfied. Under this agreement, we were obliged to pay Turkmentelekom a monthly amount calculated as 30% of our net profit in Turkmenistan based on accounting rules of Turkmenistan.
On July 25, 2012, we, our subsidiary BCTI, the Republic of Turkmenistan, the Ministry of Communications of Turkmenistan, the state-owned company, Turkmentelecom, and a mobile operator, Altyn Asyr, signed a settlement agreement (which included the dismissal of all international lawsuits) concerning the suspension of our operations in Turkmenistan in December 2010.
In August 2012, we restarted our mobile communication network in Turkmenistan and resumed providing services to subscribers who had not canceled their contracts. Since October 1, 2012 we resumed our operations in Turkmenistan entirely and started entering into contracts with new subscribers.
MTS-Turkmenistan was compelled to suspend communication services in Turkmenistan from 00:00 September 29, 2017, due to the actions of the Government of Turkmenistan, the Ministry of Communications of Turkmenistan, the state-owned telecommunications company, Turkmentelekom, and its wholly-owned subsidiary, Altyn Asyr, the state owned mobile operator in Turkmenistan. These actions resulted in the disconnection of international and long-distance zonal communication services and Internet access.
In July 2018, we filed a Request for Arbitration against the Sovereign State of Turkmenistan with the ICSID in order to protect its legal rights and investments in Turkmenistan. The Tribunal for these proceedings was constituted on December 18, 2018 and the Company subsequently filed its Memorial (statement of claim) with ICSID on March 29, 2019.
Unless resolved to our satisfaction, we intend to vigorously pursue our claims in arbitration and seek all available remedies.
In May 2022, the tribunal held the main hearing and we expect the final award to be rendered by the tribunal in 2023.
See also Note 3433 to our audited consolidated financial statements and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Turkmenistan.”.
Unless resolved to our satisfaction, we intend to vigorously pursue our claims in arbitration and seek all available remedies.11
Russian companies can be forced into liquidation on the basis of formal non-compliance with certain legal requirements.
Certain provisions of Russian law, including the general provisions of the Civil Code of the Russian Federation, may allow government authorities to seek a court order for the liquidation of a Russian legal entity on the basis of its formal non-compliance with certain requirements during formation, reorganization or during its operation.
For example, under Russian corporate law, if the net assets of a Russian joint stock company calculated on the basis of Russian accounting standards are lower than its charter capital as atof the end of its thirdsecond reporting year or any subsequent financialreporting year, the company must either decrease its charter capital or be placed in liquidation. If the company fails to comply with these requirements, governmental or local authorities can seek the involuntary liquidation of such company in court, andcourt.
Special rules are also provided for joint-stock companies. If, as of the company’s creditors will haveend of the second reporting year or each subsequent reporting year, the company's net assets are lower than the amount of its charter capital:
● | the Board of Directors of the company, when preparing for the annual general meeting of shareholders, is obliged to include a section on the state of its net assets in the annual report of the company; |
● | the company is obliged to make one of the following decisions no later than 6 months after the end of the corresponding reporting year: |
o | to decrease its charter capital of the company to an amount not exceeding the value of its net assets; |
o | to liquidate the company. |
At the same time, if the company's net assets are less than its charter capital by more than 25 percent at the end of three, six, nine or twelve months of the reporting year following the second reporting year or each subsequent reporting year, at the end of which the company's net assets turned out to be less than its charter capital, the company twice with a periodicity of one once a month, it is obliged to place in the mass media, in which data on the state registration of legal entities are published, a notice of a decrease in the company's net assets.
The creditor of the company, if his rights of claim arose before the publication of the notice of the decrease in the company's net assets, no later than 30 days from the date of the last publication of such notice, has the right to accelerate their claims or demand from the company the early performancefulfillment of the company’s obligations as well as demandcorresponding obligation, and if its early fulfillment is impossible, the termination of the obligation and compensation for related losses.
If, at the end of any damages.
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However, pursuant to the Federal Law No. 46-FZ dated March 8, 2022 “On Amendments to Certain Legislative Acts of the Russian Federation,” (in the edition as of December 28, 2022) a reduction in the value of the net assets of a Russian joint stock company below the size of its charter capital atas of the end of 2022 and 2023 will not require the liquidationrequire:
● | when preparing for the annual general meeting of shareholders, the inclusion of a section on the state of net assets in the annual report; |
● | making a decision to reduce the charter capital to an amount not exceeding the value of its net assets, or to liquidate the company. |
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The existence of negative assets may not accurately reflect the actual ability to pay debts as they fall due. Many Russian companies have negative net assets due to very low historical asset values reflected on their Russian accounting standards balance sheets; however, their solvency, i.e., their ability to pay debts as they fall due, is not otherwise adversely affected by such negative net assets. Some Russian courts, in deciding whether or not to order the liquidation of a company for having negative net assets, have looked beyond the fact that the company failed to fully comply with all applicable legal requirements and have taken into account other factors, such as the financial standing of the company and its ability to meet its tax obligations, as well as the economic and social consequences of its liquidation. Nonetheless, creditors have the right to accelerate claims, and file damages claims, and governmental or local authorities may seek the liquidation of a company with negative net assets.
Courts have, on rare occasions, ordered the involuntary liquidation of a company for having net assets less than the minimum charter capital required by law, even if the company had continued to fulfill its obligations and had net assets in excess of the minimum charter capital at the time of liquidation.
The amount of net assets in accordance with the local accounting standards of some of our subsidiaries is less than the minimum charter capital required by law. Although these subsidiaries continue to meet all of their obligations to creditors, there is a minimal risk of their liquidation while the net assets remain below the minimum legal requirements.
There have also been cases in the past in which formal deficiencies in the establishment process of a Russian legal entity or non-compliance with provisions of Russian law have been used as a basis to seek the liquidation of a legal entity. Weaknesses in the Russian legal system create an uncertain legal environment, which makes the decisions of a Russian court or a governmental authority difficult, if not impossible, to predict. If involuntary liquidation were to occur, such liquidation could lead to significant negative consequences for our group.
Nevertheless, according to sub-paragraphs 1 and 2 of paragraph 1 of Article 17 of Federal Law No. 46-FZ dated 08.03.2022 "On Amendments to Certain Legislative Acts of the Russian Federation" (in the edition as of December 28, 2022) a decrease in the value of net assets in subsidiaries of MTS PJSC below the size of subsidiaries’ charter capital as of the end of 2022 and 2023 will not require the company to make a decision on reducing the charter capital to an amount not exceeding the value of its net assets or liquidation of the company.
Insufficient adherence to the independence and competitiveness of the judicial process, the difficulty of enforcing court decisions and governmental discretion in enforcing claims could prevent us or holders of our securities from obtaining effective redress in a court proceeding.
The judicial bodies in the countries where we operate are not always completely independent or immune from economic and political influences, and are often understaffed and underfunded. Judges and courts are often inexperienced in the area of business, corporate and industry (telecommunications) law. Judicial precedents generally have no binding effect on subsequent decisions, and not all court decisions are readily available to the public or organized in a manner that facilitates understanding. The judicial systems in these countries can also be slow or unjustifiably swift.
Enforcement of court orders can, in practice, be very difficult to achieve. All of these factors make judicial decisions in these countries difficult to predict and effective redress uncertain. Additionally, court claims are often used in furtherance of political and commercial aims or infighting. We may be subject to such claims and may not be able to receive a fair hearing. Additionally, court orders are not always enforced or followed by law enforcement agencies. Furthermore, recognition and enforcement of arbitral awards in countries where we operate is subject to compliance with corresponding rules of civil procedure and applicable laws, and courts in the countries where we operate may interpret applicable regulations in a manner which would result in denial of such recognition and enforcement.
These uncertainties also extend to property rights. For example, during RussiaRussia’s transformation from centrally planned economy to market economy, legislation has been enacted in the country to protect private property against uncompensated expropriation and nationalization.
However, there is a risk that due to the lack of experience in enforcing these provisions and due to political factors, these protections would not be enforced in the event of an attempted expropriation or nationalization. Expropriation or nationalization of any of our entities, their assets or portions thereof, potentially without adequate compensation, would have a material adverse effect on our business, financial condition, results of operations and prospects.
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Selective or arbitrary government action could have a material adverse effect on our business, financial condition, results of operations and prospects.
Governmental authorities in the countries where we operate have a high degree of discretion and, at times, act selectively or arbitrarily, without hearing or prior notice, and sometimes in a manner that is inconsistent with legislation or influenced by political or commercial considerations.
Selective or arbitrary governmental actions have reportedly included the denial or withdrawal of licenses, sudden and unexpected tax audits and claims, criminal prosecutions and civil actions. Federal and local government entities have also used ordinary defects in matters surrounding share issuances and registration as pretexts for court claims and other demands to invalidate such issuances and registrations or to void transactions. Moreover, the government also has the power in certain circumstances, by regulation or government acts, to interfere with the performance of, nullify or terminate contracts.
In addition, the Russian tax authorities have brought tax evasion claims relating to Russian companies’ use of tax-optimization schemes, and press reports have speculated that these enforcement actions have been selective. Selective or arbitrary government action, if directed at us, could have a material adverse effect on our business, financial condition, results of operations and prospects.
Failure to comply with existing laws and regulations as well as requirements of international and regional standards or to obtain all approvals, authorizations and permits required to transmit television channels or operate telecommunications equipment, or the findings of government inspections or increased governmental regulation of our operations, could result in a disruption in our business and substantial additional compliance costs and sanctions.
Our operations and properties are subject to regulation by various government entities and agencies in connection with obtaining and renewing various licenses, approvals, authorizations and permits, as well as with ongoing compliance with existing laws, regulations and standards. Regulatory authorities exercise considerable discretion in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licenses, approvals, authorizations and permits and in monitoring licensees’ compliance with the terms thereof. Russian authorities have the right to, and frequently do, conduct periodic inspections (planned and unscheduled) of our operations and properties throughout the year. Any such future inspections may conclude that we or our subsidiaries have violated laws, decrees or regulations, and we may be unable to refute such conclusions or remedy the violations. See also “—The regulatory environment for telecommunications in Russia and other countries where we operate or may operate in the future is uncertain and subject to political influence or manipulation, which may result in negative and arbitrary regulatory and other decisions against us on the basis of other than legal considerations and in preferential treatment for our competitors.”
Primarily due to delays in the issuance of permits, approvals and authorizations by regulatory authorities, it is frequently not possible to procure all of the permits for each of our base stations or other aspects of our network before we put the base stations into commercial operation or to amend or maintain all of the permits when we make changes to the location or technical specifications of our base stations.
We are constantly in the process of registration and re-registration of ownership over certain infrastructure facilities. For example, MGTS carries out measures aimed at registration of ownership rights to the cable line structures (CLS). At the same time, MGTS is not insured against the risks of challenging the ownership rights by third parties. MGTS performs legal registration of its ownership rights to minimize the risk. In case of receiving reasonable claims, MGTS reconciles cable line objects to distinguish the ownership rights. MGTS is ready to assert its rights to CLS in court when necessary.
In addition, we may be unable to transmit certain television channels if entities that provide television content to us do not possess the requisite licenses. In case such providers of television content do not obtain the required licenses, or have their existing licenses suspended or terminated, our selection of potential television channels for transmission could be significantly limited. The Federal Law No. 257 “On Amending Federal Law “On Mass Media” and Federal Law “On Communications” dated July 13, 2015 introduced a numberinability of amendmentsoperators to the national mandatory free television channels list. Requirementscomply with requirements on sequence of channels, sound and image quality and signal reception points of national mandatory free television channels were adopted in September 2015. In October 2020,(pursuant to the Ministry of Digital Development, Communications and Mass Media adopted itsFederal Law dated July 13, 2015 No. 257, Order dated July 31, 2020 No. 369, “On Determining the Requirements for the Quality of Sound and (or) Image of Mandatory Public TV and (or) Radio Channels”
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which updated the existing quality requirements. The inability of operators to comply with such requirementsOrder dated September 03, 2021 No. 921) may lead to suspension or termination of a license.
Furthermore, we could be subject to fines and other penalties, including forced suspension of our cable network operators’ activity for up to 90 days. In some cases of our service provision (for example, those employing GPON technology) power failures in subscribers’ households may lead to non-compliance with rules regulating local telephony communication services. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.
On June 1, 2018, Federal Law No. 245 “On Amendments to the Federal Law” On Communications” entered into force and is aimed at further aligning the process of entering into a contract for the provision of mobile radiotelephone communication services without appropriate identification of a subscriber (i.e., a user) of communication services. Operators may be subject to penalties and other sanctions, including the suspension of an operator’s activity for up to 90 days, for non-compliance with the Law.
Our failure to comply with existing laws and regulations of the countries where we operate as well as requirements of international and regional standards or to obtain all approvals, authorizations and permits required to operate telecommunications equipment, or the findings of government inspections including the State Labor Inspection Service may result in the imposition of fines or penalties or more severe sanctions including the suspension, amendment or termination of our licenses, approvals, authorizations and permits, or in requirements that we cease certain of our business activities, or in criminal and administrative penalties applicable to our officers. We have also engaged in certain disputes, which could require us to pay damages or settlements. We may incur expenses in defending these lawsuits. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation”.
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Moreover, an agreement or transaction entered into in violation of law may be invalidated and/or unwound by a court decision. Any such decisions, requirements or sanctions, or any increase in governmental regulation of our operations, could result in a disruption of our business and substantial additional compliance costs and could materially adversely affect our business, financial condition, results of operations and prospects. In addition, we may assume risks of potential claims from subscribers and regulating authorities regarding former activities of the acquired or merged businesses.
Generally, communication networks are vulnerable to physical or software break-ins, viruses, unauthorized interferences and similar events. Should such events occur with respect to our network elements, we may become subject for additional inspection by the regulatory authorities. Although we obtain all necessary permissions and certificates for the operation of our equipment and provide measures to protect confidential information, our failure to fully comply with all legislation requirements could result in the imposition of fines or penalties, additional government regulations, substantial additional compliance costs, disruption of our business including its suspension or termination, and other adverse effects.
We provide certain common contractual protections to the purchaser under the VF Ukraine Sale Agreement and are subject to certain post-closing obligations.
In December 2019, we sold our telecommunication business in Ukraine under an agreement entered into with Telco Solutions and Investments LLC, as purchaser, an entity affiliated with telecommunication company Bakcell LLC, which is a part of the NEQSOL Holding international group of companies (the “Sale Agreement”), see “Item 4—Information4.Information on our Company—A. History and Development” and Note 1110 to our audited consolidated financial statements for details of the transaction. We provide certain common contractual protections to the purchaser and are subject to certain post-closing obligations under the Sale Agreement. Further, the Sale Agreement contains a post-completion price adjustment mechanism. As a result of applying this mechanism, the purchase price was adjusted in our favor so we were not required to pay any sum to the purchaser.
Although we do not anticipate any further material price adjustments or other liability under the Sale Agreement, there can be no assurance that a liability will not emerge in the future, in which case it could have an adverse effect on our financial position and results of operations.
According to the terms of the Sale Agreement, an additional consideration based on the performance of the discounted operations in Ukraine was receivable. The group received the first part of the additional contingent consideration in March 2021. In 2022 following uncertainty over the receipt of the consideration and economic volatility and sanctions in Russia, the group created expected credit allowance for the total amount of receivable and its value decreased to nil. See also Note 10 to our audited consolidated financial statements.
There is insufficient minority shareholder protection in Russia.
Minority shareholder protection under Russian law principally derives from (a) supermajority shareholder approval requirements for certain corporate actions, (b) the ability of a shareholder to demand that the company purchase the shares held by that shareholder if that shareholder voted against or did not participate in voting on certain types of actions, (c) the ability of a shareholder
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to sell his shares at a fair price when the control is changed, the company is acquired at a price determined in accordance with the requirements of the current legislation, (d) shareholders’ right to challenge decisions of the company’s management bodies in certain circumstances, and (e) shareholders’ right to challenge transactions which caused company’s loss. Companies are also required under Russian law to obtain the approval of disinterested shareholders for certain transactions with interested parties. In practice, enforcement of these protections has not always been effective. Shareholders of some companies have suffered as a result of fraudulent bankruptcies initiated by hostile creditors.
The supermajority shareholder approval requirement is met by a vote of 75% of all voting shares that are present at a shareholders’ meeting. Thus, controlling shareholders owning slightly less than 75% of outstanding shares of a company may have a 75% or more voting power if certain minority shareholders are not present at the meeting. In situations where controlling shareholders effectively have 75% or more of the voting power at a shareholders’ meeting, they are in a position to approve amendments to the charter of the company or significant transactions including asset transfers, which could be prejudicial to the interests of minority shareholders. It is possible that our controlling shareholder in the future may not operate us and our subsidiaries for the benefit of minority shareholders, and this could have a material adverse effect on the value of our shares and ADSs.shares.
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While the Federal Law on Joint Stock Companies provides that shareholders owning not less than 1% of the company’s outstanding common stock may bring an action for damages caused to a company by its CEO, member of the Board of Directors or its Management Board and certain other officials acting on behalf of the company, minority shareholders may have difficulties with proving such damages with the court and as a consequence their claims may be denied by the court. In 2009, legislation was adopted which contemplates class action litigation, in 2015 mechanism of class action regarding corporate disputes was introduced and in 2019 this mechanism was updated and specified. Although there have been several disputes in the past few years, Russian courts do not have a clear and consistent approach in regards to class action litigation. In addition, the issue of claims by shareholders against the company to compensate the shareholders for their losses is not clearly regulated by the current legislation.
Moreover, due to the adoption of Federal Law No. 55-FZ dated March 14, 2022, until December 31, 2022 shareholders holding alone or with other holders 5% or more of the voting shares have the right to appeal to the court with claims to challenge major and interested party transactions, as well as claims against a member of the Board of Directors or member of any executive body of the Company. Before the adoption of this Federal Law, shareholders holding alone or with other holders 1% or more of the voting shares had the right to file such lawsuits.
Accordingly, your ability to pursue legal redress against us may be limited, reducing the protections available to you as a holder of our shares.
In addition, Federal Law No. 55-FZ of 14.03.2022 temporarily (until December 31, 2023) raised the threshold from 1% to 5% of voting shares required for access to information provided for in paragraph 1 of Article 84, paragraphs 2 and ADSs.3 of Article 91 of the Federal Law "On Joint Stock Companies".
Also, the Decree of the Government of the Russian Federation No. 351 of March 12, 2022 (in the edition as of November 24, 2022) allows us not to disclose or disclose in a limited manner some information until July 1, 2023.
According to Russian legislation, shareholders/participants of Russian companies have an opportunity to demand either liquidation of a company in a judicial proceeding or exclusion of other shareholder/ participant (except for public joint stock companies) from the company.
According to the amendments to the Civil Code of the Russian Federation, which came into effect on September 1, 2014, shareholders and participants of Russian companies have, inter alia, the following rights, which can be executed via judicial proceedings:
● | to demand the liquidation of a company in case of failure to achieve a corporate purpose for which it was created, including a case when an operation of a company becomes impossible or is substantially hampered; and |
● | to demand exclusion of a shareholder or a participant (except for the public joint stock companies, including MTS) whose actions/inactivity either cause significant harm or hampers the company’s operations. |
In this regard, we cannot rule out the possibility of such claims being filed against us. Should such claims be brought, thisMTS or our subsidiaries which may have a negative impact on our business, financial condition and results of operations.
Shareholder liability under Russian legislation could cause us to become liable for both obligations of our subsidiaries and losses of the legal entities in which we have a practical possibility of determining actions.
The Civil Code of the Russian Federation, the Joint Stock Companies Law and the Federal Law “On Limited Liability Companies” generally provide that shareholders in a Russian joint stock company or members of a limited liability company are not
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liable for the obligations of the company and bear only the risk of loss of their investment. This may not be the case, however, when one entity is capable of determining decisions made by another entity. The entity capable of determining such decisions is deemed an “effective parent.” The entity whose decisions are capable of being so determined is deemed an “effective subsidiary.” The effective parent bears joint and several liability for transactions concluded by the effective subsidiary in carrying out its decisions or decisions made with its consent. However, joint and several responsibility of the effective parent is excluded in case of voting of the effective parent on the approval of the transaction at a general shareholders’ meeting of the effective subsidiary, as well as the approval of the transaction by the body of the effective parent, if the need for such approval is envisaged in the charter of the effective subsidiary and/or the effective parent. In addition, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt resulting from the action or failure to act of an effective parent. This is the case no matter how the effective parent’s ability to determine decisions of the effective subsidiary arises.
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Accordingly, we could be liable in some cases for debts of our subsidiaries and losses of the legal entities to the extent that we had any power of determining such subsidiaries’ actions that caused such losses. This liability could have a material adverse effect on our business, results of operations and financial condition.
Shareholder rights provisions under Russian law could impose additional obligations and costs on us, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Russian law provides that shareholders that vote against or did not participate in voting on certain matters have the right to sell their shares to the company at market value in accordance with Russian law. The decisions that trigger this right to sell shares include:
● | decisions with respect to a reorganization; |
● | the approval by shareholders of a “major transaction,” which involves property in excess of 50% of the balance sheet value of the company’s assets calculated according to Russian accounting standards, regardless of whether the transaction is actually consummated (including those which are simultaneously interested-party transactions), except for transactions undertaken in the ordinary course of business; |
● | the amendment of our charter in a manner that limits shareholder rights; |
● | the amendment of our charter in a manner that excludes reference to the entity’s public status, approved simultaneously with a decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities; and |
● | a decision on applying for delisting of shares and convertible securities from a stock exchange. |
For example, during 2015-2021 we repurchased MTS ordinary shares, for more details seeSee also “Item 16E—Purchases of Equity Securities by the Issuer and Affiliated Purchasers.” Our obligation to purchase shares in these circumstances, which is limited to 10% of the company’s net assets calculated in accordance with Russian accounting standards at the time the matter at issue is voted upon, could have a material adverse effect on our business, financial condition, results of operations and prospects. Under Russian law, if we are unable to sell the repurchased shares at a price equal to or exceeding the market price within one year of the date of repurchase, we will have to make a decision within a reasonable time period to reduce our charter capital accordingly.
The Strategic Foreign Investment Law imposes certain restrictions on us and our existing and potential foreign shareholders, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
On May 7, 2008, the Federal Law “On the Procedure for Foreign Investment in Commercial Organizations of Strategic Importance for the Defense and Security of the State,” or the Strategic Foreign Investment Law, came into force in Russia. This law sets forth certain restrictions relating to foreign investments in Russian companies of “strategic importance.” Among others, companies with a dominant position in the Russian telecommunications market are considered to be strategically important and foreign investments in such companies are subject to regulations and restrictions to these companies set out by the Strategic Foreign Investment Law. For purposes of the Strategic Foreign Investment Law, a mobile telecommunications provider is deemed to be dominant if its market share in the Russian market exceeds 25%, as may be determined by the FAS. In addition, a company may be considered to be strategically important due to our offering of services involving the use of cryptographic technologies.
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Starting from the effective date ofUnder the Strategic Foreign Investment Law, a foreign investor (including Russian citizens having foreign citizenship according to the amendments which came in force on July 1, 2017)citizenship) seeking to obtain direct or indirect control over a strategically important company is required to have the respective transaction pre-approved by a special governmental commission on control of foreign investments. On December 6, 2014, the amendments to the Strategic Foreign Investment Law came into effect.FAS. The law further stipulates that foreign investors are obliged to obtain prior approval of transactions envisaging the acquisition of right of ownership, possession or use of property classified as the fixed production assets of a strategic company and the value of which represents 25% or more of the balance sheet value of the assets of such company as of the last reporting date, according to accounts. In addition, foreign investors are required to notify this authorized governmental body about any transactions undertaken by them resulting in the acquisition of 5% or more of the charter capital of strategically important companies. Within 18045 days from the effective date of the Strategic Foreign Investment Law, foreign investors having 5% or more of the charter capital of strategically important companies were required to notify the authorized governmental body about their current shareholding in such companies.
Commencing December 6, 2014, a17
A foreign investor is also obliged to notify the authorized governmental body about the fact of conducting the pre-approved transactions. With effect from July 1, 2017, according to the amendments, offshoreOffshore companies (and companies under their control) are also prohibited from obtaining control over a strategically important company and are obliged to have any acquisition of 25% or more of right of ownership of voting shares pre-approved. According to the amendments that came into force on July 1, 2017, certainCertain sanctions may be imposed in respect of such transactions conducted without notification, for example, a deprivation of the foreign investor of any voting rights at a shareholders’ meeting of strategically important companies through judicial proceedings brought by an authorized governmental body.
As we are classified as a strategically important company, our current and future foreign investors are subject to the notification requirements described above and our current and potential investors may be limited in their ability to acquire a controlling stake in, or otherwise gain control over, us. Such increase in governmental control or limitation on foreign investment could impair the value of your investment and could hinder our access to additional capital.
Regulatory changes in Russia as well as regulatory changes at the international level may have a material adverse effect on our financial condition and results of operations.
Following an amendmentNew laws or regulations or changes to the Federal Law on Communications,existing regulatory framework at the federal, local, or international level, such as those described below, could, among other things, change the ways in which became effective July 1, 2006, fixed-line operators began charging their subscribers for calls to mobile phone userswe operate our businesses and started to transfer a percentage of the charge to mobile operators terminating such calls. The percentage transferred to mobile operators is established by the regulatorprovide our services, require additional costs, and is known as the “settlement rate.”impair revenue opportunities.
The Ministry of Digital Development, Communications and Mass Media is considering altering the approach to inter-carrier settlements in Russia and the subsequent lowering of the settlement rate. Any reduction of the settlement rate, by the regulatorwhich could have a negative impact on our average monthly service revenues per subscriber and margins. Over the past few years the government authoritieshas developed a number of new initiatives, which have not yet beenhowever, it remains unclear whether all such initiatives will be implemented or werewhether those implemented recently and a lackinitiatives will be enforced. For example, the enforcement of law enforcement practice may cause difficulties in interpreting these developments and lead to additional burden for telecommunications operators. In December 2018,certain provisions of the Ministry of Communications developed new initiatives relating to the reframing of interaction between operators. It is unclear yet how this proposal may be implemented, however it may potentially lead to a reduction in traffic transmission revenues and margin. The final decision on the implementation of this proposal has not been made yet. The agreement on the conditions of inter-carrier mutual settlements while delivering international communication services in CIS-countries, was signed on the CIS Heads of Government Council meeting held in Dushanbe on October 30, 2015, (the “Agreement”). The enforcement of certain provisions of the Agreement may adversely affect our operation in terms of the execution of inter-carrier mutual settlements among CIS-operators. In order to be implemented, the corresponding provisions should be introduced to the Russian legislation. To date, the provisions haveCIS-operators, however, such agreement has not yet been implemented yet.into law.
According to Government Regulation No. 1240 dated November 24, 2014, starting from January 1, 2015, federal public bodies were vested with a right to make decisions on using data transmission network of government bodies, which is a part of infrastructure ensuring information and technological interaction with the information systems used for rendering state and municipal electronic services for the purposes of exercising public functions. To date, the single operator of infrastructure of electronic state services is Rostelecom. Adoption of the Regulation may adversely affect our revenues with regard to the B2G market segment due to competitive disadvantage.
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With the entry into force of the Treaty onThe supra-national antimonopoly body established by the Eurasian Economic Union (the “EEU”) on January 1, 2015, a supra-national antimonopoly body empowered to control compliance withis currently responsible for general competition and anti-trust rules, on cross-border marketsincluding powers to administer fines and to apply antitrust measures was established. Shouldother remedies. If violations with respect to companies operating on cross-border markets be identified, this might lead both, to imposition of fines in accordance with the legislation of the EEU and adoption of the decisions for compulsory execution.
The amendments introducedPursuant to Article 5 of the Federal Law No. 115 “On Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism” dated August 7, 2001, entered into force on March 1, 2015. The list of organizations carrying out cash/other property operations, to whom the law requirements are applied, was expanded according to those amendments. In addition to telecommunications operators entitled to independently render mobile radio telecommunications services, the telecommunications operators occupying “substantial position” in public switched telephone networks entitled to independently provide data transmission services and render services on the basis of contracts with individual subscribers, have been also included in the list. A telecommunications operator which meets the specified criteria is obliged to provide the Federal Financial Monitoring Service with the information on cash/other property operations (that is subject to compulsory control or that seems suspicious while implementing the rules of internal control), as well as to take measures for freezing of cash assets / other property (in case there is an information on its involvement in extremist activities or terrorism). Lack of law enforcement practice may cause difficulties in interpreting the above- mentioned amendments and lead to additional burden for telecommunications operators.
On July 8, 2017, the Federal Law No. 110 “On Amendments to Article 66 of the Federal Law “On Communications” and Article 35 of the Federal Law “On Mass Media” dated June 7, 2017 came into force, which requires operators to transmit warning signals to telecommunications services users or inform them about dangers arisen by threat of occurrence of emergencies or occurrence of emergencies. Expenditure related to the transmission of warning signals is not compensated to operators.
On April 4, 2016, the Ministry of Communications of the Russian Federation adopted the order No. 135 “On the Approval of Requirements for Communication Networks Operation With Respect to the Use of Services Provided by Third Parties.” The order came into force on July 26, 2017.
According to the requirements, a telecommunications operator is obliged (on a quarterly basis) to provide authorities with data on foreign companies and foreign citizens that are engaged to provide works or services related to exploitation and management of its communication network. In addition, a telecommunications operator is obliged to store information concerning all actions on communication facilities executed by servicing staff or third parties engaged in exploitation and management of communication networks both from workplaces and with the use of a remote access.
The Federal Law No. 374 “On the Introduction of Amendments to Certain Legislative Acts of the Russian Federation with Respect to Setting up of Additional Counter-terrorism Measures and Public Security Enforcement” was adopted ondated July 6, 2016. Pursuant to that law,2016, operators are obliged to store certain information, on the facts of receiving, transferring, delivery and/or processing ofsuch as voice information and text messages as well as images, sounds, video- and other messages of telecommunications services users (for a three-year period) and the contents of such communications including voice data, text messages, pictures, sounds, video or other communications (for up to six months). The requirement relating to the storage of messages contents entered into force on July 1, 2018. The Government regulation “On Rules, Terms and Volume of Voice Information, Text Messages, Images, Sounds, Video- and Other Messages of Telecommunications Services Users to be Stored” was adopted on April 12, 2018 (the “Rules on Storage”). According to this regulation, commencing July 1, 2018,requires communication operators that render communication services such as intercity and international communication services (as well as personal radio call services, mobile radio services in a public communication network, mobile radiotelephone and satellite communication services, data transmission services for the purposes of transferring voice information, zonal and local telephone communication services) are required to store voice information and text messages, for a period of six months from the moment of the end of their receipt, transfer, delivery and/or processing. Starting from October 1, 2018, operatorsOperators that render telematics services, as well as data transmission services (except for data transmission services for the purposes of transferring voice information) are also obliged to store telecommunication messages by using data storage technical equipment in the volume of electronic communication messages sent and received by the operator’s subscribers (the actual traffic) duringfor 30 days before the commissioning date of the technical equipment.days. Moreover, the capacity of the data traffic storage system is required to be increased by 15% annually duringfor 5 years from the date the data storage technical equipment was put into operation. Significant additional costs have been and will be required in order to comply with these requirements.
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With effect from October 1,In 2019, the Federal Law No. 191 “On Introduction of Changes to Certain Legislative Acts of the Russian Federation” dated July 18, 2019 came into force and assumes important changes to the proceduralnew legislation regarding class actions in Russia. According toRussia was introduced (191-FZ dated July 18, 2019) giving consumers the law, consumers have a right to file class action lawsuits with the courts of general jurisdiction. Moreover, the law provides changes relating to class actions in arbitration proceeding, specifically, a “group” is defined as those having common or homogeneous rights. The law is aimed at harmonization of civil and arbitration proceedings as well as boosting the effectiveness of the Arbitration Procedure Code (“APC”) clauses, therefore the changes are generally consistent with the Civil Procedure Code (“CPC”) developments. These changes allowallows mass consumer claims in casewhere the amount of each individual claim is small, but the total amount of all claims is significant that could additionally motivate to initiate lawsuits, inter alia, by using litigation funding (investment) tools. The lawand expanded the list of persons who can advocate the interests of a group of persons. Claims might be filed by, inter alia, Rospotrebnadzor, FAS, Bankpersons.. These measures could increase the number and change the nature of Russia, stakeholders and other persons as well as by a group of consumers, whose interests are suffered as a result of violation of competition legislation. Any class actions filed against us, which could have a material adverse effect on our business, financial condition and results of operations.
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In November 2019, the Federal Law No. 90 “On certain amendments to the Federal Law “On communications” and the Federal Law “On information, information technologies and information protection” dated May 1, 2019 (the “Sovereign Internet Law”) aimed at ensuring stable, secure and integral functioning of the Internet in the territory of the Russian Federation, came into force. Under the Sovereign Internet Law, operators, installed equipment on their networks, which could adversely affect the networks’ stability and the quality of provided communication services. The Sovereign Internet Law is broadly drafted, and although the Russian authorities have already adopted necessary implementing acts, practicalPractical issues may require further subordinate legislation to be adopted further clarifying the provisions of the law. Furthermore, additional costs for maintenance and operation of this equipment may bewere required from the operators.
On January 14, 2019,July 17, 2022 criminal liability and fines for non-compliance with rules of work with technical means of countering threats to stability, security and functional integrity of the GovernmentInternet in the territory of the Russian Federation published a listand the public communications network were increased and, from January 1, 2023, further administrative and criminal liability was introduced for non-compliance with requirements for traffic transmission via technical means of instructions aimed at encouragingcountering threats to stability, security and functional integrity of the procurement of telecommunication equipment of Russian origin. According to the document, ministries should prepare proposals by May 1, 2019, relating to an increaseInternet in the import customs duty rate to a level of up to 20% with respect to telecommunication equipment. Currently, there can be no certainty as to the formterritory of the implementation of these initiatives; therefore, it is difficult to assess how such changes will affectRussian Federation and the company’s operations. Should the import customs duty rate increase in respect of the equipment we purchase, this may have a material adverse effect on our financial condition and results of operations.
Thepublic communications network (Federal Law No. 259 dated 14.07.2022, Federal Law No. 533260 dated December 30, 2020, which came into effect from June 1, 2021, introduced amendments14.07.2022).
Amendments to the Law “On Communications” clarifying, effective from June 2021 (533-FZ dated December 30, 2020), clarify the contracting process with subscribers, including provisions, among others, on concluding contracts, rendering services for corporate clients and the following changes:
Roskomnadzor |
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In July 2021 the Russian President signed the Federal Law No. 319 accordingand the Order No. 1313 of the Russian Government dated 22.07.2022 determine information, which operators are obliged to whichtransfer to Roskomnadzor, including information about subscribers (users), volume and period of providing telecommunication services etc.
Pursuant to Russian law (319-FZ dated July 2, 2021), free access must be organized starting from December 1, 2021,granted to the websites of domestic socially significant Internet resources including the websites of state bodies, non- budgetary funds, state and municipal service portals and other websites that will beas determined by the Government Commission. In furtherance of the abovementioned Federal Law, the Government adopted Decrees No. 2531addition, rules (Decrees No.2531 dated December 29, 2021 and No. 2469No.2469 dated December 25, 2021, containing the Rules2021) have been adopted for maintaining a list of domestic socially significant informationsuch resources and establishing thea relevant Government Commission, including its tasks, rights and decision-making procedures.Commission. The conditions under which the operator provides free access are regulated by the rules for the rendering of telecommunication services. In January 2022 the Government Commission determined the list of domestic socially significant information resources and includedincludes the “Vkontakte” social networking system and the “Gosuslugi” Integrated Identification and Authentication System in the list. WeSystem. As we provide free access to these resources on our mobile network. Thisnetwork, this could potentially have a material adverse effect on our business, financial condition and results of operations.
The Federal Law No. 319Russian law (319-FZ dated July 02,2, 2021 introduced amendments to the Law “On Communications” expanding the listand 465-FZ dated December 30, 2021) also imposes a variety of related requirements for operators, including:
● |
● |
The Federal Law No. 465 dated December 30, 2021 introduced amendments to the Law “On Communications”, according to which:
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● | the extension of special features of providing communication services, connection services and traffic transmission services (for example, pricing) |
● |
The Federal Law No. 48019
On January 01, 2023 a law (480-FZ dated December 30, 2021 establishes2021) came into force establishing administrative sanctions for non-compliance with obligations related to the transfer of a subscriber number and (or)or a unique identification code and termination of rendering communication services and (or)or services for traffic transmission (it entered into force on December 30, 2021) as well astransmission. It also established connection by operators to the system for ensuring their compliance with requirements for the provision of communication services and services for traffic transmission in the public communication network (it will comenetwork.
The Federal Law No. 625 dated December 29, 2022 introduces additional liability in the telecommunication sector, including certain prescribed matters for the formation and performance of contracts and verification procedures.
On September 1, 2022 amendments came into force that require advertising distributors to provide or ensure the provision of information about advertisements distributed on January 1, 2023).the Internet, including information about advertisers and advertising distributors, advertising system operator, to Roskomnadzor through the advertising data operator. This legislation lacks sufficient regulation, interpretations from the regulator and law enforcement practice, which may cause difficulties in interpreting these developments.
At the end of 2022 a law was approved banning, among other things, LGBTQ+ propaganda. MTS is monitoring the changes and law enforcement practice, however, it is currently unclear how the law could affect our business.
Currently, the Russian Civil Code is undergoing the process ofundergone substantial revisions, with new provisions being introduced relating to a number of sectors. Particularly,such as Federal Law No. 430No.430 dated December 21, 2021 (excluding certain provisions) will come inwhich came into force on March 1, 2023 and, among other things, supplementsupplements the Civil Code of the Russian Federation with chapters on real estate and rights to buildings, structures, objects under construction, premises. The regulation also defines the types and concepts ofregulates certain immovable things, land, buildings, structures, and premises, as well as the general principles for the formation of immovable things.
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premises. At present, the potential interpretation of these amendments by state authorities (including the courts), along withand their impact on our activities areis unknown.
A roadmap for 2018-2020, for the development of competition in economic sectors of the Russian Federation and the transition of particular sectors from the state of natural monopolies to the competitive market was approved by the Order of the Government of the Russian Federation No. 1697-r dated August 16, 2018. The roadmap provides for the adoption of a number of regulatory legal acts, inter alia, in the telecommunication sphere. Currently, it is difficult to assess how such changes and their interpretation by state bodies, particularly by courts, may affect our operation.
Russian companies are obliged to pay various and significant taxes including income tax, VAT, real estate tax, excise tax, payroll tax and others. Along with tax liabilities there are different obligatoryother non-tax payments. These includepayments, including payments into Universal Service Fund which currently amounts to 1.2% of our annual revenue on telecommunications services. Furthermore, potential future regulatory changes that may be enacted in the future,, such as the introduction of new rules regulating MVNOs, and new rules concerning our pricing policy and others, could weaken our competitive position in the mobile telecommunications market. Changes in tax laws and non-tax regulations may lead to the growth of our tax burden and increase of our costs and may, as a result, materially adversely affect our financial condition and results of operations.
The failure of our subsidiaries that are subject to regulations as natural monopolies to comply with the requirements of the Federal Law No. 223 “On Procurement Process,” inter alia, in case of collective tendering, can lead to application of certain liability measures with respect to ourcould result in liabilities for subsidiaries.
One of our subsidiaries, MGTS, is categorized as a natural monopoly in the Moscow telecommunications market. According to the Federal Law No. 223 “On Procurement Process,” natural monopolies are obliged to conduct the procurement process in accordance with the principles of transparency and non-discrimination and unjustified limitation of competition. If our subsidiaries that are under additional regulations as natural monopolies are found failing to comply with the law on procurement process, inter alia in case of collective tendering with us, our subsidiaries cancould be subject to certain liability measures, according to Russian legislation. See also “—Risks Relating to Our Business—If we are found to have a dominant position in the markets where we operate and are determined to have abused this position and/or concluded anti-competitive agreements, or found to have committed concerted actions, the FAS may be entitled to impose fines as well as regulate our subscriber tariffs and impose certain restrictions on our operations.”
Russian and foreign legislation on personal data and information security in information systems and communication networks may turn out to be hard to implement and require significant resources. Inability to comply with the requirements may lead to sanctions.
Communication operator activity in the sphere of information security in the Russian Federation is representedgoverned by the following legal acts: Federalvarious federal laws “On Communication,” “On Information, Information Technologies and Information Protection,” “On Personal Data,” “On Trade Secret,” “On Electronic Signature,” by-laws of the Government, FSTEC, FSS, Ministry of Communication and. The Federal Service for Supervision of Communications, Information Technology and Mass Media of the Russian Federation, among others. Mainmain risks posed by organization of processing and providing security of personal data include the following factors:following:
● | ambiguity |
● | responsibility of personal data operators for the actions of the third parties processing personal data |
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● | in case of failure to comply with requirements for confirmation of licenses for the technical and cryptographic protection activity of confidential information by FSTEC of Russia or FSS of Russia, the company would not be able to provide the corresponding commercial services to the third |
In addition, recent legislation (152-FZ) introduces new requirements for the content of requests to process personal data, including the need to describe the purposes of personal data processing, the list of personal data, actions (operations) performed with personal data and terms of their processing, including obligations to informed personal data operators and Roskomnadzor about data transfers and violations, among other measures.
These changes could materially affect our business, financial condition, results of operations, including through additional compliance measures, associated costs and potential sanctions for non-compliance.
On December 29, 2022 the Federal Law No. 572 came into force (excluding certain provisions) and governs identification or authentication of individuals with use of biometric personal data via the Unified Biometric System (“UBS”) or with use of the UBS vectors. The law prohibits processing of biometric personal data for identification or authentication in information systems of organizations excluding certain cases addressed the law. Adoption of this law and other regulations provided for by it could require additional expenses on means of information protection to provide secure integration with the Unified biometric system.
With effect from May 25, 2018, the General Data Protection Regulation came into force in the European Union which imposes various new data protection and privacy measures and remedies with which we must comply.
In case of non-compliance with the Russian legislation on information security and personal data protection the company cannot rule out the possibility of imposing sanctionslegislation, we may be subject to penalties by the regulatory bodies in the form of fines,(including penalties based on our turnover), confiscation of uncertified means of information protection, suspension of business processes for 90 days as well as suspension or withdrawal of the license allowing to providefor the provision of communication services, technical and cryptographic protection of confidential information.
In addition, it is possible that subscribers will file legal claims, seeking to reimbursereimbursement for tangible and moral damage in connection with the violation of the legislation requirements.
With effect from May 25, 2018, the General Data Protection Regulation came into force in the European Union. Our basic business processes and our subsidiaries were audited in order to determine applicability and compliance with the GDPR requirements. In addition, a control mechanism for determination of compliance with the specified requirements was proposed to be established for new business processes (if they are initiated). In case of launching services and products, to which the GDPR will apply, we must ensure these services and products comply with the GDPR requirements.
Federal Law No. 519-FZ dated December 30, 2020, which came into force from March 1, 2021, established specific regulation for processing of personal data, permitted by the personal data subject for distribution. The Law established certain consent requirements for such personal data processing. For example, the consent should be obtained separately from other consents. An operator must provide the opportunity for the subject to determine the list of personal data for each personal data category specified in such consent. Lack of response or inaction of the personal data subject cannot be considered as consent to the processing of personal data, authorized by him for disclosing. The personal data subject has a right to request any personal data operator to remove his personal data from public access without additional proving the fact of illegal processing of his personal data.
If the resources required to maintain, develop and implement data protection and information security systems meeting the legislation requirementapplicable legislative requirements are greater than expected, or we fail to comply with the data protection laws despite our best efforts to do so, our business, financial condition and results of operations could be materially adversely affected.
The Ministry of Digital Development, Communications and Mass Media of the Russian Federation prepared draft amendments to the Federal Law No. 149-FZ “On Information, Information Technology and Data Protection” dated July 27, 2006 aimed at unifying the approach to big data processing. Currently there is no clarity as to the requirements to the big data processing and when the announced draft law and subordinate legislation may be adopted, hence we are not able to estimate their potential impact on the Group.
The Federal Law No. 441 was adopted on December 30, 2021. According to the Law, if we continue to collect and process biometric personal data to authenticate personal data subjects, we will have to be accredited by September 1, 2022 in accordance with the requirements of legislation on information, information technology and information protection. In addition, we must check the compliance of organizational and technical measures for the processing (including collection) and protection of personal biometric data and, in case of non-compliance with such requirements, take appropriate measures. At present, such changes in the legislation could lead to significant additional costs as well as significant risks including administrative sanctions in case of non-compliance with these requirements.
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The Russian taxation system is underdeveloped and any imposition of significant additional tax liabilities could have a material adverse effect on our business, financial condition or results of operations.
The discussion below provides general information regarding the Russian tax regime and is not intended to be inclusive of all issues. Investors should seek advice from their own tax advisors as to these tax matters before investing in our shares and ADSs. See also “Item 10—Additional Information—E. Taxation.”
In general, taxes payable by Russian companies are substantial and numerous. These taxes include, among others, corporate income tax, value added tax, property taxes, excise duties, payroll-related taxes and other taxes.
In addition, intercompany dividends are subject to a withholding tax of 0% or 13% (depending on whether the recipient of dividends qualifies for Russian participation exemption rules), if being distributed to Russian companies, and 15% (or lower, subject to benefits provided by relevant double tax treaties), if being distributed to foreign companies.
Lately the Russian government has taken measures aimed at revising the existing structure and practice of applying agreements on avoidance of double taxation in order to limit the taxpayer’s ability to apply reduced rate (exemptions) when paying dividends and interest in certain jurisdictions. The terms of the agreements have already been revised with a number of jurisdictions in order to increase tax rate on dividends and interest, and are being revised with other ones. Limitation of the taxpayer’s ability to apply reduced rate (exemptions) might lead to higher tax rates, and thus increase our costs.
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The Russian tax authorities may take a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may nonetheless be subject to challenges in the future. The foregoing factors raise the risk of the imposition of arbitrary or onerous taxes on us, which could adversely affect the value of our shares and ADSs.shares.
Current Russian tax legislation is, in general, based upon the formal manner in which transactions are documented, looking to form rather than substance. However, the Russian tax authorities are increasingly taking a “substance and form” approach, which may cause additional tax exposures to arise in the future. Moreover, the Russian Tax Code was amended with direct provisions which prohibit tax benefits, if achieved without real business activities, or the main aim of the transaction was tax benefits. Additional tax exposures could have a material adverse effect on our business, financial condition, results of operations and prospects.
It is expected that Russian tax legislation will become more sophisticated, which may result in the introduction of additional revenue raising measures. Although it is unclear how any new measures would operate, any such introduction may affect our overall tax efficiency and may result in significant additional taxes becoming payable. Additional tax exposures could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition to the usual tax burden imposed on Russian taxpayers, these conditions complicate tax planning and related business decisions. For example, tax laws are unclear with respect to deductibility of certain expenses. This uncertainty could possibly expose us to significant fines and penalties and to enforcement measures, despite our best efforts at compliance, and could result in a greater than expected tax burden.
See also “Item 8—Financial8.Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Tax Audits and Claims.”
Lack of law enforcement practice of the Russian anti-offshore policy may have an adverse impact on our business, financial condition and results of operations.
In the past few years, the Russian Federation like a number of other countries in the world has been actively involved in a discussion of measures against tax evasion by the use of low tax jurisdictions as well as aggressive tax planning structures.
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The rules of controlled foreign companies (CFC) came into force on January 1, 2015. The rules oblige Russian taxpayers being controlling persons of a foreign company to submit to the tax authorities both standard notifications on participation in CFC and tax declarations in certain cases. Profit generated commencing in 2015, including retained earnings, is subject to taxation in the Russian Federation. The innovations could impose additional tax on the undistributed profits of any foreign entity controlled by us (in proportion to such controlling stake) at the rate of 20%. These innovations caused amendments to the Tax Code providing for liability in case of non-disclosure or incomplete disclosure of information on CFCs and the non-payment or underpayment of relevant tax.
In addition, implementation of new concept of beneficial ownership, with regard to taxation of payment of passive income (dividends, royalty, interest, capital gain), may negatively affect possibility to apply benefits set by the double tax treaties, in case such payments pass through intermediary entities.
This may potentially lead to increase of tax burden with regard to such payments.
On November 4, 2014, the President of the Russian Federation signed the Federal law No. 325 “On Ratification of the Convention on Mutual Administrative Assistance in Tax Matters.” Ratification of this Convention will enable the Russian Federation to receive tax information from all participating countries, which include a number of offshore jurisdictions.
Lack of law enforcement practice may cause difficulties in interpreting the above-mentioned laws by the Russian tax authorities.
It is also currently unclear how the enacted laws could affect our counterparties, which may be registered in off shoreoffshore jurisdictions.
In case the impact of legislative initiatives is significant for some of our counterparties it may also impact our results of operations.
Vaguely drafted Russian transfer pricing rules, and lack of reliable pricing information may impact our business and results of operations.
Russian transfer pricing legislation became effective in the Russian Federation on January 1, 1999.
This legislation allowed the tax authorities to make transfer pricing adjustments and impose additional tax liabilities with respect to all “controlled” transactions, provided that the transaction price differed from the market price by more than 20%. “Controlled” transactions included transactions with related parties, barter transactions, foreign trade transactions and transactions with significant price fluctuations (i.e., if the price with respect to such transactions differs from the prices on similar transactions conducted within a short period of time by more than 20%). Special transfer pricing provisions were established for operations with securities and derivatives. Russian transfer pricing rules were vaguely drafted, generally leaving wide scope for interpretation by Russian tax authorities and courts. There has been very little guidance (although some court practice is available) as to how these rules should be applied. These transfer pricing rules apply with respect to transactions that occurred before January 1, 2012.
NewUpdated transfer pricing rules became effective on January 1, 2012. The implementation of these newchanged rules should helphave helped to align domestic rules with OECD principles. The newThese rules are expected to considerably toughentoughened the previously effective law by, among other things, effectively shifting the burden of proving market prices from the tax authorities to the taxpayer and obliging the taxpayer to keep specific documentation.
If the Russian tax authorities were to impose significant additional tax liabilities through the introduction22
Changed transfer pricing rules may increase the risk of transfer pricing adjustments being made by the tax authorities. In addition to the usual tax risks and tax burden imposed on Russian taxpayers, the uncertainties of the new transfer pricing rules complicate tax planning and related business decisions. It will also requirerequires us to ensure compliance with the newspecific transfer pricing documentation requirements proposedimposed in such rules. Uncertainty of the new rules may also require us to expend significant additional time and material resources for implementation of our internal compliance procedures. Tax authorities could impose additional tax liability as well as 40% penalties on the underpaid tax in case the prices or profitability are outside the market range and if the required transfer pricing documentation has not been prepared, which could have a material adverse effect on our results of operations and financial condition.
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The regulatory environment for telecommunications in Russia and other countries where we operate or may operate in the future is uncertain and subject to political influence or manipulation, which may result in negative and arbitrary regulatory and other decisions against us on the basis of other than legal considerations and in preferential treatment for our competitors.
We operate in an uncertain regulatory environment. The legal framework with respect to the provision of telecommunications services in Russia and the other countries where we operate or may operate in the future is not well developed, and a number of conflicting laws, decrees and regulations apply to the telecommunications sector.
Moreover, regulation is conducted largely through the issuance of licenses and instructions, and governmental officials have a high degree of discretion. In this environment, political influence or manipulation could be used to affect regulatory, tax and other decisions against us on the basis of other than legal considerations. In addition, some of our competitors may receive preferential treatment from the government, potentially giving them an advantage over us.
We are subject to currency control regulations.
The Currency Control Law provides a framework and establishes general rules within which the government of Russia and the Bank of Russia are authorized to introduce certain measures of currency regulation, in connection with which there may be some uncertainty in the process of our implementation of foreign exchange operations when importing equipment.
The change in the currency regulation may negatively affect our performance of obligations under contracts previously concluded with Russian and foreign counterparties, requiring us to make payments on them in foreign currency and necessitating the conclusion of additional agreements in relation to the relevant contracts. As a result, we are exposed to the risks of changes in the currency regulation and foreign exchange control in Russia. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesGeopolitical situation and sanctions imposed as a result thereof,of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.shares.”
The regulation of critical information infrastructure in the Russian Federation may lead to additional costs which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Federal Law No. 187 “On the Security of the Critical Information Infrastructure of the Russian Federation” which came into force on January 1, 2018 (the “Law“Law on CII”CII”) provides for the creation of a register of significant critical information infrastructure (CII) objects, to which the communication networks elements may be assigned (after the classification of CII objects). Both state-owned and non-state-owned organizations are classified as subjects of the CII.
The law envisages criminal penalties if the security requirements in respect of such significant CII objects are not met and damage is incurred. CII subjects, including communication operators, are required to, among other things:
● | categorize CII objects; |
● | sent the results of CII objects categorization with the authorized bodies; |
● | create a security system for significant CII objects and implement measures targeted at significant CII protection and protection of information, belonging to the corresponding category; |
● | set up and provide the operations of means for attacks search on the communication network with the transfer of management to the authorized body; and |
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● | organize transfer of information about computer incidents on the CII to the authorized body. |
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The by-laws envisage measures aimed at CII objects protection, which are difficult to implement, especially as regards the implementation of information protection measures that are not provided by such communication standards as 3GPP, ETSI, etc., which may lead to incompliance with the regulatory requirements. The implementation of these requirements will require additional costs to be incurred. Requirements of Federal Service for Technology and Export Control of the Russian Federation and the Ministry of Communications (orders No. 239 and No. 582) restrict remote access to CII objects, which may affect possibility to provide warranty and technical support of communication infrastructure by foreign vendor agents.
Pursuant to paragraph 1 d)-2The Decree of the Order No. Pr-1180President of the Russian President dated July 2, 2019 the Ministry of Communications developed draft ordersFederation No. 166 «On economic measures to ensure technological independence and security of critical information infrastructure objects» and «On approval of requirements applicable for software, telecommunications equipment and radio-electronic products used at critical information infrastructure objects, and the procedure for the transition to the preferential use of Russian software, telecommunications equipment and radio-electronic products», providing fordated March 30, 2022 provides an obligation of operators to use only Russian equipment and software at CII objects.
The Decree of the President of the Russian Federation No. 250 dated May 5, 2022 introduced personal liability of heads of the CII subjects in order to ensure the information security of organizations. Starting from 2025, CII subjects are prohibited to use information security means created in certain foreign states.
Compliance with the requirements of the laws and regulations or introduction of similar regulations may require additional costs to be incurred by us or otherwise negatively affect us and could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Relating to the Shares and ADSs and the Trading Market
Government regulationsADS holders who have not yet converted their ADSs into shares may limit the abilityface difficulties (including a loss of investorsvalue) in converting their ADSs into shares or may even be unable to deposit shares into our ADS facility.do so.
The Federal Law No.114 dated April 16, 2022 “On Amendments to the Federal Law “On Joint Stock Companies” and certain legislative acts of the Russian Federation” requires termination of foreign depositary programs, under which the depositary receipts of such companies (including the Company) are listed on foreign stock exchanges programs. As a result of these legislative acts, on June 9, 2022 the Company terminated the Deposit Agreement with J.P. Morgan Bank International, who was the Russian depositary which accounted for the ADSs under the Company’s ADS program held by JPMorgan Chase Bank, N.A. In light of the Company’s termination of the Deposit Agreement, on July 13, 2022 the Company’s ADSs ceased trading and were subsequently delisted from the NYSE on August 8, 2022.
Pursuant to the unwinding of the ADS program, an automatic conversion process applied to Russian depositaries that accounted for ADSs where such ADSs were written off from the holders’ accounts and shares in the Company were credited instead. This process was commenced around August 16, 2022 and concluded about three weeks later. If the receipts are held on the holder's account with a foreign broker (custodian), with blocking sanctions imposed on the holder of the receipts, the broker (custodian) or the custodian in the chain of nominal holdings (in particular, NSD) the conversion was possible through a forced conversion mechanism. The deadline for submitting forced conversion applications expired on November 11, 2022. Under the terms of the Deposit Agreement, the period guaranteed for converting ADRs into ordinary shares ended on January 12, 2023 (inclusive), whereafter, as we understand, the depositary may continue to convert ADRs in ordinary shares and/or sell unconverted ordinary shares to distribute the proceeds of sale among ADRs holders. In all the types of conversion processes, ADSs were converted into shares at a ratio of 1 ADS to 2 shares. ADS holders who failed to convert their ADSs into shares by the deadline may now face difficulties (including a loss of value) in converting their ADSs into shares or may even be unable to do so. The ability to convert ADSs into shares and the allotment of investorsthe resulting shares to deposit shares into ourpersons who hold the ADS facility may be affected by current or future governmental regulations.depends on the structure through which the ADSs are held. For example, before November 28, 2021, under Russian securities regulations, no more than 25% of a Russian company’s shares could have been circulated abroad through sponsored depositary receipt programs. Prior to December 31, 2005, and at the time of our initial public offering, this threshold was 40%. Although we believe that the lower threshold, which was subsequently abolished, did not apply to our ADSs, in the future, we may be required to reduce the size of our ADS program or amend the depositary agreement for the ADSs.
Because our ADS program is regularly at or near capacity, purchasers of our sharesconversion may not be able to deposit these shares into our ADS facility, and ADS holders who withdraw the underlying shares from the facility may not be able to re-deposit their shares in the future. As a result, effective arbitrage between our ADSs and our shares may not always be possible. Our sharespossible where blocking sanctions are listed and tradedimposed on the Moscow Exchange. Due to the limited public free float of our common stock, the public market for our shares is significantly less active and liquid than for our ADSs. The cumulative effect of these factors is that our shares may from time to time, and for extended periods of time, trade at a significant discount to our ADSs.
Failure to comply with requirements on the disclosure of certain information on ADSs and ADS holders may restrict your ability to vote.
Pursuant to the Russian securities laws, depositaries, and as a result, ADS holders are not able to vote in connection with the shares underlying ADSs on behalf of the ADS holders unless they provide certain information to the issuer. At a minimum, this information includes the identity of the holder of the ADSs, registration details including a state registration number (for legal entities), and the numberbroker (custodian) or the custodian in the chain of shares attributable to each ADS holder.nominal holdings. In particular, the chain of holding includes the NSD.
Nevertheless, the legislation stipulates that the issuer, CBR, Russian courts and pretrial investigation agenciesIn addition, there may request such lists of depositary receipt holdersbe other adverse implications arising from the holder of depositary program depo account. The holder of depositary program depoconversion process. For example, when ADSs belonging to certain non-residents are converted into shares, the resulting shares are to be credited to a С-type depository account shall take all reasonable measures in order to provide such information. In case of non-compliance with the above requirements, the CBR may suspend, or impose limitationsfor which restrictions on transactions with securities heldwere imposed. ADS holders may also face challenges in seeking to claim unpaid dividends from July 13, 2022 and until the relevant accountsconversion of Russian custodians for a period of up to six months. As a result, the shares underlying the ADSs may be blocked and it may be impossible to deposit or withdraw the shares into or from the depositary program. In addition, uncertainties with respect to exercise of certain rights attaching to shares underlying ADS holders could complicate the exercise of right to, and the ability to derive benefits from, the shares represented by ADSs.shares.
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Under the terms of the ADS unwinding program, after January 13, 2023, J.P. Morgan Bank International as depositary commenced a process pursuant to which it is currently endeavoring to sell any shares represented by the ADSs that have not been cancelled as a result of the conversion. The resulting proceeds from such sales shall be held for the benefit of the ADS holders (in proportion to the rights of each such holder and without liability to accrue interest). However, there are risks and challenges associated with this sales process. In particular, there is no guarantee that J.P. Morgan Bank International will be able to sell such shares for their full value and what the timing of such sale shall be. Accordingly, ADS holders who have not yet converted may not realize the full value of their underlying shares, for example, if J.P. Morgan Bank International needs to sell such shares at a discount. See also “Item 10. Additional Information – B. Charter and Certain Requirements of Russian Legislation – Registration and Transfer of Shares”. In addition, the current legislative measures of the Russian Federation contain certain restrictions on the sale of shares by depositaries. Accordingly, it is difficult for the Company to anticipate the exact consequences for those holders who failed to convert their ADSs by the deadline.
Finally, the Company is of the view that the regulatory landscape is highly volatile and legislative measures affecting the holders of ADSs and shares are rapidly changing in response to the current geopolitical environment. In addition, the specific circumstances of an ADS holder may impact the particular challenges faced by that ADS holder. Accordingly, there may be other implications or challenges facing ADS holders in addition to those mentioned in this document.
The market price of our ADSsshares has been and may continue to be volatile.
The market price of our ADSsshares has experienced, and may continue to experience, significant volatility. Volatility remains relevant,continued to increase over the past year, including as trading in our ADSs on NYSE was suspended on 28 February 2022, following the suspension of all trading on the Moscow Exchange on the same day. MOEX stock trading was resumed on March 24, 2022. See also “—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesGeopolitical situation and sanctions imposed as a result thereof,of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs.”
For information on the closing price of our ADSs on the New York Stock Exchange, see “Item 9—Offer and Listing Details—A.4. Market Price Information.shares.”
Numerous factors, including many over which we have no control, may have a significant impact on the market price of our ADSs,shares, including, among other things:
● | geopolitical situation; |
● | periods of regional or global |
● | announcements of technological or competitive developments; |
● | governmental policies and regulatory developments in our target markets affecting us, our customers or our competitors; |
● | actual or anticipated fluctuations in our quarterly operating results; |
● | changes in financial estimates or other material comments by securities analysts relating to us, our competitors or our industry in general; |
● |
● | change of the key |
● | announcements by other companies in our industry relating to their operations, strategic initiatives, financial condition or financial performance or to our industry in general; |
● | announcements of acquisitions or consolidations involving industry competitors or industry suppliers; |
● | sales or perceived sales of additional ordinary shares |
● | impact and development of any investigation or lawsuit, currently pending or threatened, or that may be instituted in the future. |
For example, market price25
In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our ADSs,shares, regardless of our operating performance.
Voting rights with respect to the shares represented by our ADSs are limited by the terms of the deposit agreement for our ADSs and relevant requirements of Russian law.
ADS holders will have no direct voting rights with respect to the shares represented by the ADSs.
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They are able to exercise voting rights with respect to the shares represented by ADSs only in accordance with the provisions of the deposit agreement relating to the ADSs and relevant requirements of Russian law. Therefore, there are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with them. For example, the Joint Stock Companies Law and our charter require us to notify shareholders no less than 30 days prior to the date of any meeting and at least 50 days prior to the date of an extraordinary meeting to elect our Board of Directors. Our ordinary shareholders will receive notice directly from us and will be able to exercise their voting rights by either attending the meeting in person or voting by power of attorney.
ADS holders by comparison, will not receive notice directly from us. Rather, in accordance with the deposit agreement, we will provide the notice to the depositary. The depositary has undertaken, in turn, as soon as practicable thereafter, to mail to ADS holders the notice of such meeting, voting instruction forms and a statement as to the manner in which instructions may be given by ADS holders.
To exercise their voting rights, ADS holders must then instruct the depositary how to vote the shares represented by the ADSs they hold. Because of this additional procedural step involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of the shares and we cannot assure ADS holders that they will receive voting materials in time to enable them to return voting instructions to the depositary in a timely manner. ADSs for which the depositary does not receive timely voting instructions will not be voted.
Given the above, we cannot provide any assurance that holders and beneficial owners of ADSs will (i) receive notice of shareholder meetings to enable the timely return of voting instructions to the depositary, (ii) receive notice to enable the timely cancellation of ADSs in respect of shareholder actions or (iii) be given the benefit of dissenting or minority shareholders’ rights in respect of an event or action in which the holder or beneficial owner has voted against, abstained from voting or not given voting instructions.
See also “—Failure to comply with requirements on the disclosure of certain information on ADSs and ADS holders may restrict your ability to vote.”
ADS holdersShareholders may be unable to repatriate distributions made on the shares and ADSs.shares.
We anticipate that any dividends we may pay in the future on the shares represented by the ADSs will be declared and paid to the depositary in rublesrubles. See also “Item 10. Additional Information — B. Charter and will be converted into U.S. dollars by the depositary and distributed to holdersCertain Requirements of ADSs, net of the depositary’s fees and expenses. TheRussian Legislation — Dividends.” A shareholder’s ability to convert rubles into U.S. dollars or other currencies is subject to the availability of U.S. dollars or such other currency in Russia’s currency markets.
Although there is an existing, albeit limited, by size, market within Russia for the conversion of rubles into U.S. dollars and other currencies, including the interbank currency exchange and over-the-counter and currency futures markets, the further development of this market is uncertain. At present, there is a limited market for the conversion of rubles into foreign currencies outside of Russia and limited market in which to hedge ruble and ruble-denominated investments.
ADS holders may be subject to Russian regulatory restrictions.
Prior to the amendments to the Russian securities laws introduced in 2011, a depositary bank could be considered the owner of the shares underlying the ADS, and as such could be subject to the mandatory public tender offer rules, anti-monopoly clearance rules, governmental consents or reporting requirements in respect of acquisition of shares and other limitations contemplated by Russian law. The amendments to the Russian securities laws introduced in 2011 provide that a depositary bank is not an owner of underlying shares, and as such, these requirements should apply to ADS holders.
ADS holders may be unable to benefit from the United States - Russia income tax treaty.
Under Russian law, dividends paid to a non-resident holder of the shares generally will be subject to Russian withholding tax at a rate of 15%. The tax burden may be reduced to 5% or 10% under the United States—Russia income tax treaty for eligible U.S. holders; a 5% rate may potentially apply for U.S. holders who are legal entities owning 10% or more of the company’s voting shares, and a 10% rate applies to dividends paid to eligible U.S. holders in other cases, including dividend payments to individuals and legal entities owning less than 10% of the company’s voting shares. However, according to the recent amendments to the Russian Tax
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Code, U.S. holders will only be able to utilize the 5% reduced rate through tax reimbursement procedures, as the tax agent is required to use the baseline tax rate established by the code or the applicable tax treaty, whichever is appropriate. See also “Item 10—Additional Information—E. Taxation—Certain Russian Tax Consequences—United States—Russia Income Tax Treaty Procedures.”
The Russian tax rules in relation to ADS holders (that would affect U.S. holders) are characterized by significant uncertainties and limited interpretive guidance. Recent amendments to the tax rules have clarified the status of the ADS holders as beneficial owners of the income from the underlying shares by establishing that the custodian holding the depo account with the shares underlying the ADSs acting as the tax agent and determines amounts of the withholding tax based on the information about the ADS holders and their tax residency status as provided by the program depositary. However, the application of the baseline tax rate for ADS holders and any double tax treaty relief is available only if the tax treaty residence of the holder is provided to the custodian along with the other information prescribed by the Tax Code. In relation to ADS holders such information is to be provided by the ADS holders to the depositary, who relays it to the custodian, who acts as the tax agent and withholds the taxes when making transferring the dividends to the depositary. It is currently unclear how the depositary will collect the necessary information from ADS holders. Thus, while a U.S. holder may technically be entitled to benefit from the provisions of the United States—Russia income tax treaty, in practice such relief may be difficult or impossible to obtain. See also “Item 10—Additional Information—E. Taxation” for additional information.
If we were classified as a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes, U.S. holders of the ADSsour shares could be subject to adverse U.S. federal income tax consequences.
In general, we will be a PFIC for any taxable year in which either: (i) at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest, capital gains, rents, and royalties, other than rents or royalties derived in the active conduct of a trade or rental business); or (ii) at least 50% of the value of our assets (generally determined on the basis of a quarterly average) is attributable to assets that produce, or are held for the production of, passive income. Our PFIC status is an annual determination that can be made only after the end of each taxable year, and will depend on the composition of our income and assets and the value of our assets from time to time, including goodwill (which may be determined by reference to the market value of our shares, or ADSs, which may fluctuate), and the manner in which we operate our business. Recent volatility in the global capital markets could increase the risk that we might be classified as a PFIC in the current taxable year or in future taxable years. Accordingly, there can be no assurance that we will not be a PFIC for any taxable year.
If we were classified as a PFIC for any year in which a “U.S. Holder” (as defined under “Certain United States Federal Income Tax Consequences”) owns our ADSs,shares, the U.S. Holder could be subject to adverse U.S. federal income tax consequences. For any year during which a U.S. Holder held the ADSs,shares, we will continue to be treated as a PFIC with respect to that U.S. Holder for all succeeding years during which the U.S. Holder held the ADSs,shares, unless we cease to be a PFIC and the U.S. Holder has made certain “purging” elections with respect to the ADSs.shares. Each U.S. Holder of the ADSsshares should consult its tax advisor regarding the PFIC rules and should read the discussion below under “Certain United States Federal Income Tax Consequences—Consequences — Passive Foreign Investment Company Considerations.”
Capital gain from the sale of shares and ADSs may be subject to Russian income tax.
Income received by a foreign company from the sale, exchange or other disposal (assuming that such income is not related to a permanent establishment of a foreign company in Russia) of shares (participation interest) in an organization in which over 50% of the assets consist of immovable property located in Russia, as well as financial instruments derived from such shares, is treated as income derived from a source in the Russian Federation and is subject to withholding tax at a rate of 20%. However, gains arising from the disposition of the securities, which are traded on an organized stock exchange, are not treated as Russian-source income, and should not be subject to taxation in Russia.
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The amount of such income is typically determined as the sales price of shares (participation interest). However, if documentary support for the acquisition cost of the shares (participation interest) is available, the tax may instead be assessed on the basis of the difference between the sales price and the acquisition cost (including other related costs) if documentary evidence of such costs is submitted to the tax agent. The Russian Tax Code also establishes special rules for calculating the tax base for the purposes of transactions with securities. However, an exemption applies if immovable property located in Russia constitutes more than 50% of a company’s assets and the securities are traded on a foreign stock exchange. The determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an on-going basis and the relevant Russian legislation and regulations in this respect are not entirely clear. Hence, there can be no assurance that immovable property owned by
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us and located in Russia does not currently and will not constitute more than 50% of our assets as at the date of the sale of ADSsshares by non-residents.
Where the ADSsshares are sold by legal entities or organizations to persons other than a Russian company or a foreign company or an organization with a registered permanent establishment in Russia, even if the resulting capital gain is considered taxable in Russia, there is currently no mechanism under which the purchaser will be able to withhold the tax and remit it to the Russian budget.
Under the United States / Russia income tax treaty, capital gains from the sale of shares and/or ADSs by eligible U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (the term “fixed assets” is used in the Russian version of the treaty) were to consist of immovable property located in Russia.
The taxation of income of non-resident individuals depends on whether this income is received from Russian or non-Russian sources. Russian tax law does not give a definition of how the “source of income” should be determined with respect to the sale of securities, other than that income from the sale of securities, which takes place “in Russia” should be considered as Russian source income. As there is no further definition of what should be considered to be a sale “in Russia,” the Russian tax authorities have a certain amount of freedom to conclude what transactions take place in or outside Russia, including looking at the place of the transaction, the place of the issuer of the shares, the location of the registrar recording the transfer of legal title to the relevant securities or other similar criteria.
Non-residents who are individuals are taxable on Russian-source income. Provided that gains arising from the disposition of the foregoing types of securities and derivatives outside of Russia by U.S. holders who are individuals not resident in Russia for tax purposes will not be considered Russian source income, then such income should not be taxable in Russia. However, gains arising from the disposition of the same securities and derivatives “in Russia” by U.S. holders who are individuals not resident in Russia for tax purposes may be subject to tax either at the source in Russia or based on an annual tax return, which they may be required to submit with the Russian tax authorities. See also “Item 10—Additional10.Additional Information—E. Taxation.”
The lack of a central and rigorously regulated share registration system in Russia may result in improper record ownership of our shares and ADSs.shares.
Ownership of Russian joint-stock company shares (or, if the shares are held through a nominee or custodian, then the holding of such nominee or custodian) is determined by entries in a share register and is evidenced by extracts from that register. Currently, there is no single central registration system in Russia. Share registers can be maintained only by licensed registrars located throughout Russia. Regulations have been adopted regarding the licensing conditions for such registrars, as well as the procedures to be followed by licensed registrars when performing the functions of registrar. In practice, however, these regulations have not been strictly enforced, and registrars generally have relatively low levels of capitalization and inadequate insurance coverage. Moreover, registrars are not necessarily subject to effective governmental supervision. Due to the lack of a central and rigorously regulated share registration system in Russia, transactions in respect of a company’s shares could be improperly or inaccurately recorded, and share registration could be lost through fraud, negligence or oversight by registrars incapable of compensating shareholders for their misconduct. This creates risks of loss not normally associated with investments in other securities markets. Furthermore, the depositary, under the terms of the deposit agreements governing record keeping and custody of our ADSs, is not liable for the unavailability of shares or for the failure to make any distribution of cash or property with respect thereto due to the unavailability of the shares. See “Item 10. Additional Information—Information — Charter and Certain Requirements of Russian Legislation—Legislation — Registration and Transfer of Shares.” and “—ADS holders who have not yet converted their ADSs into shares may face difficulties (including a loss) in converting their ADSs into shares or may even be unable to do so.”
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Foreign judgments may not be enforceable against us.
Our presence outside the United States may limit your legal recourse against us. We are incorporated under the laws of the Russian Federation. Substantially all of our directors and executive officers named in this document reside outside the United States. All or a substantial portion of our assets and the assets of our officers and directors are located outside the United States. As a result, you may not be able to effect service of process within the United States on us or on our officers and directors. Similarly, you may not be able to obtain or enforce U.S. court judgments against us, our officers and directors, including actions based on the civil liability provisions of the U.S. securities laws.
In addition, it may be difficult for you to enforce, in original actions brought in courts in jurisdictions outside the United States, liabilities predicated upon U.S. securities laws.
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There is no treaty between the United States and the Russian Federation providing for reciprocal recognition and enforcement of foreign court judgments in civil and commercial matters. These limitations may deprive you of effective legal recourse for claims related to your investment in our shares and ADSs. The deposit agreement provides for actions brought by any party thereto against us to be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, provided that any action under the U.S. federal securities laws or the rules or regulations promulgated thereunder may, but need not, be submitted to arbitration.shares. The Russian Federation is a party to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, but it may be difficult to enforce arbitral awards in the Russian Federation due to a number of factors, including the inexperience of Russian courts in international commercial transactions, official and unofficial political resistance to enforcement of awards against Russian companies in favor of foreign investors and Russian courts’ inability to enforce such orders and corruption. Current geopolitical situation may increase the likelihood of these challenges when seeking to enforce foreign judgments.
Risks Relating to our Financial Condition
We may be adversely affected by the current economic environment.
Macroeconomic challenges, resulting from a number of reasons, including but not limited to, the geopolitical developments, the COVID-19 pandemic, credit market crisis (including uncertainties with respect to financial institutions and the global capital markets), volatility of prices for major export commodities (including oil and metals), microchip shortages and other factors, currently affecting many of the markets in which we operate, may negatively impact our clients’ disposable incomes and our vendors’ cash flows. See also “—Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of shares”.
Consequently, customers may modify or decrease their usage of our services and products or fail to pay the outstanding balances on their accounts, and vendors may significantly increase their prices, eliminate vendor financing, reduce their output, decrease quality or fail to supply equipment, subscriber devices and services on a timely basis.
We may also experience increases in accounts receivable and bad debt among corporate subscribers, some of whom may face liquidity problems and potential bankruptcy, as well as the potential bankruptcy of our corporate partners. The deterioration of economies in the countries of our operation may lead, inter alia, to insolvency of financial institutions, which in turn may affect our business and financial condition.
A decline in subscriber usage, an increase in bad debts, material changes in equipment pricing or financing terms or the potential bankruptcy of our corporate subscribers or partners may have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, a further deterioration in macroeconomic conditions could require us to reassess the value of goodwill on certain of our assets, recorded as a difference between the fair value of the assets of business acquired and its purchase price. This goodwill is subject to impairment tests on an ongoing basis. The weakening macroeconomic conditions in the countries in which we operate and/or a significant difference between the performance of an acquired company and the business case assumed at the time of acquisition could require us to write down the value of the goodwill or portion of such value. Future write-downs relating to the value of the goodwill or portion of such value could have a material adverse effect on our financial condition and results of operations. Likewise, the current geo-political situation might also have an impact on the value of our business goodwill. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
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Continued turmoil in the credit markets could cause our business, financial condition, results of operations and the value of our shares to suffer.
Sanctions introduced by the United States, European Union, Switzerland, United Kingdom and other countries with respect to the Russian Federation coupled with an economic downturn caused a significant capital outflow, ruble depreciation, a rise of credit rates in the domestic market and a lack of available financing.
In February 2022, the Bank of Russia raised the key rate from 8.5% to to 20%, and starting from April 2022 gradually reduced the rate down to 7.5% by September 2022. Growth of the key rate may negatively affect the cost of funding. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
A continuation or repetition of the downturn in the global or regional financial markets as well as a toughening or extension of international sanctions against Russia and the resulting volatility of the trading price of our shares may negatively impact our ability to obtain financing on commercially reasonable terms, either domestically or overseas, and could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our inability to generate sufficient free cash flow to satisfy our debt service obligations, or to refinance debt on commercially reasonable terms, could materially adversely affect our business, financial condition, results of operations and prospects.
We have an amount of outstanding indebtedness, primarily consisting of the obligations we entered into in connection with our notes and bank loans. Also see Note 28 to our audited consolidated financial statements. For information about our debt and finance cost, see “Item 5.Operating and Financial Review and Prospects—A. Operating Results.”
Our ability to service, repay and refinance our indebtedness and to fund planned capital expenditure will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, we may default under the terms of our financial indebtedness, and the holders of our indebtedness would be able to accelerate the maturity of such indebtedness, potentially causing cross-defaults under and acceleration of our other indebtedness. The existing debt servicing is becoming more difficult due to our dependence on floating interest rates in the financial markets.
We may not be able to generate sufficient cash flow or access domestic or international capital markets, or incur additional loans to enable us to service or repay our indebtedness or to fund our other liquidity needs. We may be required to refinance all or a portion of our indebtedness on or before maturity for a number of reasons. This, in turn, may force us to sell assets, reduce or delay capital expenditure or seek additional capital. Refinancing or additional financing may not be available on commercially reasonable terms or at all, and we may not be able to sell our assets or, if sold, the proceeds therefrom may not be sufficient to meet our debt service obligations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance debt on commercially reasonable terms, would materially adversely affect our business, financial condition, results of operations and prospects. See “Item 5.Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”
Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of shares.
Recent ruble volatility can be explained by external geopolitical factors, limited financial markets, change in oil prices, change in internal consumption and other factors.
As of December 31, 2020, ruble amounted to 73.88 per one U.S. dollar. As of December 31, 2021 and December 31, 2022, the ruble exchange rate was RUB 74.29 per 1 U.S. dollar and RUB 70.34 per 1 U.S. dollar, respectively. During 2022, the ruble hit a low of 120.38 per US dollar. See also “—Fluctuations in the global economy may materially adversely affect the economies of the countries where we operate and our business in these countries.” and “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
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See also “—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial results.”
The stability of the ruble will depend on many political and economic factors. These include the ability of the government to finance the deficit of the state budget without recourse to monetary emissions and to control the level of interest rates and inflation. Furthermore, changes in foreign currency regulation may affect our ability to fund payments denominated in foreign currency and result in us entering into supplementary agreements with our foreign counterparts.
A significant portion of our capital expenditure and liabilities are either denominated in or tightly linked to the U.S. dollar. Conversely, a majority of our revenues are denominated in rubles. As a result, devaluation of the ruble against the U.S. dollar can adversely affect us by increasing our costs in rubles, both in absolute terms and relative to our revenues, and make it more difficult to comply with the financial ratios contained in our various loan agreements or fund cash payments on our indebtedness on time. It also reduces the U.S. dollar value of tax savings arising from tax incentives for capital investment and the depreciation of our property, plant and equipment, since their basis for tax purposes is denominated in rubles at the time of the investment. Increased tax liability would also increase total expenses, which would have an adverse impact on our results.
We also anticipate that any dividends we may pay in the future will be declared and paid in rubles. See also “—Risks Relating to the Shares and ADSs and the Trading Market—Shareholders may be unable to repatriate distributions made on the shares”. Any further depreciation of the ruble against the U.S. dollar or other foreign currencies could therefore materially adversely affect our financial condition, results of operations and prospects and the value of our shares. See also “Item 11.Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial results.
Our expenditure, including capital expenditure, is denominated in, or closely linked to, the Ruble, the U.S. dollar, euro and/or yuan, while substantially all of our revenues are denominated in local currencies of the countries where we operate. The devaluation of local currencies against the Russian ruble can adversely affect our revenues reported in Russian rubles and increase our costs in terms of local currencies. In addition, local regulatory restrictions on the purchase of hard currency in the majority of countries where we operate may delay our ability to purchase equipment and services necessary for network expansion which, in turn, may cause difficulty in expanding our subscriber base in those countries. Further, a portion of our cash balances is held in jurisdictions outside Russia, and as a result of currency exchange controls in those jurisdictions, these cash balances may not always be readily available for our use.
In addition, a portion of our liabilities and borrowings (including our U.S. dollar denominated notes) are also either denominated in or tightly linked to the U.S. dollar or euro. A significant part of these is hedged through financial instruments with various banks, though the risk that such hedging is not fully effective remains.
The possible devaluation of the Belarusian ruble in the future may also adversely affect our revenues from this market.
See also “—Inflation could increase our costs and adversely affect our results of operations” and “Item 11.Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
If we are unable to obtain adequate capital, we may have to limit our operations substantially, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
We have to make significant capital expenditure, particularly in connection with the development, construction and maintenance of, and the purchasing of necessary software for, our mobile and fixed-line networks. For information about our capital expenditures, see “Item 4.Information on Our Company—A. History and Development—Capital Expenditure.” Further, the acquisition of 3G and 4G licenses and frequency allocations and the build-out of our 3G, 4G, 5G and broadband Internet networks will require additional capital expenditure.
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However, future financings and cash flow from our operations may not be sufficient to meet our planned needs in the event of various unanticipated potential developments, including the following:
● | a lack of external financing sources; |
● | changes in the terms of existing financing arrangements; |
● | construction of the wireless networks at a faster rate or higher capital cost than anticipated; |
● | pursuit of new business opportunities or investing in existing businesses that require significant investment; |
● | acquisitions or development of any additional wireless licenses; |
● | slower than anticipated subscriber growth; |
● | slower than anticipated revenue growth; |
● | regulatory developments; |
● | changes in existing interconnect arrangements; or |
● | a deterioration in the economies of the countries where we operate. |
International economic sanctions may also adversely affect our ability to gain external funding. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
Our indebtedness and the limits imposed by covenants in our debt obligations could limit our ability to obtain additional financing and thereby constrain our ability to invest in our business and place us at a possible competitive disadvantage. If we cannot obtain adequate funds to satisfy our capital requirements, we may need to limit our operations significantly, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Inflation could increase our costs and adversely affect our results of operations.
The Russian economy has been characterized by high rates of inflation, which over the past few years have been mainly driven by weakening of national currencies, restrictions on foreign trade and acceleration in food prices.
According to the Bank of Russia, the inflation rate in Russia reached 11.9% in 2022. On January 11, 2023, the Ministry of Finance announced the resumption of foreign currency sale as part of the budget rule mechanism. This resulted in weak pro-inflationary effects to occur due to the budget deficit. According to the forecast of the Bank of Russia, annual inflation may decline to 5.0-7.0% in 2023.
In 2022, the annual rise of consumer prices published by the National Bank of the Republic of Belarus amounted to 12.8%.
High rates of inflation in Russia and other countries of our operation could increase our costs and decrease our operating margins. See also “Item 5.Operating and Financial Review and Prospects—A. Operating Results—Certain Factors Affecting our Financial Position and Results of Operations—Inflation.” and “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
See also “—Changes in the exchange rate of local currencies in the countries where we operate against the Russian ruble, as well as changes in the exchange rate of the Russian ruble and local currencies against the U.S. dollar and/or euro could adversely impact our financial results” and “Item 11.Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
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Indentures relating to some of our notes contain, and some of our loan agreements contain, restrictive covenants, which limit our ability to incur debt and to engage in various activities.
Covenants in the loan agreement relating to MTS-23 Eurobonds (ISIN XS0921331509) due 2023 limit our ability to create liens on our properties, merge or consolidate with another person or convey our properties and assets to another person. Pursuant to the terms of the Extraordinary Resolution passed on December 13, 2022, amongst other things, Amended Payment Mechanics was introduced allowing for the coupon payment and repayment of Eurobonds principal amount to be made in Rubles at the Central Bank of Russia foreign exchange rate.
Some of our loan agreements contain similar and other covenants, including, in relation to the incurrence of indebtedness, creation of liens and disposal of assets. We may also incur additional credit obligations providing for similar covenants. Failure to comply with these covenants may cause a default and result in the debt becoming immediately due and payable, which would materially adversely affect our business, financial condition and results of operations.
A material adverse effect on our financial condition and results of operations could occur if redemption rights of our noteholders are invoked.
Under the terms of the notes, upon occurrence of the circumstances described below, noteholders will have the right to require us to redeem notes not previously called for redemption. The price upon such event will be 101% of the principal amount of the notes, plus interest accrued prior to the redemption date. Such redemption scenario could be triggered, with respect to the notes due 2023, if any person (with certain exceptions) acquires beneficial or legal ownership of, or control over, more than 50% of our issued shares, ownership of or control over more than 50% of the voting interests in our share capital or obtains the power to elect not less than half of our directors.
Some of our loan agreements contain similar redemption provisions triggered by occurrence of similar events. If such events occur, and our noteholders and other debt holders exercise their right to require us to redeem all of their notes or debt, such event could have a material adverse effect on our financial condition and results of operations.
In addition, under certain of our debt agreements, an event of default may be deemed to have occurred and/or we may be required to make a prepayment if Sistema disposes of its stake in our company and a third party takes a controlling position in our company. The occurrence of any such event of default or failure to make any required prepayment, which leads to an event of default, could trigger cross default / cross acceleration provisions under certain of our other debt agreements. In such event, our obligations under one or more of these agreements could become immediately due and payable, which would have a material adverse effect on our business and our shareholders’ equity.
However, until July 1, 2023, in accordance with Article 27 of Federal Law No. 519-FZ of 19.12.2022 "On Amendments to Certain Legislative Acts of the Russian Federation and Suspension of Certain Provisions of Legislative Acts of the Russian Federation" (hereinafter referred to as FZ of 19.12.2022 No. 519-FZ), the creditor cannot demand early repayment bonds in the event that:
● | the issuer of the bonds fulfills its obligations in accordance with the temporary procedure for fulfilling obligations to certain creditors; |
● | non-fulfillment or improper fulfillment of obligations by the issuer of bonds is caused by non-financial circumstances that could not be prevented by the issuer. |
The rules apply both to bonds issued under the law of the Russian Federation and under foreign law. Similar rules apply to loan obligations.
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Risks Relating to Business Operations in Emerging Markets
Emerging markets such as the Russian Federation and other CIS countries are subject to greater risks than more developed markets, including significant legal, economic, social, regulatory, tax and political risks.
Investors in emerging markets such as the Russian Federation, Armenia, Belarus and other CIS countries should be aware that these markets are subject to greater risk than more developed markets, including in some cases, significant legal, economic, social, regulatory, tax and political risks. Investors should also note that emerging economies such as the economies of the Russian Federation and other CIS countries are subject to rapid change and that the information set out herein may become outdated relatively quickly.
There are a number of risks associated with investing in emerging markets, including the following:
● | volatility of emerging markets (for more information, see “—Risks Relating to Economic Risks in Our Countries of Operation” and “—Legal Risks and Uncertainties”); |
● | high volatility of national currencies (for more information, see “—Risks Relating to our Financial Condition”); |
● | possible geopolitical disputes (for more information, see “—Political and Social Risks”); and |
● | possible liquidity constraints (for more information, see “—Risks Relating to Economic Risks in Our Countries of Operation” and “—Risks Relating to our Financial Condition”). |
For example, in September 2020, martial law was declared in Armenia due to escalation of the conflict in Nagorno-Karabakh. As of the end of 2022, the situation in the region remained tense. Political environment could have a negative effect on the Armenian economy as well as our business, financial position and results of operations. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
Accordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to consult with their own legal and financial advisors before making an investment in our securities.
Risks Relating to Our Business
The telecommunications and digital services market is characterized by rapid technological change, which could render our services obsolete or non-competitive and result in the loss of our market share and a decrease in our revenues.
The telecommunications industry as well as the digital services sector are subject to rapid and significant changes in technology and are characterized by the continuous introduction of new products and services. The mobile telecommunications and digital services industries in Russia are also experiencing significant technological change, as evidenced by the constant technological evolution of standards for radio telecommunications, such as Long Term Evolution (“LTE”), 5G, as well as ongoing improvements in the capacity and quality of communications, shorter development cycles for new products and enhancements and changes in customer requirements and preferences. Such continuing technological advances make it difficult to predict the extent of the future competition we may face and it is possible that existing, proposed or as yet undeveloped technologies will become dominant in the future and render the technologies we use less profitable or even obsolete. New products and services that are more commercially effective than our products and services may also be developed. Furthermore, we may not be successful in responding in a timely and cost-effective way to keep up with these developments. Changing our products or services in response to market demand may require the adoption of new technologies that could render many of the technologies that we are currently implementing less competitive or obsolete. To respond successfully to technological advances and emerging industry standards, we may require substantial capital expenditure and access to related or enabling technologies in order to integrate the new technology with our existing technology.
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We face increasing competition in the markets where we operate, which may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing policies.
The telecommunication and digital services markets where we operate are highly competitive, particularly in Russia.
Competition is generally based on price, product functionality, range of service offerings and customer service.
Generally, increased levels of competition, including potential entry of new companies, particularly new mobile operators, government-backed operators, mobile virtual network operators, operators of satellite TV and alternative fixed line operators, as well as the strengthening of existing companies, increased use of IP-telephony and other services provided via the internet, may adversely affect our ability to keep the level of revenue which we receive from our operations on the telecom and other digital markets. This in turn could result in reduced operating margins and a loss of market share and may have a material adverse effect on our business, financial condition and results of our operations.
Competition in the Russian market
Our principal wireless competitors in Russia are Public Joint Stock Company “Vimpel-Communications” (“VEON”), Public Joint Stock Company MegaFon (“MegaFon”), as well as the federal cellular operator established in 2014 by the combination of Tele2 Russia and the mobile assets of Public Joint Stock Company “Rostelecom” (“Rostelecom”). We also face competition from several regional operators. In addition, we face competition in the fixed line telecommunications business, in particular from Rostelecom.
In the area of digital services, we compete with russian technological companies which are focused on developing digital services, as part of either new or existing core elements of their business. Digital markets are growing strongly, driven both by a natural trend and other factors, which has dramatically increased online consumption and the importance of digital sales channels. Due to these market dynamics, current positions of market participants are subject to significant change in the near to medium term.
See also “—If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices, which may diminish our market share and result in a loss of revenues and margins” below.
Competition in the foreign markets of our operation
In Belarus, our associate, MTS Belarus, while maintaining its leadership in the market in 2022, faced increasing competition and aggressive pricing from the main competitors – Best CJSC, a subsidiary of Turkcell Iletisim Hizmetleri A.S. (“Turkcell”), which operates in Belarus under the “life:)” brand and A1 (a subsidiary of A1 Telekom Austria Group) which actively promotes convergent services. The Belarus government has made several attempts to privatize its 51% stake in MTS Belarus, but future efforts in this regard are uncertain. If such stake is again offered for sale and we are unable to acquire this ownership interest at a commercially reasonable price, or if it is acquired by one of our competitors, it may impact our competitive position and results of operations in Belarus.
The change in ownership structure of Belarusian Cloud Technologies LLC (beCloud brand), which is the unified 4G infrastructure operator in Belarus, was effected at the end of 2021. The state acquired full control over the beCloud operation: Republican unitary enterprise “National traffic exchange center” increased its ownership to 60%, the Republican Unitary Enterprise Beltelecom (owns 51% stake in Mobile TeleSystems JLLC) acquired a 40% stake. In January 2022, Beltelecom gained a license to provide mobile communications services, which will allow the company to compete in the mobile communications market. In March 2022, the Belarusian operator BeST CJSC (brand name – “life”) signed an investment agreement, which assumes some state preferences and benefits.
We also face competition in Armenia. In October 2020, VEON telecommunications holding (under the Beeline brand) reached an agreement to sell its business in Armenia to the local telecommunications company Team LLC. In the beginning of 2022, the Public Service Regulatory Commission of Armenia approved the sale of 100% of the shares of Filor Ventures Limited, the only stockholder of Rostelecom Armenia, (GNC-Alfa, subsidiary of Rostelecom). Details and further course of the transaction were not disclosed. If one of our competitors buys this asset, it could have negative effect on our business, financial condition and results of operations in Armenia. In 2022, both in Armenia and in Belarus our competitors actively promoted converged products based on their own fixed networks, which may adversely impact our subsidiaries’ subscriber churn in these countries.
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We are subject to anti-corruption laws in the jurisdictions in which we operate, including anti-corruption laws of Russia and the US Foreign Corrupt Practices Act (the “FCPA”), and we may be subject to the UK Bribery Act 2010 (the “UK Bribery Act”). Our failure to comply therewith could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. We may also be subject to the UK Bribery Act. The UK Bribery Act is broader in scope than the FCPA in that it directly addresses commercial bribery in addition to bribery of public officials and it does not recognize certain exceptions, notably facilitation payments that are permitted by the FCPA.
We operate primarily in Russia and other countries of the former Soviet Union, many of which pose elevated risks of corruption violations. We and certain of our subsidiaries are in frequent contact with persons who may be considered “foreign public officials” under the FCPA and UK Bribery Act, and, therefore, are subject to an increased risk of potential FCPA and UK Bribery Act violations. If we or any third party acting on our behalf or in our interests are not in compliance with the FCPA, the UK Bribery Act and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.
As disclosed in our public filings, in March 2014, we received requests for the provision of information from the United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”)relating to an investigation of the Group’s former subsidiary in Uzbekistan. See also Note 33 to our audited consolidated financial statements. In February 2019, the Group reached a resolution with the SEC and the DOJ relating to the previously disclosed investigation of our former subsidiary in Uzbekistan. We consented to the entry of an administrative cease-and-desist order (the “Order”) by the SEC.
The United States District Court for the Southern District of New York approved a deferred prosecution agreement (“DPA”) entered by the Group and a plea agreement entered into by our subsidiary in Uzbekistan. Under the agreements with the DOJ, we agreed to pay a total criminal penalty of USD 850 million (RUB 59.1 billion as of December 31, 2018) to the United States. We provided a provision of USD 850 million (RUB 55.8 billion as of the date of accrual), which was recognized as a part of discontinued operations in the consolidated statement of profit or loss for the year ended December 31, 2018.
See also “—We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA and the SEC Order,” “—We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Compliance monitorship.”
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We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA and the SEC Order.
We are subject to the DPA with the DOJ and the SEC Order. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation— Compliance monitorship” and Note 33 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. In conjunction with the DPA and pursuant to the SEC Order, we are required to retain, at our own expense, an independent compliance monitor. Pursuant to the DPA and the SEC Order, the monitorship was initially due to continue for a period of three years from the date of appointment and the term of the monitorship could be terminated early or extended depending on certain circumstances, as ultimately determined and approved by the DOJ and the SEC. We have not received notice from the SEC, the DOJ or the monitor of any breach of the terms of the DPA or the SEC Order. However, given a variety of factors, including the COVID-19 pandemic, we agreed to a one-year extension of the DPA and the monitorship with the DOJ and the SEC to (i) provide us with adequate time to implement necessary enhancements to certain critical components of our anti-corruption compliance and ethics program and (ii) allow the monitor sufficient time to be able to complete its review of our remedial efforts, including our implementation of the monitor’s recommendations and an assessment of the sustainability of our remedial actions. The term of the monitorship will continue until September 2023. The monitor assesses and monitors our compliance with the terms of the DPA and the SEC Order as well as reviews and evaluates the effectiveness of our policies, procedures, practices, internal accounting controls, record keeping and financial reporting as they relate to our current and ongoing compliance with the anti-bribery, books and records and internal accounting controls provisions of the FCPA and other applicable anti-corruption laws, and makes recommendations reasonably designed to improve the effectiveness of our internal accounting controls and FCPA corporate compliance. See also “—We are subject to anti-corruption laws in the jurisdictions in which we operate, including anti-corruption laws of Russia and the US Foreign Corrupt Practices Act (the “FCPA”), and we may be subject to the UK Bribery Act. Our failure to comply therewith could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.”
We have incurred significant costs in connection with the disposition of the matters covered in the DPA and SEC order, including retention of legal counsel and other advisors and other costs related to the investigations undertaken in connection with these matters. We currently cannot estimate additional costs that we are likely to incur in connection with compliance with the DPA and the SEC Order, including the ongoing obligations relating to the monitorship, our obligations to cooperate with the agencies regarding their investigations of other parties, and the costs of implementing the changes, if any, to our internal controls, policies and procedures required by the monitor. However, such costs could be significant. See also “—We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation.”
We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation.
Failure to comply with the terms of the DPA, whether such failure relates to alleged improper payments, internal controls failures, or other non-compliance, could result in criminal prosecution by the DOJ, including for the matters addressed in the DPA. Under such circumstance, the DOJ would be permitted to rely upon the admissions and the waiver of certain defenses we made in the DPA. Similarly, breach of the SEC Order could result in additional penalties against the Company.
Criminal prosecution by the DOJ as a result of a breach of the DPA or penalties imposed as a result of noncompliance with the SEC Order could subject us to penalties and other costs and could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects.
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We may also face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC, and other authorities. None of the DPA and the SEC Order prevents these or any other authorities from carrying out certain additional investigations with respect to the facts not covered in the agreements or in other jurisdictions, or prevents authorities in other jurisdictions from carrying out investigations related or unrelated to the matters which being investigated. Additionally, on March 19, 2019, a proposed class action complaint, captioned Salim v. Mobile TeleSystems PJSC et al., case number 1:19-cv-01589, was filed in the United States District Court for the Eastern District of New York against us and certain of our managers. On March 1, 2021 the United States District Court of Eastern District of New York granted MTS’s motion to dismiss with prejudice and dismissed the complaint in full. The plaintiff filed an appeal of the dismissal by the Eastern District Court of New York. On March 31, 2022, the United States Court of Appeals for the Second Circuit affirmed the dismissal by the Eastern District Court of New York and determined that the plaintiff's claims are without merit.
Any collateral investigations, litigation or other government or third-party actions resulting from these, or other, matters could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects. In addition, any ongoing media and governmental interest in the investigations, the agreements and claims could impact the perception of us and result in reputational harm.
COVID -19 and potential variations or escalations thereof may have a material adverse effect on our business, financial condition, results of operations and prospects
A novel strain of the coronavirus, COVID-19, was discovered in Wuhan, China in December 2019 and on 11 March 2020, was declared by the World Health Organization to be a global pandemic. It has adversely affected and continues to affect the economies and financial markets of many countries, including Russia and CIS and has resulted in a series of measures implemented by governments around the world aimed at mitigating the further spread of the virus. There is still significant uncertainty regarding the impacts and duration of the COVID-19 pandemic. If the spread of COVID-19 persists for a significant period or the infection rates stagnate or increase, this could lead to renewed nationwide lockdowns or other potentially unforeseen impacts, which could have a material negative impact on the global and Russian economies.
The impact of COVID-19 on the Group is limited so far. However, due to the uncertainty of the duration and degree of impact of the COVID-19 pandemic, we continue to evaluate various scenarios and their potential impacts on Group financials. We have also carried out risk assessments for each of our business units, considering potential strategic, operational and regulatory related impacts.
We have a significant shareholder, which may limit your ability to influence corporate matters and may give rise to conflicts of interest.
Sistema, which is a public company, owns approximately 42% of the Company’s ordinary shares. As a result, Sistema may exert influence over us and any action requiring the approval of the holders of our ordinary shares. Sistema can take actions that may conflict with the interests of other security holders. Furthermore, our international, credit, investment and other ratings, which determine, inter alia, peculiarities of our operations, terms of raising debt financing and our other activity could be affected by Sistema’s activity and (or) its ratings. See also “Item 5.Operating and Financial Review and Prospects—B. Liquidity and Capital Resources— Credit Rating Discussion.”
Sistema, as well as other our shareholders, have a right regulated by applicable law to receive dividends at the amount proportionate to the number of our shares belonging to a respective shareholder. For information about dividends see “Item 5.Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Requirements.” The indentures relating to our outstanding notes and other debt do not restrict our ability to pay dividends. As a result of paying dividends, our reliance on external sources of financing may increase, our credit rating may decrease, and our cash flow and ability to repay our debt obligations, or make capital expenditure, investments and acquisitions could be materially adversely affected.
Moreover, if Sistema were to dispose of its stake in us, we may be deprived of the benefits and resources that we derive from Sistema, which could harm our business.
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Difficulties with operational management of acquired businesses could hamper our continued growth and profitability.
Our continued growth depends, in part, on our ability to identify attractive opportunities in markets that will grow and on our ability to manage the operations of acquired or newly established businesses. Our acquisitions may occur in countries and regions that represent new operating environments for us. We therefore may have less control over their activities. We may also face uncertainties with respect to the operational and financial needs of those businesses and may, in the course of our acquisitions, incur additional debt to finance the acquisitions and/or take on substantial existing debt of the acquired companies. In addition, it is possible that our activities in the countries of our current presence and counties into which we may expand may be associated with greater political, economic, social and legal risks.
For example, see “—Legal Risks and Uncertainties—An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable” and “—Any inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations.” Our failure to identify attractive opportunities for expansion into new markets and to manage the operations of acquired or newly established businesses in these markets could hamper our continued growth and profitability, and have a material adverse effect on our financial condition, results of operations and prospects.
Acquisitions and mergers may pose significant risks to our business.
We have expanded our business through a number of acquisitions. We will continue to evaluate opportunities to acquire, invest in or merge with other existing operators or license holders, as well as other complementary businesses. In 2017-2022, our acquisitions focused on various segments, including communication and software development companies, providers of cloud services, as well as management investment and other non-telecom companies.
These and other business combinations entail a number of risks that could materially and adversely affect our business, financial condition, results of operations and prospects, including the following:
● | assumption of the acquired target’s liabilities and contingencies; |
● | failure to realize any of the anticipated benefits or synergies from any acquisitions or investments we complete; |
● | problems connected with integrating the acquired businesses, technologies or products into our operations; |
● | incurrence of debt to finance acquisitions and higher debt service costs related thereto; |
● | difficulties in retaining business relationships with suppliers and customers of the acquired companies; |
● | risks associated with businesses and markets in which we lack experience, including political, economic, social, legal and regulatory risks and uncertainties; |
● | competition risks; |
● | potentially incorrect assessment of the value of any acquired target resulting from the facts we could not have known at the time of evaluation (subsequently discovered facts); |
● | more onerous government regulation; |
● | potential loss of key assets of the acquired company; |
● | potential loss of key employees of the acquired company; |
● | potential write-offs of acquired assets; and |
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● | lawsuits arising out of disputes over ownership of acquired assets and/or the enforcement of indemnities relating to the title to such assets. |
See also “—Legal Risks and Uncertainties—Any inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations” and “—Risks Relating to our Financial Condition—We may be adversely affected by the current economic environment.”
In addition, companies that we acquire may not have internal policies, including accounting policies and internal control procedures that are compatible, compliant or easily integrated with ours.
If any of our future business combinations is structured as a merger with another company, or we merge with or absorb a company subsequent to its acquisition by us, such a merger would be considered a corporate reorganization under Russian law. This would entitle our creditors to file a claim seeking to accelerate their claims or terminate the respective obligations and seek damages. The creditors would need to prove in court that we will not perform our obligations in due course and the amount of damages suffered. Secured creditors would also be required to prove that the security provided by our shareholders, any third parties or us is not sufficient to secure our obligations. Creditors whose claims are secured by pledges do not have the right to claim additional security.
In 2019-2022, we also acquired certain companies such as Gulfstream JSC, Webinar ecosystem, Bronevik Group, VisionLabs, United Russian Studios JSC, JUST AI Limited, Zelenaya Tochka Group and others. See “Item 4.Information on Our Company—A. History and Development” for further information.
These acquisitions have allowed us to diversify our business. However, additional risks relating to acquired companies’ liabilities and non-achievement of initial financial and operational targets may arise in connection with these acquisitions. See also Note 4 to our audited consolidated financial statements.
We may also be involved in various litigation to protect our title or other rights related to acquired businesses and incur loss.
In addition, a merger or any corporate reorganization or business combination that constitutes a “major transaction” under Russian law would trigger the right of our shareholders who abstain from voting on or vote against such reorganization or transaction to sell, and our obligation to buy, their shares in an amount representing up to 10% of our net assets as calculated under Russian Accounting Standards. See “—Legal Risks and Uncertainties—Shareholder rights provisions under Russian law could impose additional obligations and costs on us, which could have a material adverse effect on our business, financial condition, results of operations and prospects.”
If we cannot successfully develop our network or integrate the acquired companies, we will be unable to expand our subscriber base and maintain our profitability.
Our ability to increase our subscriber base depends upon the success of our network expansion (including fixed-line networks).
We have expended considerable amounts of resources to enable both organic expansion and expansion through acquisitions, and we plan to continue to do so. Limited information regarding the markets into which we have expanded or are considering expanding, through either acquisitions or new licenses, complicates accurate forecasts of future revenues from those regions, increasing the risk that we may overestimate these revenues. In addition, we may not be able to integrate previous or future acquisitions successfully or operate them profitably. Any difficulties encountered in the transition and integration process and in the operation of acquired companies could have a material adverse effect on our results of operations.
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The build-out of our network is also subject to risks and uncertainties, which could delay the introduction of services in some areas and increase the cost of network construction, including difficulties in obtaining base station sites on commercially attractive terms. Further, telecommunications equipment used in Russia and other CIS countries is subject to governmental certification and periodic renewals of the same. We are also required to obtain permits and governmental certification for the operation of telecommunications equipment and/or permission for the import and export of certain network equipment, which can result in procurement delays and slower network development. The failure of any equipment we use to receive timely certification or re-certification, as applicable, could hinder our expansion plans. See also “—Risks Relating to our Financial Condition—If we are unable to obtain adequate capital, we may have to limit our operations substantially, which could have a material adverse effect on our business, financial condition, results of operations and prospects.”
For example, the import and export of products containing cryptographic hardware is subject to special documentation requirements and approvals. As telecommunications networks comprise various components with cryptographic hardware, we must comply with these requirements in order to import such components. Moreover, where imported equipment does not contain cryptographic hardware, the federal customs service requires manufacturers to provide written confirmation regarding the absence of such hardware. The range of goods requiring the provision of such “certificates of conformance” by suppliers and manufactures prior to their import into Russia has also been expanded to cover most of our key network components, and imported radioelectronic equipment is required to be licensed by the Russian Ministry of Industry and Trade.
See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.”
If we are unable to develop additional sources of revenue and competitive services, it could have a material adverse effect on our business, financial condition, results of operations and prospects.
Until recently, customer growth has been our principal source of revenue growth. Currently, however, increasing competition, market saturation and technological development lead to the increased importance of digital services based on mobile Internet, smart home, artificial intelligence, cloud services, big data solutions, Internet of things and media services. As a result, we will need to focus on the development of new services based on the abovementioned technologies. We invest in new businesses, such as artificial intelligence, financial technologies, big data, IoT, cloud services and others. Decreases in or absence of demand for new services, as well as competition increase on current markets, new companies’ entries, or lack of access to advanced technologies may lead to revenue decrease and necessity to revise our strategy regarding new businesses, which may require additional investments. Our inability to develop additional sources of revenue could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, in September 2021 our shareholders approved the separation of our passive infrastructure as well as a significant share of our active network and digital infrastructure into the wholly-owned subsidiaries. An inability to realize the anticipated benefits of this separation could have an adverse effect on our business, financial condition, results of operations and prospects.
If we cannot interconnect cost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices, which may diminish our market share and result in a loss of revenues and margins.
Our ability to provide commercially viable services depends on our ability to continue to interconnect cost-effectively with zonal, intercity and international fixed-line and mobile operators in Russia and other countries in which we operate. Interconnect fees are established by agreements with network operators and vary depending on the network used, the nature of the call and the call destination.
Although Russian legislation requires that operators of public switched telephone networks that are deemed to be “substantial position operators” cannot refuse to provide interconnect services or discriminate against one operator over another, we believe that, in practice, some operators attempt to impede wireless operators by delaying interconnect applications and establishing technical conditions for interconnecting that can be met only by certain operators.
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Any difficulties or delays in interconnecting cost-effectively with other networks could hinder our ability to provide services at competitive prices, or at all, causing us to lose our market share and revenues, which would have a material adverse effect on our business and results of operations. See also “—If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.”
We may not realize the benefits we expect to receive from our investments in 4G and 5G wireless services and Internet of Things (IoT) technologies, which could have a material adverse effect on our business and results of operations.
Russian legislation regarding 4G and 5G wireless services and Internet of Things (IoT) technologies are subject to change, particularly:
● | in 2017 the State Commission for Radio Frequencies (“the Commission”) issued a decision allowing the use of frequency bands previously allocated for LTE mobile communications for NB IoT technology. |
● | in 2018-2020 the Commission awarded additional frequencies for the use of radio electronic means, operating in the range of 800 MHz under LPWAN group of standards (Low-power Wide-area Network) relating to IoT technology; |
● | in 2020 the Commission allowed indefinite range of persons and entities to use the 24.25-24.65 GHz frequency band under the 5G standard for radio electronic means. This decision allows the construction of local communication networks under the 5G/IMT-2020 standard, which could lead to increased competition. Later the terms regarding mandatory use of equipment of Russian origin were approved, which may affect the possibility of using these frequencies. |
● | in 2021 the Commission prolonged permits to use the frequencies of 700 MHz, 800 MHz, and 2600 MHz for LTE networks for another 10-year term. The main conditions for the prolongation includes: |
o | for 800 MHz, and 2600 MHz range: operators must provide network coverage of settlements with a population of more than 1,000 persons and federal highways until September 2031 in accordance with the schedule; |
o | for 700 MHz range in case of its reallocation for mobile telecommunication services: operators must provide network coverage of settlements with a population of more than 500 persons and regional highways until the end of 2031 in accordance with the schedule; |
o | starting from 2023, operators will have to use local equipment. |
In 2022 the Commission postponed the fulfilment of the above-mentioned obligations for one year, except the deadline for obligatory use of local equipment, which will prolonged till 2028. At the same time the annual plan of local equipment deployment has to be fulfilled starting from 2025. The aforementioned changes, on the one hand, allow operators to use the necessary radio frequency resources, and on the other hand, could require additional costs for network construction.
4G wireless services provide faster, higher quality data transfer and/or streaming capabilities, as compared to 2G and 3G, and 5G wireless services pose a similar advantage over 4G. Historically, mobile operators that are developing 4G networks experienced various difficulties and challenges, including a limited supply of compatible handsets, limited international roaming capabilities, as well as various software and network related problems. We may experience similar problems or encounter new difficulties when developing our 4G and 5G networks (including NB- IoT) and may be unable to fully resolve them. For example, we cannot be certain that:
● | we will be able to build-out our 4G (including NB-IoT) and 5G networks in a timely manner or within the time frame stipulated by the license terms; |
● | our 4G (including NB-IoT) and 5G networks will deliver the quality and level of service that our customers demand or expect; |
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● | we will be able to provide all contemplated 4G services (including NB-IoT) and 5G at reasonable prices and within a reasonable timeframe; |
● | manufacturers and content providers will develop and offer new marketable products and services for our4G and 5G networks (including NB-IoT) on a timely basis; |
● | demand for our 4G services (including NB-IoT) will not be lower than expected; |
● | our 4G and 5G networks will be commercially viable in all of the locations we are required to operate pursuant to our licenses, approvals, authorizations and permits; |
● | our competitors will not offer similar services at lower prices; and |
● | changes in governmental policies, rules, regulations or practices will not affect our network rollout or our business operations. |
See also “—If we cannot successfully develop our network or integrate the acquired companies, we will be unable to expand our subscriber base and maintain our profitability.”
In addition, Russian authorities also use frequencies in the 4G and 5G spectrum, which may limit the availability of 4G and 5G frequencies for commercial use in certain areas. During the construction of our networks, there is also a risk that the frequencies assigned to us for commercial use may overlap with those used by the Russian authorities. If such conflict were to occur, it could cause problems or delays in the development and operation of our 4G and 5G networks in Russia.
Potential competition from other 4G and LPWAN providers, together with any problems relating to the rollout of our 4G and 5G networks and provision of 4G and 5G services in the future, could materially adversely affect our business, financial condition and results of operations.
The State Commission for Radio Frequencies has imposed certain obligations on network operators. For example, in case of using frequencies on the terms of technological neutrality principle, we are, inter alia, obliged to provide network coverage to settlements with lower subscriber numbers, where the commercial rationale for doing so may otherwise be limited. Such changes lead to additional costs for the construction of our 3G and 4G wireless networks and may therefore adversely affect our business, financial condition and results of operations. Moreover, the rules on the Russian-produced telecommunication equipment usage, which require to operate only equipment included in the Unified Register of the Russian radio-electronic products, could affect implementation of the Internet of things (IoT) technology and 5G networks deployment.
If we are unable to successfully develop and/or deploy 4G and 5G wireless services in the countries in which we operate, or if any operators in those markets obtain a significant technological and/or commercial advantage over us in 4G and 5G wireless services, it may have a material adverse effect on our business and results of operations in the long term.
Currently, the ability to develop 4G/LTE and 5G networks is one of the key factors of an operator’s competitiveness in the market for mobile services in Russia and other countries where we operate. The cost of 4G/LTE and 5G network deployment and quality of services (including data speed and quality of radio coverage) depends on the band and the width of frequency range given to an operator.
In 2012 outside of the auction process, the State Commission for Radio Frequencies granted Scartel (operating the “Yota” retail brand) a paired range of LTE frequencies (2x30 MHz) in the 2.5-2.7 GHz band for use in the entire territory of Russia. The remaining frequencies, 40 MHz of the 2.5-2.7 GHz band, were allocated evenly during the auction among four major market participants (VEON, MegaFon, Rostelecom and us). On October 1, 2013, MegaFon acquired Scartel As a result of this transaction, MegaFon obtained a competitive advantage in terms of LTE network development costs and may also obtain an advantage in LTE network performance.
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Significant material resources for the introduction of such technologies may be required, which could have a material adverse effect on our business and results of operations. Furthermore, the limited number of available frequencies may prevent us from realizing the full benefits we expect to receive from the development of a 4G or 5G network, because our network capacity would be constrained and our ability to expand limited.
In 2019, Rosletelcom PJSC received a LTE frequency in the 2.3-2.4 GHz band outside of the auction process. In July 2020, the State Commission for Radio frequencies allowed Rostelecom PJSC to share this frequency band with T2 Mobile LLC (Tele2), which gave an advantage to these operators. However, in December 2020, the State Commission for Radio frequencies changed its decision relating to permission for the commercial use of this range. These developments reflect ongoing discussions on allocation frequencies in order to construct 5G network in Russia, deployment of which has been actively negotiated by operators and regulators since 2017. The greater part of frequency spectrum suitable for 5G network in Russia, is partially or fully occupied by other users (for example, satellite communication companies use the most suitable frequencies for 5G in 3.5 GHz band), including state-owned companies. Significant expenses and time may be required to clear frequencies, however the frequency conversion mechanism has not been fully defined yet and if it will be realized, there is no assurance that sufficient frequencies optimal for 5G deployment will be cleared in low- band spectrum (“sub-6”).
As a solution, the regulator is considering creation of a Single Infrastructure Operator, which will be assigned with the 5G frequencies, and, as one of the discussed variants, will construct a single 5G network in Russia mainly using equipment produced in Russia and will maintain this network. It is planned that the Single Infrastructure Operator will operate as a technological platform based on which independent market players will develop and provide a wide range of services to clients. According to market players and certain industry experts, this solution has variety of advantages as well as some disadvantages and risks as compared to traditional network deployment by operators on a free and non-discriminatory basis.
Final regulator decision on frequency allocation for 5G will significantly affect the development of the mobile communication market and may lead to certain difficulties, including extension of time needed for putting 5G network into operation, increases in capital and operating expenditures, failure to realize all 5G technological advantages caused by separation of 5G and earlier generation network infrastructure, realization of market advantages by certain players due to non-equal frequency allocation or obtaining of other technological advantages connected with frequency allocation. All of these factors may affect our ability to develop 5G network, which in turn may have a material adverse effect on our business.
Moreover, if we cannot develop and maintain commercially viable 4G and 5G networks, and one of our competitors does, that competitor would have an advantage over us, which in turn may have a material adverse effect on our business.
In July 2022, we entered a joint venture of mobile operators, New Digital Solutions LLC (NRC). Earlier in November 2021, the State Commission on Radio Frequencies granted a 4500-4555 MHz and 4630-4990 MHZ bands to NRC for testing 5G networks. The goal of this joint venture is frequency conversion and clearing of the spectrum for the further 5G technology development. The regulator will make a decision on possible frequency allocation in the 4500-4990 MHz band, inter alia, after clearing of this frequency spectrum. The operators’ business model of 5G services development will depend on this decision.
New requirements and technologies will require significant material resources from operators, which could have a material adverse effect on their business and results of operations.
Disruptions on our networks and information systems could lead to a loss of subscribers, damage to our reputation, violations of the terms of our licenses and subscriber contracts, penalties and have a material adverse effect on our business and financial condition.
We are able to maintain our operations only to the extent that our network infrastructure, information systems and data processed therein is protected from unlawful actions, including hacker and targeted attacks, technical malfunctions, power failures and natural disasters. Any failure, accident or network or information systems security breach, that causes interruptions in our operations could impair our ability to provide services to our customers or may influence other business processes, any of which could materially adversely affect our reputation, business and results of operations.
In addition, to the extent that any disruption or network or elements of information systems security breach results in a loss of or damage to customers’ personal data, or inappropriate disclosure of confidential information, we may incur liability as a result, including costs to remedy the damage caused by these business-interruptions or elements of information systems security breaches.
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While we maintain backup systems for our telecommunications and infrastructure equipment, network and data management, operations and maintenance systems, these systems may not ensure recovery in the event of a network or information systems failures. In particular, in the event of extensive software and/or hardware failures, significant disruptions to our systems could occur, leading to our inability to provide services in full. The quality of our services in roaming (including roaming between networks) also depends, inter alia, on the network quality of our roaming partners, which is out of our control. Disruptions in our provision of services could lead to a loss of subscribers, damage to our reputation, violations of the terms of our licenses and subscriber contracts and penalties.
Our computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, loss of power, telecommunications failures, physical or software break-ins, viruses and similar events. Although our computer and communications hardware is insured against fire, storm and flood, we do not have business interruption insurance to protect us in the event of a catastrophe, even though such an event could have a material adverse effect on our business.
Failure to fulfill the terms of our licenses could result in their suspension or termination, which could have a material adverse effect on our business and results of operations.
Each of our mobile licenses requires service to be offered by a specific date and some contain further requirements as to territorial coverage to be reached by specified dates.
In addition, all of our mobile licenses require us to comply with various telecommunications regulations relating to the use of radio frequencies and numbering capacity allocated to us, network construction, interconnect rules and technical requirements relating to compliance with law enforcement authorities’ requests, among others. If we fail to comply with the requirements of Russian or other applicable legislation or meet any terms of our licenses, our licenses and other authorizations necessary for our operations may be suspended or terminated, which could significantly limit our operations. In addition to the impact on our operations, the suspension or loss of certain licenses could also constitute an event of default under certain of our debt obligations and cause certain of our debt to be accelerated.
The Russian government enacted its Decree No. 2385 dated December 30, 2020, as amended, which came into force starting from January 1, 2021. It replaced the previously existing regulation on licensing activities in the communication services sector and introduced certain new mandatory licensing requirements and grounds for license termination.
The Federal Law No. 356 dated 14.07.2022 obliges operators to report annually on their activities to Roskomnadzor from December 2022. Failure to submit such report, or submitting of a report containing deliberately false or incomplete information, may be a basis for license termination.
A suspension or termination of our licenses or other necessary governmental authorizations, as well as regulatory changes of licensing requirements could therefore have a material adverse effect on our business and results of operations.
Failure to renew our licenses, or receive renewed or new licenses with similar terms to our existing licenses, could have a material adverse effect on our business and results of operations.
Our telecommunications licenses have their expiration dates in various years. These licenses may be renewed upon application to the relevant governmental authorities. Government officials in Russia and the other countries in which we operate consider the compliance with license requirements and the conditions of using the allocated frequency range when deciding whether to renew a license.
Additionally, new mandatory conditions, which relate to the need for further development of the communication network in order to provide licensed communication services for potential users of the communication service in sparsely populated residential areas, may be introduced when deciding whether to renew a license. These new conditions will require additional investment. Moreover, we may be subject to penalties or our licenses may be suspended or terminated for non-compliance with any such new license requirements. The suspension or loss of certain licenses could significantly limit our operations and cause certain of our debt to be accelerated.
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If frequencies currently assigned to us are revoked, or if we fail to obtain renewals of our frequency allocations, our network capacity will be constrained and our ability to expand limited, resulting in a loss of market share and revenues.
There is a limited radio frequency spectrum available for wireless operators in each of the regions in which we operate or hold licenses to operate. We are dependent on access to adequate spectrum allocation in each market in which we operate in order to maintain and expand our subscriber base. If frequencies are not allocated to us in the future in the required quantities, with the geographic span and for time periods that would allow us to provide wireless services on a commercially feasible basis throughout all of our license areas, our business, financial condition, results of operations and prospects may be materially adversely affected.
According to the decision of the State Commission for Radio Frequencies No. 13-22-01 dated December 11, 2013, the terms of radio frequency bands usage by radio electronic facilities for mobile communication include a requirement for the dynamics of network deployment in the settlements of over 1,000 people (depending on the used frequency range and radio technology). If we are not able to fulfill these requirements, our authorizations for the use of radio frequency spectrum might be either terminated or not prolonged in extrajudicial procedure.
A loss of allocated spectrum, which is not replaced by other adequate allocations, could also have a substantial adverse impact on our network capacity. In addition, frequency allocations are often issued for periods that are shorter than the terms of the licenses, and such allocations may not be renewed in a timely manner, or at all. If our frequencies are revoked, or if we are unable to renew our frequency allocations, our network capacity would be constrained and our ability to expand limited, resulting in a loss of market share and revenues.
An increase in the fees for frequency spectrum usage could have a negative effect on our financial results.
The Russian and the CIS legislation requires us to make payments for frequency spectrum usage. The fees for frequency spectrum usage are calculated based on the total frequency band allocated to each operator in each region with such frequency spectrum usage determined with reference to the decision of the State Commission for Radio Frequencies, frequency allocation decisions or to the license conditions.
The rates and coefficients used for calculating fees for frequency spectrum, are subject to revision at least once every two years. The Ministry of Communications developed and circulated for discussion a draft order “On Amendments to the Methodology for establishing of single fee and annual fee for the use of radio frequency spectrum in the Russian Federation”. The order provides for, inter alia, imposition of payment for radio frequency spectrum usage for 5G technology. Currently, key coefficients, which define the payment amount for using 5G technology, have not been approved. In case of the exchange of radio frequency spectrum between operators in the ranges with high fragmentation (GSM 900/1800) operators are obliged to change coefficients used for calculating the fee for the spectrum that may lead to significant additional expenses.
Any significant increase in the fees payable for the frequency channels that we use or additional frequency channels that we need in Russia or the CIS could have a negative effect on our financial results.
If we are unable to maintain our favorable brand image, we may be unable to attract new subscribers and retain existing subscribers, which may lead to a loss of market share and revenues.
Developing and maintaining awareness of our brands is critical to informing and educating the public about our current and future services and is an important element in attracting new subscribers.
We believe that the importance of brand recognition is increasing as our markets become more competitive. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful products and services at competitive prices. Brand promotion activities may not yield increased operating revenues and, even if they do, such operating revenues may not offset the operating expenses we incur in building our brands.
Furthermore, our ability to attract new subscribers and retain existing subscribers depends, in part, on our ability to maintain what we believe to be our favorable brand image. Negative publicity or rumors regarding our company, our shareholders and affiliates or our services could negatively affect our brand image, which could lead to a loss of market share and revenues. Failure to successfully and efficiently promote and maintain our brands may limit our ability to attract new subscribers and retain our existing subscribers and materially adversely affect our business and results of operations.
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MTS Bank’s business entails regulatory and operational risks.
MTS Bank’s operations are subject to regulation by various government and banking authorities in connection with obtaining and renewing various licenses and permits, as well as with ongoing compliance with existing laws and regulations and with the terms and conditions of MTS Bank’s licenses and permits. MTS Bank has the required license in connection with its banking activities issued by the CBR.
Requirements imposed by regulators, including capital adequacy requirements, which are designed to ensure the integrity of the financial markets and to protect customers and other third parties with whom MTS Bank deals, may limit MTS Bank’s activities, including its lending, and may increase MTS Bank’s costs of doing business, or require MTS Bank to seek additional capital in order to maintain CBR capital adequacy requirements or different varieties of funding to satisfy the CBR’s liquidity requirements. The CBR may also amend the capital adequacy requirements and increase the capital adequacy ratios applicable to Russian banks at any time and, in such circumstances, MTS Bank may be forced to seek additional capital or alternative sources of financing to comply with these requirements. Such additional capital or alternative sources of financing may not be available or may only be available on commercially unacceptable terms.
If MTS Bank’s capital position were to decline below the minimum statutorily required levels of capital adequacy, its banking licenses could be suspended or revoked and it could encounter difficulties in continuing to operate its business and obtaining funding, which could materially adversely affect its business, financial condition, results of operations and prospects. MTS Bank’s capital adequacy level may decrease organically with the growth of business or the payment of dividends. In addition, any breach of regulatory requirements in the Russian Federation could expose MTS Bank to potential liability and other sanctions, including the loss of general banking license. If the CBR were to suspend or revoke MTS Bank’s general banking license, then this would render MTS Bank unable to perform any banking operations and/or would lead to winding-up of its business. Our shareholding in MTS Bank may require us to make subsequent investments in the share capital of the bank in order to sustain growth of MTS Bank’s business as well as to comply with the capital adequacy requirements and relevant banking regulations. See also “—Political and Social Risks—Geopolitical situation and sanctions imposed as a result of current political environment could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares.” and ““—Political and Social Risks—The imposition of sanctions on MTS Bank and the potential for further international sanctions and export restrictions affecting the Group may have a material adverse impact on our business, financial condition and result of operations.”
Uncertainty in the international financial markets, possible further tightening in credit conditions and contraction of the global economy and markets in which MTS Bank operates (including the impact of COVID-19), could adversely impact, should the market conditions continue to worsen, MTS Bank’s business and operating results due to:
● | decreases in MTS Bank’s net interest income as well as fee and commission income; |
● | decreases in the demand for MTS Bank’s credit products as a result of higher interest rates; |
● | significantly increased non-performing loans and loan provision charges, loan losses and write-offs; |
● | decreases in the business activity of Russian companies and the credit-worthiness of Russian companies and individuals; |
● | increases in borrowing costs and reduced, or zero, access to the capital markets due to unfavourable market conditions; |
● | currency volatility; |
● | liquidity constraints; |
● | outflows of deposits from accounts; |
● | significant declines in the market values of securities held in MTS Bank’s trading and available for sale portfolios; and |
● | deterioration of capital adequacy. |
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Any of the factors discussed in the preceding paragraphs could adversely affect the financial condition of MTS Bank and its customers and may result, among other things, in a reduction in MTS Bank’s capital adequacy ratios and profits, pressure on credit risk concentration levels, an increase in exchange rate risk and losses, higher funding costs, a change in the strategy of MTS Bank or curtailment of some business operations due to increased risks. Moreover, any of these factors may cause a decrease in customer funds, a reduction in the demand for loans, foreign currency, investment and other banking transaction services that customers carry out with MTS Bank, as well as a general deterioration in the quality of MTS Bank’s loan book and/or a reduction in the market values of securities or other assets held on MTS Bank’s balance sheet, leading to possible defaults of such loans and/or the need for increased loan provisions. Should any of this take place, this could materially adversely affect our business, financial condition and results of operations.
Failure to monitor, manage and prevent MTS Bank’s operational and technological risks could have a material adverse effect on our business, financial condition and results of operations.
MTS Bank is exposed to technological risks as banking business requires the development of sufficient communication channels and software, the creation of large automated systems and considerable computer capacity located throughout the Russian Federation. MTS Bank invests considerable time and money in order to upgrade its technologies in a timely manner, centralize its information systems, create appropriate reserves and duplicate capacities, develop internal audit functions and control the operation of its hardware and software, however MTS Bank’s IT systems are significantly less developed in certain respects than those of banks in more developed countries. The lack of immediately available consolidated financial and operating data may hinder the ability of MTS Bank’s management to make decisions, to react promptly to changes in market conditions and to detect fraud and non-compliance with internal procedures. In addition, insufficient integration of the IT system increases MTS Bank’s operational risks and the costs of further business development.
MTS Bank’s ability to operate its business depends on its ability to protect the computer systems and databases which MTS Bank operates and uses from the intrusion of third parties who may attempt to gain access to MTS Bank’s computer systems, networks or databases through the Internet or otherwise. In addition, MTS Bank is exposed to risk of fraud by employees or outsiders, mismanagement, unauthorized transactions by employees and operational errors, including clerical or record keeping errors or errors resulting from faulty computer or telecommunications systems. Given MTS Bank’s high volume of transactions, errors may be repeated or compounded before they are discovered or rectified. In addition, a number of transactions at MTS Bank are processed manually, which may further increase the risk that human error or employee tampering or manipulation will result in losses that are difficult to detect. There can be no assurance that MTS Bank will be able at all times to successfully monitor, prevent and manage its operational and technological risks in the future. Any failure to do so could materially adversely affect our business, financial condition and results of operations.
MTS may potentially enter into agreements with companies of the Sistema group (i.e. related parties transactions) on terms which are different from those that would be obtainable on an arm’s length basis.
We have purchased interests in certain companies from Sistema, for example, United Russian Film Studios JSC and MTS Bank PJSC. We enter into agreements from time to time with other companies within the Sistema group for supply of switching and subscriber network equipment, power supply devices, medical services, license agreements, agreements on providing access to the infrastructure for installation of communication equipment, leasing of non-residential real-estate, rent of cloud services and other services. According to the applicable Russian legislation, and MTS’s control procedures in respect of related parties transactions, we seek to verify that such transactions comply with market terms, and require that related parties transactions with the companies within the Sistema group are reviewed by the Audit Committee of the Board of Directors in accordance with our corporate governance procedures. Nevertheless, a number of transactions with the companies within the Sistema group may potentially be concluded on terms, which are different from those that would be obtainable on an arm’s length basis.
See “Item 7.Major Shareholders and Related Party Transactions—B. Related Party Transactions” and Note 31 to our audited consolidated financial statements.
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In the event that our past or future interested party transactions are successfully challenged, our business, financial condition, results of operations and prospects could be materially adversely affected.
We own less than 100% of the equity interests in some of our subsidiaries. In addition, certain of our wholly owned subsidiaries have had other shareholders in the past. We and our subsidiaries in the past have entered into, and continue to enter into, transactions that may be considered to be “interested party transactions” for the purposes of Russian law, requiring in some cases consent or approval by disinterested directors, disinterested independent directors, disinterested shareholders or owners of voting shares, depending on the nature of the transaction and parties involved. It is possible that our and our subsidiaries’ interpretation and application of these provisions could be subject to challenge. Any such challenge, if successful, could result in the invalidation of transactions, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Moreover, following a recent legislative change, dated December 2022, until December 31, 2023 only shareholders holding alone or with other holders 5% or more of the voting shares have the right to appeal to the court with claims to challenge major and interested party transactions, as well as claims against a member of the Board of Directors or a member of any executive body of the Company. Before the adoption this Federal Law, shareholders holding alone or with other holders 1% or more of the voting shares had the right to file such lawsuits.
In the event that our minority shareholders or the minority shareholders of our subsidiaries do not consent to or approve certain transactions or other matters requiring their consent or approval we could be limited in our operational flexibility, and our business, financial condition, results of operations and prospects could be materially adversely affected.
Russian law requires a three-quarters majority vote of the holders of voting stock present at a shareholders’ meeting to consent to or approve certain transactions and other matters, including, for example, charter amendments, major transactions involving assets in excess of 50% of the total assets of the company, purchase of offered shares by the company and certain share issuances. In addition, a 95% or a unanimous vote is required to approve certain matters, for example, certain charter amendments regarding shareholders’ rights. A majority of disinterested shareholders participating in the voting is required to consent to or approve an “interested party transaction” in certain cases. In the event that our minority shareholders or minority shareholders of our subsidiaries do not consent to or approve such transactions or other matters requiring their consent or approval, we could be limited in our operational flexibility, and our business, financial condition, results of operations and prospects could be materially adversely affected.
Our competitive position and future prospects depend on our senior managers and other key personnel and our inability to attract, retain and motivate qualified personnel and embrace their well-being could have a material adverse effect on our business, financial condition and results of operations.
Our ability to maintain our competitive position and to implement our business strategy is dependent to a large degree on the services of our senior management team and other key personnel.
Moreover, competition in Russia and in the other countries where we operate for personnel with relevant expertise is intense due to the relatively small number of qualified individuals. The loss of any our senior management team members or an inability to attract, retain and motivate qualified personnel and embrace their well-being could have a material adverse effect on our business, financial condition and results of operations. We structure our compensation packages in a manner consistent with the evolving standards of the labor markets in these countries. We are not insured against the detrimental effects to our business resulting from the loss, dismissal, or unavailability of our key personnel. In addition, it is not common practice in Russia and the other countries where we operate to purchase key-man insurance policies, and we do not carry such policies for our senior management and other key personnel.
The entry of mobile virtual network operators into the Russian mobile communications market could increase competition and subscriber churn, resulting in a possible loss of our market share and decreased revenue.
Mobile virtual network operators (“MVNOs”) are companies that provide mobile communications services but do not own the radio frequencies and, in some cases, the network infrastructure required to do so. According to Russian regulation, MVNOs in Russia must be licensed, and their use of frequencies and infrastructure and rendering of services is to be done pursuant to agreements entered into between MVNOs and existing frequency holders. However, existing frequency holders are under no obligation to enter into such agreements with the MVNOs.
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The existing frequency holders, including us, may receive revenues from MVNOs for the use of our frequencies and network infrastructure. However, in the event we lose either subscribers to MVNOs that lease their frequencies and infrastructure from other operators or MVNOs that lease their frequencies and infrastructure from us, we will be deprived of the revenue streams from both the subscribers and the MVNOs. The MVNOs may also establish aggressive tariffs, which could result in increased subscriber churn and/or driving down the tariffs of all mobile operators.
The emergence of new MVNOs in the market or any of the foregoing trends might affect market competition and subscriber churn, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
A finding by the FAS that we have acted in contravention of antimonopoly legislation could have a material adverse effect on our business, financial condition and results of operations.
Our businesses have grown substantially through the acquisition and formation of companies, many of which required the prior approval of, or subsequent notification to, the FAS or its predecessor agencies.
Relevant legislation restricts certain acquisitions or formation of companies by groups of companies or individuals acting in concert without such prior the FAS approval. While we believe that we have complied with the applicable legislation for our acquisitions and formation of new companies, this legislation is sometimes vague and subject to varying interpretations. If the FAS were to conclude that our acquisition or formation of a new company was done in contravention of applicable antimonopoly legislation, which has led or may lead to restriction of competition, including emergence or strengthening of the company’s dominant position, or find prescriptions of the FAS, issued as part of the transaction approval, not fulfilled, it could file a claim to liquidate or reorganize in the form of separation or division of an acquired or established company. Moreover, the FAS may impose administrative sanctions for non-compliance with antimonopoly law when acquiring or creating a company. These could have a material adverse effect on our business, financial condition and results of operations.
In recent years, the FAS has been investigating mobile operators, including MTS, for suspected violations of antimonopoly laws. For example, see “Item 8.Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Antimonopoly Proceedings” and “—Changes to the rules and regulations involving roaming charges in Russia may adversely affect our financial condition and results of operations.”
If the FAS finds that we have violated or otherwise acted in contravention of antimonopoly legislation, this could have a material adverse effect on our business, financial condition, results of operations and prospects.
If we are found to have a dominant position in the markets where we operate and are determined to have abused this position or found to have committed concerted actions and/or concluded anti-competitive agreements, the FAS may be entitled to impose fines as well as regulate our tariffs and impose certain restrictions on our operations.
Under Russian legislation, a company controlling over 35% of a market may be found by the FAS to hold a dominant position in such market. In case of collective dominance of legal entities and in certain instances provided by law, a company could be also categorized by the FAS as dominant under certain conditions even if its share of the corresponding market is less than 35%, but equals to or is higher than 8%. Current Russian legislation does not clearly define “market” in terms of the types of services or the geographic area. In 2016, as a result of certain amendments to the Federal Law No. 135 “On the Protection of Competition,” the register of business entities having more than 35% of a certain commodity market or otherwise occupying a dominant position in the markets in which they operate, which previously listed MTS as occupying a dominant position in certain markets, was repealed. At the same time, the FAS continues to conduct market analysis in order to identify entities holding a dominant position in the markets in which they operate.
Companies recognized as natural monopolies are also considered to have a dominant position in their respective markets. One of our subsidiaries, MGTS, is categorized as a natural monopoly in the Moscow telecommunications market. As a result, MGTS’ tariffs are now subject to regulation by the FAS. In addition, as a natural monopoly, MGTS is obliged to comply with the rules of non-discriminatory third party access to its infrastructure. See also “—Change of regulated tariffs may lag behind MGTS’ real expenses growth, which may negatively impact profitability of our business.”
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In the event that we are found in the future to have a dominant position in the markets where we operate and are either determined to have abused the dominant position or found to have committed concerted actions in the market and/or concluded anti-competitive agreements, the FAS will have a right to impose certain restrictions on our operations in such markets. See “Item 4.Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation—Regulation in the Russian Federation—Competition, Interconnect and Pricing” for additional information.
If we are found to have violated antimonopoly legislation, an order requiring us to transfer any illegally obtained revenue to the federal budget may be issued in relation to such violations.
According to the Code of Administrative Offences of the Russian Federation, a company may be subject to either fixed penalty fine up to RUB 1 million or fine based on total turnover in the market where the violation is conducted, depending on the nature of violation of antimonopoly legislation. The level of fine ranges from 3% to 15% of revenue in the market where the violation is conducted for cartel agreements, from 1% to 15% of revenue for abuse of dominant position, from 1% to 5% of revenue for other anticompetitive agreements and from 1% to 3% of revenue for coordinated actions. Moreover, if the FAS finds actions of a company insufficient to rectify past violations of antimonopoly laws, it could file a claim for liquidation of this company or its reorganization in the form of division or separation.
If we or any of our subsidiaries were found by the competition authority to be business entities occupying a dominant market position, the competition authority would have a power to impose certain restrictions on our or our subsidiaries’ businesses. In particular, the authorities may impose on us tariffs at levels that could be competitively disadvantageous. If we or any of our subsidiaries were found by the FAS to be business entities occupying a dominant market position with a market share exceeding 70% and determined to abuse such dominant position, the Russian government would have a right to determine the rules of non-discriminatory access to goods or services offered by us. Additionally, geographic restrictions on our expansion could reduce our subscriber base and prevent us from fully implementing our business strategy, which may materially adversely affect our business, financial condition, results of operations and prospects.
If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.
In addition to the regulation of dominant operators by the FAS, the Federal Law on Communications provides for the special regulation of telecommunications operators occupying a “substantial position” (i.e., operators which, together with their affiliates, have 25% or more of installed capacity or capacity to carry out transmission of not less than 25% of traffic in a geographically defined zone within the Russian Federation). These regulations provide for governmental regulation of the key terms of such operators’ interconnect agreements, including the interconnect tariffs. In addition, such operators are required to develop standard key terms of interconnect agreements and publish them as a public offer made to all operators who intend to interconnect to the networks of those operators. Refusal of such operators to conduct an interconnect agreement is prohibited, except in cases where such agreement would contradict the terms of their license or other regulatory acts in respect of the unified communications network in the Russian Federation.
For additional information, see “Item 4.Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation—Regulation in the Russian Federation.”
At present, the foregoing regulations apply only to fixed-line operators in Russia, including our fixed-line business. If any legislation that extends the foregoing regulations to mobile operators is adopted, and we and any of our mobile network operator subsidiaries operating in Russia are identified as operators occupying a “substantial position,” regulators may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our revenues, financial condition and results of operations.
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In addition, MGTS is categorized as fixed-line operator occupying a substantial position in the Moscow telecommunications market and its interconnect tariffs are therefore subject to state regulation. In February 2013, Comstar-UTS was removed from the list of “substantial operators” in Moscow and MTS was not included therein. There is however a possibility that we could be categorized as fixed-line operator occupying a “substantial position” in Moscow due to our affiliation with MGTS and because of our integration with Comstar-UTS. As a result of the state regulation of the relevant interconnect rates, we, as “substantial operators,” may be unable to increase these in line with economic developments or any increases of our relevant costs, resulting in a material adverse effect on our financial condition and results of operations. See also “—Change of regulated tariffs may lag behind MGTS’ real expenses growth, which may negatively impact profitability of our business.”
Change of regulated tariffs may lag behind MGTS’ real expenses growth, which may negatively impact profitability of our business.
In addition to holding a “substantial position” in the Moscow telecommunications market, MGTS is included in the register of natural monopolies in the telecommunications market. Consequently, tariffs for basic services rendered to public switched telephone networks subscribers (fees for providing access to a local telecommunications network, monthly fees for granting subscriber line in a constant use and monthly fees for providing a local telephone connection) are subject to regulation.
Although MGTS is permitted to petition the FAS for increases in tariffs based on such criteria as inflation, increased costs and the need for network investments, it is possible that future requested increases may not be granted or that the FAS may not adequately take such factors into account in setting tariffs. If the permissible tariffs applicable to MGTS do not adequately compensate MGTS for the costs of providing services, our business and results of operations could be materially adversely affected. See also “—If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.”
Changes to the rules and regulations involving roaming charges in Russia may adversely affect our financial condition and results of operations.
In September 2018, the Board of sectoral ministries of communications of the Russian Federation and the Republic of Belarus approved a Roadmap aimed at reducing roaming charges between two countries. In December 2018, the Russian party drafted a new project of the Roadmap aimed at cancellation of international roaming in the territory of the Union State in 2019. Later, as a result of negotiations between Russia and Belarus a new project of Roadmap, which assumes cancellation of roaming charges in the territory of the Union State in 2020, was developed. In December 2019, a new version of Roadmap was approved, according to which, cancellation of roaming charges in the territory of the Union State will take place in September 2020. In order to implement the Roadmap, we significantly reduced roaming charges in November 2020. This affected our revenues from roaming charges in Belarus.
An action plan to establish conditions necessary for setting fair tariffs for international roaming services on the territories of the Eurasian Economic Union states in the first quarter of 2025 was adopted by the Decree No.19 of the Eurasian Economic Commission Board dated October 29, 2021. Although it is currently unclear how the Decree and its implementation might affect our operations, it could have a material adverse effect on our business, financial condition, results of operations and prospects. Any material fines imposed on us or changes to the roaming charges may adversely affect our financial condition and result of operations.
Compliance with the new regulations on IMEI numbers may present us with technical difficulties and may lead to the expenditure of significant resources.
Federal Law No. 533 dated December 30, 2020, which came into force starting from June 1, 2021, introduced amendments to the Law “On Communications”, including the concept of International Mobile Equipment Identity (“IMEI”). According to the law, the subscriber has a right to add information on his number and/or the IMEI in the Integrated Identification and Authentication System (IIAS). If the subscriber lost his device, he may report this to the operator through the IIAS. Subject to the confirmation of an IMEI number, the operator should stop providing services for such device.
Currently, there are no practical ways to confirm the uniqueness of the equipment identifier because an IMEI number may be used by several mobile manufacturers. It is currently unclear how these amendments might affect our activities, but this could have a material adverse effect on our business, financial condition and results of operations.
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We may be required to make significant investments beyond those that are currently planned to preserve our competitive advantage in response to the rapid evolution of fixed network technology.
One of our subsidiaries, MGTS, has devised a number of projects aimed at developing communications networks and expanding availability of telecommunications services for customers. The likely shortage of free cash flow during the current economic downturn could halt such investment programs for the development of new products and services, and possibly lead to a decrease in the number of projects and cutbacks in development programs in the New Moscow and Moscow regions.
The company completed its project on connection of its subscribers to broadband optical networks employing the Gigabit-capable Passive Optical Network (“GPON”) technology in Moscow, however, the network development still continues in Moscow and Moscow region. See “Item 4.Information on Our Company—A. History and Development—Capital Expenditure” for further information. The lack or limited access to residential buildings may affect these projects on construction and modernization of fixed-line network.
We engage contractors for the construction and upgrade of our network. Due to the currently unfavorable market conditions, some of our contractors may face a lack of own current assets and/or external finance sources, as well as other reasons, which may lead to the contractor’s inability to fulfill contract obligations or, in some cases, lead to bankruptcy. This may negatively affect the terms of our projects’ implementation and lead to higher costs. If we are not able to expand and upgrade our network infrastructure in a timely manner and offer new services, or if it is required to make significant investments beyond those that are currently planned, our business, financial condition, results of operations and prospects could be materially adversely affected.
Our intellectual property rights are costly and difficult to protect.
We regard our copyrights, trademarks, patents and similar intellectual property rights, including our rights to certain domain names, as essential to our continued success. We rely upon legislation on intellectual property, trade secret protection laws, as well as confidentiality and/or license agreements or contracts with our employees, customers, partners and others, to protect our proprietary rights. Nonetheless, intellectual property rights are particularly difficult to protect in the markets where we operate. In these markets, the regulatory agencies responsible for the protection of intellectual property rights are inadequately funded, legislation is underdeveloped, piracy and infringement are commonplace, and enforcement of court decisions is problematic.
Litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of rights of others, or to defend against claims of infringement. Any such litigation may result in substantial costs and diversion of resources and, if decided unfavorably to us, could have a material adverse effect on our business. We also may incur substantial acquisition or settlement costs to the extent that it would strengthen or expand our intellectual property rights or limit our exposure to intellectual property claims of third parties.
Breach of information confidentiality, integrity and availability may lead to interruption of business-critical processes, a loss of market share and claims from subscribers, regulators, and partners which could materially adversely affect our reputation, business, financial condition, results of operations and prospects.
We ensure the security of restricted information processing in corporate information systems, including when working remotely (for example, distant work period). However, unauthorized actions of our employees and partners that violate information security policy, as well as illegal actions of third parties may lead to breach of information confidentiality, integrity and availability, including subscriber data leakage, and, as a result, to interruption of business-critical processes, a loss of market share, claims from subscribers, regulators, and partners what could materially adversely affect our reputation, business, financial condition, results of operations and prospects.
Despite the measures taken, we cannot completely exclude the possibility of such incidents occurring in the future. See also “—Legal Risks and Uncertainties—Russian and foreign legislation on personal data and information security in information systems and communication networks may turn out to be hard to implement and require significant resources. Inability to comply with the requirements may lead to sanctions.”
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Alleged medical risks of cellular technology may subject us to negative publicity or risk of litigation, decrease our access to base station sites, diminish subscriber usage and hinder access to additional financing.
Electromagnetic emissions from transmitter masts and mobile handsets may harm the health of individuals exposed for long periods of time to such emissions. The actual or perceived health risks of transmitter masts and mobile handsets could materially adversely affect us or our subsidiaries by reducing subscriber growth, reducing usage per subscriber, increasing the number of product liability lawsuits, increasing the difficulty of obtaining or maintaining sites for base stations and/or reducing the financing available to the wireless communications industry. Each of these potential risks may adversely affect our business, financial condition, results of operations and prospects.
Effects of climate change may impose risk of damage to our infrastructure, our ability to provide services, additional costs and have a material adverse effect on our business and financial condition.
Extreme weather events precipitated by long-term climate change have the potential to directly damage network facilities or disrupt our ability to build and maintain portions of our network and could potentially disrupt suppliers’ ability to provide products and services required to provide reliable network coverage. Any such disruption could delay network deployment plans, interrupt service for our customers, increase our costs and have a negative effect on our operating results, financial condition and our business. The potential physical effects of climate change, such as increased frequency and severity of storms, floods, fires, freezing conditions, sea-level rise, and other climate-related events, could adversely affect our operations, infrastructure, and financial results. Operational impacts resulting from the potential physical effects of climate change, such as damage to our network infrastructure, could result in increased costs and loss of revenue. We could incur significant costs to improve the climate resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate such physical effects of climate change. We are not able to accurately predict the materiality of any potential losses or costs associated with the physical effects of climate change.
Effects of climate change may lead to regulatory changes and additional requirements from regulators, customers, investors and other stakeholders that may have a negative effect on our business, financial condition, results of operations and reputation.
Due to the nature of our operations, we may be impacted by regulatory developments related to climate change, including, for example, the introduction of national carbon regulation, and the revision of plans for the contract on the provision of renewable energy capacity, which may lead to an increase in the price of purchased electricity. In addition, the introduction of carbon pricing in various jurisdictions may lead to an increase in the prices of purchased equipment and the lack of a public position regarding the setting of decarbonization goals and the development of appropriate action plans may lead to a deterioration of market positions and a decrease in the confidence of interested parties. In addition, in case of the lack of response to customer requirements regarding the company’s decarbonization goals and the availability of low carbon telecommunications solutions it may lead to a decrease in revenue.
Further, customers, consumers, investors and other stakeholders are increasingly focusing on environmental issues, including climate change, water use, deforestation, plastic waste, and other sustainability concerns. Concern over climate change or other environmental, social and governance (ESG) matters may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the environment and reduce the impact of our business on climate change.
Climate change regulations (such as in relation to emissions of pollutants into the atmospheric air, waste management, impact on water resources) may require us to alter our proposed business plans or increase our operating costs due to increased regulation or environmental considerations. Non-compliance with regulations related to environmental protection could adversely affect our reputation and lead to fines.
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Other Risks
We have not independently verified information we have sourced from third parties.
We have sourced certain information contained in this document from third parties, including private companies and Russian government agencies, and we have relied on the accuracy of this information without independent verification. The official data published by Russian federal, regional and local governments may be substantially less complete or researched than those of more developed countries. Official statistics may also be produced on different bases than those used in Western countries. Any discussion of matters relating to Russia in this document must, therefore, be subject to uncertainty due to concerns about the completeness or reliability of available official and public information. In addition, the veracity of some official data released by the Russian government may be questionable.
Because no standard definition of an average monthly service revenue per user (“ARPU”), average monthly usage per user (“MOU”) or churn exists in the telecommunications industry, comparisons between certain operating data of different companies may be difficult to draw.
The methodology for calculating subscriber numbers, ARPU, MOU and churn varies substantially in the telecommunications industry, resulting in variances in reported numbers from that which would result from the use of a uniform methodology. Therefore, comparisons of certain operating data between different telecommunications companies may be difficult to draw.
Factors over which we have little or no control may affect our revenues.
Our business activities depend on a number of factors which are outside of our control, including natural disasters, imposition of a state of emergency in the countries of our operations, strikes and global and regional economic conditions. Any of these factors could result in deterioration of our revenues, which could have a material adverse effect on our results of operations, financial condition, prospects and the price of our ADSs.shares.
Item 4. Information on Our Company
A. | History and Development |
Corporate information
Our legal name is Mobile TeleSystems Public Joint Stock Company (MTS PJSC , MTS) and we are incorporated under the laws of the Russian Federation. Our head office is located at 5 Vorontsovskaya Street, Bldg. 2, Moscow 109147, Russian Federation, and the telephone number of our investor relations department is +7 495 223-2025. The address of our incorporation is 4 Marksistskaya Street, Moscow 109147, Russian Federation. We maintain a website at https://ir.mts.ru/home. The information on our website is not a part of this report. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Our predecessor, Mobile TeleSystems CJSC (“MTS CJSC”), our predecessor, was formed in 1993. The founding shareholders included MGTS and three other Russian telecommunications companies, which collectively held 53% of our original share capital, and two German companies, Siemens AG and T-Mobile Deutschland GmbH, an affiliate of Deutsche Telekom AG, which collectively held the remaining 47%. Sistema currently owns 42.085% of our share capital (effective ownership as of April 10, 2023 - 49.94%49.73%). See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”
Our legal name is Mobile TeleSystems Public Joint Stock Company (MTS) and we are incorporated under the laws of the Russian Federation. Our head office is located at 5 Vorontsovskaya Street, Bldg. 2, Moscow 109147, Russian Federation, and the telephone number of our investor relations department is +7 495 223-2025. The address of our incorporation is 4 Marksistskaya Street, Moscow 109147, Russian Federation. We maintain a website at www.ir.mts.ru. The information on our website is not a part of this report. We have appointed Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711 as our authorized agent for service of process for the service or processing of any suit or proceeding arising out of, or relating to, our shares, ADSs, or the depositary agreement(s). We maintain a website at www.ir.mts.ru. The information on our website is not a part of this report. The SEC
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maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.Mobile TeleSystems Public Joint Stock Company (MTS PJSC) is the new legal name of Mobile TeleSystems Open Joint Stock Company (MTS OJSC) registered on July 1, 2015 in order to comply with the regulations of Chapter 4 of the Civil Code of Russian Federation (as amended). MTS OJSC was created on March 1, 2000, through the merger of MTS CJSC and RTC CJSC, a wholly owned subsidiary. The name of MTS OSJC was then changed to our current name, Mobile TeleSystems Public Joint Stock Company. Our charter was registered with the State Registration Chamber on March 1, 2000, which is our date of incorporation, and with the Moscow Registration Chamber on March 22, 2000. Our initial share issuance was registered by the Russian Federal Commission on the Securities Market on April 28, 2000.
We completed our initial public offering on July 6, 2000, and listed our shares of common stock, represented by ADSs on the New York Stock Exchange (the “NYSE”) under the symbol “MBT.” Each ADS represents two underlying shares of our common stock. Prior to May 3, 2010, each ADS represented five shares of our common stock.
In September 2001, we won a tender held by the Telecommunications Ministry of the Belarus Republic to form a joint venture with a GSM 900/1800 license to operate in Belarus. On June 26, 2002, MTS Belarus received all of the governmental approvals and licenses required to commence operations in Belarus and it began operations on June 27, 2002.
In 2003 through a number of purchases we acquired a 100% stake in MTS Ukraine (now VF Ukraine) for RUB 11,872 million. Starting from 2007 until 2015, we operated under the MTS brand in Ukraine. In 2015, as part of our strategic partnership with Vodafone, we introduced Vodafone brand in Ukraine. In December 2019, our wholly owned subsidiary Allegretto Holding S.a.r.L (Lux) sold its 100% stake in its Dutch subsidiary Preludium B.V., the sole shareholder of VF Ukraine, for total consideration of USD 689 million (RUB 44,386 million) (including fair value of earn-out of USD 44 million). See Note 11 to the consolidated financial statements. This deal is in line with our revamped strategy focused on Russia and aimed to build innovative digital services on top of a strong telecoms foundation.
We started operations in Uzbekistan, following the two step acquisition of 100% ownership interest in Uzdunrobita in 2004 and 2007. In July 2012, we suspended providing services in Uzbekistan per the order from the State Agency for Communications and Information (“SACI”) of Uzbekistan on the temporary suspension of the operating license of Uzdunrobita for a period of 10 business days which was subsequently extended to three months. On April 22, 2013, the Tashkent Economic Court declared Uzdunrobita bankrupt and initiated liquidation procedures. As a result, we lost control over the subsidiary and deconsolidated Uzdunrobita. In July 2014 the disputes between us and Republic of Uzbekistan were resolved. The parties signed the Settlement Agreement and according to its terms all mutual claims were eliminated. Furthermore, a new mobile operator, UMS, was established by governmental authorities of Republic of Uzbekistan. On September 24, 2014, an ownership interest of 50.01% in UMS was transferred to us as an incentive for reentrance into the country by the State Unitary Enterprise “Center of Radio Communications, Radio Broadcasting and Television,” the second shareholder of an operator, on behalf of the Republic of Uzbekistan. We started operations in Uzbekistan in December 2014. On August 5, 2016, we sold our 50.01% stake in UMS to the State Unitary Enterprise “Center of Radio Communications, Radio Broadcasting and Television.”
Please see “Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations” regarding recent suspension of our services in Uzbekistan and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—7. Litigation—Uzbekistan.”
In two separate purchases in June and November 2005, we acquired 100% of BCTI, the leading wireless operator in Turkmenistan, for $46.7 million (RUB 1,343 million) in cash. Since October 2006, we have operated under the MTS brand in Turkmenistan. On December 21, 2010, the Ministry of Communication of Turkmenistan suspended our primary operating license and we ceased providing mobile telecommunications services in Turkmenistan. In August 2012, we restarted our mobile communication operations in Turkmenistan via MTS-Turkmenistan and resumed providing services for subscribers who did not cancel their contracts. Since October 1, 2012, we resumed our operations in Turkmenistan entirely and started entering into contracts with new subscribers. On September 29, 2017, we stopped providing communication services in Turkmenistan due to the actions of the state-owned telecommunication company Turkmentelekom, which resulted in the disconnection of international and long-distance zonal communication services and internet access. See “Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable.”
In September 2007, we acquired an 80% stake in International Cell Holding Ltd., a 100% indirect owner of K-Telecom (now MTS-Armenia), the leading wireless operator in Armenia, for €260.0 million (RUB 9,142 million), and entered into a call and put
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option agreement initially validOn February, 28, 2022 trading in the Company’s ADSs on the NYSE was suspended.
In April 2022, Russian Federal Law No. 114-FZ dated April 16, 2022 (the “Delisting Law”) came into force which required Russian companies to terminate their depositary receipt programmes unless granted an exemption by the Russian Government Commission on Monitoring Foreign Investment. MTS submitted an application for such exemption, and in May 2022 received permission to maintain ADR Program until 2012 (and later extended until 2018) forJuly 12, 2022.
In June 2022, MTS informed JPMorgan Chase Bank, N.A., the remaining 20%. Subsequently International Cell Holding Ltd. was substituted by Aramayo Investments Limited and further liquidated duedepositary under the existing MTS ADR program, of its intention to corporate restructuring. terminate the Deposit Agreement, effective as of July 13, 2022.
In August 2019 Allegretto Holdings S.a.r.L (Lux), our 100% subsidiary,2022, MTS received confirmation from the NYSE that held 80%the Company’s ADSs had been delisted from the NYSE effective August 8, 2022. The existing ADSs could be converted into MTS’ ordinary shares at the ratio of Aramayo Investments Limited entered into a full and final settlement agreement, under which the value of 20% shares in MTS-Armenia was offset against the amount of loan issued to the minority shareholders and accrued interest ($99.1 million or RUB 6,618 million). Thus, as a result of the transaction, Allegretto accumulated 100% of indirect ownership over the asset. MTS-Armenia operates in the GSM-900/1800 standard, covering the entire territory of Armenia. It historically operated under the VivaCell brand, and was re-branded as VivaCell-MTS in September 2008.
In October 2009, we acquired a 50.91% stake in Comstar, a leading fixed line operator in Russia, from Sistema, and subsequently increased our ownership interest to 61.97% (or 64.03% excluding treasury shares) in December 2009 and to 70.97% (or 73.33% excluding treasury shares) in September 2010 through a voluntary tender offer. On December 23, 2010, the extraordinary general meetings of shareholders of Comstar and MTS approved a merger, which1:2. The guaranteed period for depositary receipts conversion was completed on April 1, 2011. As a result, Comstar ceased to exist as a separate legal entity and MTS became the legal successor of Comstar in respect of all its rights and obligations.January 12, 2023 (inclusive).
Prior to April 1, 2011, Comstar operated in both the Moscow and other fixed line communications markets, offering voice telephony, broadband Internet and pay-TV, operator interconnect and other services to its subscribers. As of now we still continue to provide these services. One of Comstar subsidiaries was MGTS, Moscow’s incumbent fixed line operator with “last mile” access (the final phase of delivering connectivity from a communications provider to a customer) to approximately 96% of the households in Moscow. In 2011, we completed the re-branding of Comstar with our main MTS brand. MGTS continues to provide services under its own brand.Recent acquisitions
In 2009, we started to develop2022, our sales and distribution network both organically and through the acquisition of several national and regional retail chains. We organized our retail operations under a wholly owned subsidiary, Russian Telephone Company (“RTC”). RTC handles all functions relating to our retail operations, including the management of points-of-sale, the purchase and sale of handsets and accessories and subscriber enrollment at our retail outlets.
Between 2009 until now we acquired controlling stakes in various regional fixed line operators as we are determined to develop broadband Internet through regional expansion. We also acquired controlling stakes in regional operators, holding rights to use radio frequencies in their regions of operations. The acquisitions enhanced our spectrum resources in these regions.included:
In April 2013, we acquired a 25.095% stake in MTS Bank for 5.09 billion rubles through an additional share issuance by the bank. In July 2018, we acquired additional stake in MTS Bank for RUB 8.27 billion from Sistema and our ownership share increased to 55.4%, providing control over the bank. The acquisition allowed us to consolidate MTS business in the Russian FinTech market, simplify corporate and operational management, and accelerate the launch of new products. In February 2019 we acquired a 39.48% stake for RUB 11.4 billion and later in December 2019 we acquired an additional 4.46% stake for RUB 1.4 billion. As a result of these transactions, MTS’ effective share in MTS Bank increased to 99.9% (including a 0.2% share in the bank held by our subsidiary MGTS and MTS Bank’s ownership of its own treasury shares).
In April 2014, we acquired a 10.82% stake in OZON, a leading Russian e-commerce company, through the purchase of OZON Holdings Limited’s additional share issuance for RUB 2,702 million. Cooperation with OZON created new distribution channels available to us through its extensive online retail platforms. As of December 31, 2017 our interest comprised 11.19% and was further increased to 18.69% as of December 31, 2018. In March 2019, we sold our stake in OZON to Sistema for RUB 7.9 billion. Following this date, we had no interest in OZON.
● | 100% of VisionLabs B.V., a renowed developer of products based on machine learning (February); |
● | 11.78% of UrentBike.ru, LLC, a leader on the Russian micro-mobility short-term rental market, including being Russia’s largest electric scooter rental operator (February); |
● | 36.56% of the MTS Venture Fund in Bartello, an online food and beverage ordering service (April); |
● | 58.38% of Renninga Holdings Limited, whose wholly owned subsidiary Gulfstream Security Systems JSC is one of Russia’s leading providers of digital safeguard systems for residential households, automobiles, and commercial real estate (April), together with 19.5% of Vorsicher Holding Limited, an owner of Gulfstream European divisionas well as call and put option agreements to purchase the remaining 41.62% stake in Gulfstream, exercisable starting 2025; |
● | 100% of Bronevik Online LLC and Bronevik Company LLC (Bronevik Group, one of the market leaders in online hotel booking), with the aim of developing a new business line, MTS Travel, in the tourism industry (July); |
● | 75.5% of Riandele Ltd, which owns Webinar LLC and Webinar Technologies LLC, the largest Russian developer of services for online meetings, events, training and webinars (July) (subsequently increasing our stake to 84.25% in September 2022 following the exercise of call options; with remaining options under call and put option agreements exercisable in 2024 and 2025); |
● | 25% of New Digital Solutions LLC, a joint venture to develop 5G technology, which brings together Russia’s largest telecom operators with the goal of acquiring radio frequency resources to build 5G mobile networks in Russia (July); |
● | an investment by the MTS Corporate Venture Fund in the Belarusian start-up LogicLike, an online educational platform for the development of logic and reasoning in children, with LogicLike’s interactive courses and games for children’s comprehensive educational development now available to both new and existing subscribers of MTS’s ‘NETARIF’ Junior (August); and |
● | 50.85% of Navitel Group, a Russian provider of navigation and cartographic solutions, together with call and put option agreements to purchase the remaining stake in Navitel Group, in order to create our own geo-services platform for the development of an ecosystem of services and transport solutions (October). |
In December 2015, we have completed2022, the acquisitionspin-off of NVision Grouptower assets from MTS PJSC into Tower Infrastructure Company LLC (“NVision”TIC”), a 100% subsidiary of MTS, was closed. Given the tower footprint, it is hoped that TIC could become a partner of choice for other mobile network operators for network equipment installation. It is hoped that increasing tower tenancy could enable TIC to grow incremental revenue and its subsidiaries for RUB 11.2 billion. Through this transaction, we have obtained proprietary rights over our billing systems which will allow us to reduce the time-to-market for new products and better manage billing and IT-related expenses. NVision is a system integrator and complex IT solutions provider in Russia. In November 2020 we sold our 100% stake in NVision Group JSC to Sistema PJSFC for RUB 369 million (including adjustment based on NVision’s financial results as of the date of deal closure). Under the terms of the deal, we agreed to sell NVision’s systems integration assets, excluding those utilized in the development of our product portfolio. We also retained the FORIS BSS/OSS billing system that had earlier been part of NVision.
In October 2017, we acquired 50.82% of ownership interest in the Russian retail software developer Oblachny Retail LLC, operating under trademark LiteBox, with a call and put option arrangement existing over another 49.18% of shares. The deal allowedfurther drive business performance.
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us to enter the cloud-based cash register market as a fully licensed fiscal data operator (“FDO”) and a provider of integrated digital cash management solutions for B2B clients. In 2021, we increased our stake in Oblachny Retail LLC to 100%.
In December 2017, we purchased a 100% stake in Praliss Enterprises, thus acquiring onePurchase prices of the world’s leading eSport clubs—Gambit Esports. The acquisition was a part of our 3D strategy.
In January 2018, we acquired a 78.2% stake of Cubichall Holdings Ltd (the owner of Kulturnaya Sluzhba LLC), operating under the trademark Ponominalu.ru, for RUB 321 million with a callrecent acquisitions are disclosed in Item 5. Operating and put option arrangement existing over another 21.8% of shares. Following exercise of options in May 2019financial review and July 2020 we increased our stake to 100%. In February 2018, we acquired a 100% ownership interest in Moskovskaia Direktciia Teatralno-Kontcertnyh i Sportivno-Zrelishchnyh Kass LLC, operating under the trademark Ticketland.ru, for RUB 3.19 billion. These acquisitions allowed us to enter the event ticket market, while broadening our suite of digital services, and integrate a key new product into existing loyalty program and mobile applications ecosystem.prospects—A. Operating Results—Acquisitions.
In 2018, we acquired Dekart and Serebryaniy Bor property complexes in full from Sistema. The property complexes are partly occupied by us and partly used as investment property.
In December 2018, we acquired a 100% interest in IT-Grad 1 Cloud LLC, one of the largest cloud providers on the Russian IaaS (Infrastructure as a Service) market. This acquisition allowed the Group to strengthen its presence in the Russian cloud services market.
In April 2019, we acquired from Sistema a 100% interest in Joint Stock Company “United Russian Studios,” a management company of a “Kinopolis” movie studio with its own movies production complex. The acquisition was a part of our 3D strategy.
In June 2019, we acquired a 97.42% stake in JSC “RIKT,” a regional provider of telecommunications services in Mezhdurechensk and Kemerovo Oblast. The acquisition was commenced through the voluntary tender offer procedure under Russian law. Later, in October 2019 we acquired the remaining 2.58% stake in JSC “RIKT” through obligatory squeeze-out procedure set out in Russian law. As a result of both procedures, MTS’ share in JSC “RIKT” increased to 100%. This acquisition allowed the Group to strengthen its presence in the Russian broadband Internet regional market.
In August 2019, we acquired Narodnoje property complex in full from Sistema. The property complex comprises office facilities and hostel premises, and is partly occupied by us and partly used as investment property.
In November 2019, we acquired a 7.5% stake in JUST AI Limited, IT-company specialized in artificial intelligence technologies, machine learning and natural language processing. The acquisition was a part of our CLV 2.0 strategy (as described below).
In December 2019, we acquired a 15.01% stake in SWIPGLOBAL Ltd, IT-company specialized in face recognition payments without using a smartphone or QR code. The acquisition was a part of our CLV 2.0 strategy.
In February 2020, we acquired a 51% stake in Zelenaya Tochka Group, a provider of broadband and digital TV services in a number of Russian regions, and accounted for investment in joint venture, based on the provisions of the shareholders’ agreement. The Zelenaya Tochka group of companies comprises 13 connectivity operators operating under multiple brands across 12 Russian cities: Stavropol, Mikhaylovsk, Nevinnomyssk, Elista, Tambov, Belgorod, Lipetsk, Ufa, Neftekamsk, Beloretsk, Tomsk, and Vladivostok. Under the terms of the agreement, we retain three-year call and put options to purchase the remaining 49% of Zelenaya Tochka’s share capital. Later in April 2021, we exercised a call option and bought out the remaining 49% of Zelenaya Tochka’s share capital in six local fixed-line network operators.
In June 2020, we acquired a 100% interest in Stopol Group (later renamed as “MTS Auto”), producer and supplier of car multifunctional multimedia devices / on-board computers. The acquisition is a part of our digital ecosystem strategy. The purchase price constituted a cash payment of RUB 312 million paid in July 2020 and a contingent consideration with the fair value of RUB 9 million at acquisition date.
In September 2020 we announced an agreement to invest RUB 125 million in the developer of CoinKeeper, Russia’s most popular personal finance app. The investment—which marks the first outlay by the MTS Venture Fund—is to be structured in multiple tranches, with the fund receiving a minority stake in the startup. As a first tranche we`ve invested RUB 85 m and have got
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22.08% stake in Disrapp LLC. In August-September 2021, we've additionally invested 40m Rubles and increased our indirect stake to 29.41%. In January 2021, we announced a RUB 60 million investment by the MTS Venture Fund for an approximately 10% stake in the Russian startup Airo, a platform aggregator for on-demand household and dry cleaning services in Moscow and St. Petersburg with over 50,000 users.
In January 2021, we announced an agreement to invest by MTS AI around USD 10 million in the startup Kneron, an AI chip developer. The investment will enable MTS AI to receive exclusive distribution rights in Russia for Kneron chips as well as move toward creating its own line of AI-ready products leveraging Kneron’s technology.
In April 2021, we acquired a 100% ownership interest in LLC “Credit Consulting”, a credit broker. The purchase price comprised a cash payment of RUB 10 thousand paid in May 2021 and contingent consideration at fair value of RUB 60 million, payable in 5-year period based on operating performance targets.
In May-June 2021, we acquired an 8.39% stake in TalkBank, a Russian new generation messenger-bank without physical branches, mobile applications and call centers, by investing RUB 85 million in TalkFinance LLC and purchasing a share from existing members. The acquisition is a part of our digital ecosystem strategy.
In June 2021, we acquired a 100% stake in MTT OJSC (“МТТ”), a country-wide provider of smart-telecom and IT solutions for business. In addition to B2B and inter-operator telecom services, MTT is a leading Russian company providing smart-services for business-customers based on CPaaS communication platforms and API. The purchase price constituted a cash payment of RUB 3,680 million paid in June 2021, transfer of receivables from former owners offset against the purchase price for RUB 1,958 million and deferred payment of RUB 160 million.
In June 2021, we acquired a 51% of the equity capital of Factorin LLC (“Factorin”) for RUB 867 m, including a RUB 350 m cash-in investment to support the startup’s continued development. Factorin is the developer and owner of an innovative blockchain-based platform for trade finance transactions with a focus on supply chain finance and invoice factoring. The investment is aimed at expanding our portfolio of digital financial services for B2B clients.
In June 2021, we acquired a 100% ownership interest in LLC “GDTs Energy Group” (“GreenBush”), the operator of the GreenBush data center in Tehnopolis special economic area, to use the facility’s additional capacity to offer colocation and cloud solutions to customers as well as to facilitate our own compute and storage needs. The purchase price constituted a cash payment of RUB 5,200 million paid in July 2021.
In September 2021, we acquired a 70% stake in Sistema Capital LLC (“Sistema Capital”) for RUB 3.5 bn, that allowed us to increase our share in Sistema Capital to 100%. The aim of consolidation is to accelerate the launch of new MTS Investments features; developing new offerings for retail and high-net-worth individuals; as well as expanding ecosystem of MTS’s financial services and strengthening our overall market position in the fast-growing Russian retail investment services space.
In February 2022, we acquired a 100% stake in VisionLabs B.V., a renowed developer of products based on machine learning, for RUB 6.5 bn. The company has implemented more than 500 projects in 37 countries for more than 270 clients from the financial, telecommunications, retail, transport and energy sectors. The acquisition is aimed at reinforcement of our artificial intelligence product portfolio in the computer vision space, and enhancing the potential of our digital ecosystem.
Capital Expenditures
We spent in total RUB 111,682112,581 million in 20212022 for network development in Russia and the other countries where we operate, which included RUB 73,08070,624 million in cash expenditures on property, plant and equipment, and RUB 38,60241,957 million for the purchase of intangible assets. In 20222023 we plan on spending for further network expansion, special projects relating to the development of big data, media, artificial intelligence and ecosystem products, fixed network modernization, further construction of radio subsystem and additional storage, processing and indexing centers to comply with requirements of “Yarovaya Ozerov bundle of laws,” maintenance capital expenditures, construction of new sites and purchase of software for network managing in Armenia and other initiatives. As the business scale grew, MTS increased investment until 2021 and plans to stabilize its capital expenditures and change investments structure starting from 2022 by focusing on the building of its ecosystem and digital products. We plan to finance our capital expenditures primarily through operating cash flows, and to the extent necessary, through additional external financing. The actual amount of our capital expenditures for 20222023 may vary depending on subscriber growth, demand and network development, as well as
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currency volatility, vendor terms and the availability of external financing. Please see also “Item 3. Key Information—D. Risk Factors—Political and Social Risks—FurtherFactors — Risks Relating to Economic Risks in Our Countries of Operation —Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesgeopolitical situation and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”shares” for the risks connected with sanctions.
A breakdown of our capital expenditures in 20212022 by country is set forth below.
We spent RUB 10, 18613,948 million, 10,186 million and 262 million in 2022, 2021 and 2,052 million in 2021, 2020, and 2019, respectively, for acquisitions of subsidiaries, net of cash acquired from third parties.
Russia
We spent RUB 109,703110,858 million in 20212022 for network development in Russia, including RUB 72,04669,580 million in cash expenditures on property, plant and equipment, and RUB 37,65741,278 million for the purchase of intangible assets.
Armenia
We spent RUB 1,6951,648 million in 20212022 for network development in Armenia, including RUB 1,003969 million in cash expenditures on property, plant and equipment, and RUB 692679 million for the purchase of intangible assets.
Czech Republic
We spent RUB 28475 million in 20212022 for network developmentmachinery and equipment in the Czech Republic, including RUB 3175 million in cash expenditures on property, plant and equipment, and RUB 253 millionnull for the purchase of intangible assets.
Belarus
MTS Belarus spent RUB 2,4201,414 million in 20212022 for network development, including RUB 1,4571,026 million in cash expenditures on property, plant and equipment, and RUB 963388 million for the purchase of intangible assets. We do not include the capital expenditures of MTS Belarus in our capital expenditures described above as its results are not consolidated in our financial statements.
B. | Business Overview |
We are digital ecosystem and a leading telecommunicationstelecommunication services provider in Russia and the CIS, providing a wide range of mobile and fixed line voice and data telecommunications services, including data transfer, broadband, pay-TV and various value-added services, including Big Data, IoT, cloud services, banking services, e-commerce, as well as selling equipment, accessories and software. According to AC&M Consulting,
In 2022, we are the largest provider of mobile cellularoffered fixed line communications services in Russia. According to our own estimates, updated at least annually and based on our subscriber data and reports60 regions across Russia, covering a population of other national operators, we are also the largest provider of mobile cellular communication services in Armenia in terms of mobile subscribers.
As of December 31, 2021, we had a mobile subscriber base of approximately 82.7about 30 million (80.44 million in Russia and 2.23 million in Armenia) which is an increase of 2.5% compared to December 31, 2020. As of December 31, 2020, we had a mobile subscriber base of approximately 80.6 million (78.5 million in Russia and 2.1 million in Armenia) which is a decrease of 0.8% compared to December 31, 2019. As of December 31, 2019, we had a mobile subscriber base of approximately 81.3 million (79.1 million in Russia and 2.2 million in Armenia) which is an increase of 1.4% compared to December 31, 2018.
We are also the largest operator in the Moscow residential broadband market in terms of subscribers, with a 38% market share as of December 31, 2021, based on TMT Consulting data.
Our revenues for the year ended December 31, 2021, were RUB 534,403 million, which is an increase of 8.0% from RUB 494,926 million for the year ended December 31, 2020. Our revenues for the year ended December 31, 2020, were RUB 494,926 million, representing 5.2% increase from the year ended December 31, 2019. Our profit for the year ended December 31, 2021, was RUB 64,269 million, which is an increase of 3.5% from RUB 62,073 million for the year ended December 31, 2020. Ourhouseholds.
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profit for the year ended December 31, 2020, was RUB 62,073 million, which is an increase of 12.7% from the year ended December 31, 2019.
Russia is our principal market, both in terms of subscribers and revenues. For the year ended December 31, 2021 approximately 97.5% of our revenues came from operations in Russia and approximately 2.5% of our revenues came from operations in other countries, respectively.
In July 2018 we acquired control over MTS Bank and started rendering banking services. MTS Bank is one of the 50 largest banks in the Russian Federation. MTS Bank was established in the Russian Federation as an open joint stock company in 1993. MTS Bank’s primary business consists of commercial activities, trading with securities, foreign currencies and derivative instruments, originating loans and guarantees. MTS Bank is regulated by the CBR and conducts its business under general license number 2268 issued on December 17, 2014. In 2018, RAEX (Expert RA rating agency) assigned MTS Bank a credit rating of ruBBB+, and Fitch Ratings upgraded the bank’s rating to BB−. In 2019, rating agencies affirmed the credit ratings of the financial institution. As of December 31, 2020, among Russian banks, MTS Bank ranked 29th in terms of the amount of household deposits and capital and 37th in terms of total assets, according to Banki.ru. As of December 31, 2021, among Russian banks, MTS Bank ranked 25th in terms of the amount of household deposits, 29th in terms of capital and 34th in terms of total assets, according to Banki.ru. In March 2022, Fitch Ratings decreased the bank's rating to B and further withdrew the bank’s rating, following the withdrawal of the sovereign rating of Russia.
Our strategy of MTS Bank development is building of a digital bank in cooperation with telecommunication business, resulting in positive synergies and fulfilling financial services area to create a single ecosystem of digital services for customers.
Banking services revenue in 2021 was RUB 48,340 million, representing 9.0% of our total revenues for the year ended December 31, 2021. MTS Bank’s net operating profit was positive and amounted to RUB 6,038 million. MTS Bank activities (financial assets and liabilities, management of liquidity risks connected with the activities) are described in Note 30 to the consolidated financial statements. Outstanding deposits and loans to customers as at December 31, 2021 came to RUB 205,936 million. Loans to legal entities made up 13.1% of that total, 85.2% were loans to individuals.
Operations of MTS Bank are included in "Fintech" reportable segment.Detailed segment information is presented in Note 6 to the consolidated financial statements.
As of December 31, 2021, approximately 97.2% of our mobile subscriber base was in Russia and approximately 2.8% was in other countries. According to AC&M-Consulting, as of December 31, 2021, we had a 31% market share of total mobile subscribers in Russia.
The table below sets forth our total mobile subscribers as of the end of the last five years:
| | | |
Period |
| Subscribers(1) |
|
| | (in million) |
|
2017 | | 80.4 | (2) |
2018 | | 80.1 | (2) |
2019 | | 81.3 | (2) |
2020 | | 80.6 | (2) |
2021 | | 82.7 | (2) |
|
|
|
|
In August 2016, we ceased our operations in Uzbekistan. In September 2017, we suspended the provision of telecommunication services to our subscribers in Turkmenistan, due to the termination by Turkmen state-owned companies and state authorities of line rental, frequency allocation, interconnect, and other agreements necessary to servicing MTS clients. For more information, see “Item 3. Key Information—D. Risk Factors—An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable.”
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In November, 2019, the Group entered into a sale agreement to dispose of VF Ukraine. The disposal was effected in order to concentrate on development of the Group’s core Russian market. The disposal was completed in December, 2019, and is reported in the current period and retrospectively restated in prior periods as a discontinued operation.
In October, 2020, the Group entered into a sale agreement to dispose of JSC “Nvision Group”, which provided integration services, as well as the sales of software, and constituted “System Integrator” operating segment. The disposal was completed in October 2020, and is reported in the current period and retrospectively restated in prior periods as a discontinued operation.
For details on the sales, please see “Item 4—Information on our Company—A. History and Development” and Note 11 to the consolidated financial statements.
According to AC&M Consulting, overall mobile cellular penetration in Russia was approximately 178% as at December 31, 2021, 172% as at December 31, 2020 and 178% as of December 31, 2019. According to our estimates based on our subscriber data
and reports of other national operators, mobile cellular penetration in Armenia was approximately 125.8% as at December 31, 2021 and 123% as of December 31, 2020, as compared to approximately 127.6% as of December 31, 2019.
Our consolidated mobile subscriber base changed insignificantly in the first three months of 2022. Specifically, according to our estimates as of March 29, 2022, we had approximately 82.3 million subscribers, including approximately 80.1 million in Russia and 2.2 million in Armenia.
As of December 31, 2021, according to our estimates based on our subscriber data and reports of other national operators, MTS Belarus had approximately 5.7 million subscribers and a leading market share of 45.9%. As of December 31, 2020, according to our estimates, based on our subscriber data and reports of other national operators, MTS Belarus had approximately 5.7 million subscribers and a leading market share of 48.7%. As of December 31, 2019, according to our estimates, based on our subscriber data and reports of other national operators, MTS Belarus had approximately 5.6 million subscribers and a leading market share of 46.9%. Belarus, a country with a population of approximately 9.5 million, had a mobile cellular penetration rate of approximately 123.2% as of December 31, 2019, according to our estimates based on our subscriber data and reports of other national operators. Please see “Item 3. Key Information—D. Risk Factors—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the risk of sanctions on operations of MTS Belarus.
As of December 31, 2021, we had mobile licenses to operate and commercial mobile operations throughout the entire territory of Russia with a population of approximately 146.2 million people and throughout the entire territory of Armenia with a population of approximately 3.0 million people. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Failure to renew our licenses, or receive renewed or new licenses with similar terms to our existing licenses, could have a material adverse effect on our business and results of operations,” and “—Failure to fulfill the terms of our licenses could result in their suspension or termination, which could have a material adverse effect on our business and results of operations.”
In 2021, we offered fixed line communications services in 56 regions across Russia, covering a population of about 25 million households.
Our Moscow fixed line operations contemplate communications services provided through incumbent operator MGTS. Our Moscow fixed line operations included 2.5 million unique residential subscribers as of December 31, 2021. We are the largest operator in the Moscow residential broadband market, with a 38% market share, based on TMT Consulting data. MGTS holds licenses and regulatory approvals to provide local telephony, DLD/ILD voice telephony, interconnect to other operators, Internet and data transmission and other services.
Our other fixed line operations in other cities include the following communicationscommunication services: voice, data and broadband Internet and pay-TVpay TV services for corporate and residential subscribers, as well as the provision of interconnect services to other communications operators and numbering capacity to their subscribers. As of December 31, 2021, we had 3.0 million unique residential subscribers according to our estimates. Fixed line services areWe also providedoperate in Armenia, withwhere we provide digital telephony communications services, data transmission, Internet access and the renting of channels.
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TableWe provide fixed-line communications services to corporate, operator and residential subscribers in 60 regions throughout Russia. Specifically, we offer local voice, DLD/ILD voice, data and Internet and pay TV services to our subscribers. Some of Contentsthe interconnect tariffs we charge other telecommunications operators for in Moscow and certain other cities are regulated by the Russian government.
We have also continued to develop our proprietary sales and distribution network organically.
To maintain and increase our market share and brand awareness, we use a combination of print media, radio, television, direct mail and outdoor advertising, focusing on brand and image advertising, as well as promotion of particular tariff plans.
Business Strategy
Starting from 2019, MTS followshas followed the strategy called “Customer Lifetime Value 2.0” (“CLV 2.0”) which is aimed to buildat building substantial digital business on the top of our telecommunication business. The name of the strategy reiterate that we put customers at the center of our value proposition. We plan to supply our customers with a wide range of digital services. Our strategy is focused on prolonging customers’ lifetime by use of our services by increasing emotional attachment to the brand together with level of satisfaction and loyalty. We focus on providing more value for our clients and maximize their value to us in the long run. Reference to “2.0” stresses that we are also shifting from single business line telecom centric ideology (which could be considered “1.0”) to a multi product digital services provider approach which should enable us to maximize value across the whole product portfolio.
We believe that extension from telecommunication into adjacent markets such as financial services and entertainment supported by digital capabilities like Big Data and AI is the first step to our convergence into multi service digital company. We intend not to rely on development of our own products portfolio solely, but rather build partnerships with independent services providers. Collaboration with such projects should enable us to offer more innovative, various and convenient services to our clients and bring more value to their life.The key priorities of our partnership program are: increase the number of partnerships, boost our partnership capabilities and value proposition them in order to become ultimate preferred choice for our potential partners.
The Russian market of digital services is quite unique due to the fact that in most of the segments local projects retain leadershiplead positions and compete successfully against the global players. This situation is due to multiple fundamental reasons ranging from customer’s behavior and language specifics to regulatory requirements and the structure of capital market.markets. This allows major Russian business groups from banking, retail, high tech, and telecom sectors to aggressively develop multiple lines in digital businesses and adopt ecosystem approachapproaches in their business strategies. At the moment a number of big local companies from TMT, fintech and digital industries are moving this direction, expanding their businesses outside of their core sectors and entering the market with ecosystem propositions. In this respect we believe we are enteringRecent geopolitical tensions provoked the withdrawal or radical weakening of global digital players in the Russian market, turning it into a periodfield of new competition for customer spendof mostly local companies and attention in Russia.business groups.
We believe that we are well positioned for this type of competition. Our strong brand and deep knowledge of our clients supported by powerful analytical capabilities (Big Data and AI based) will allow us to provide our clients with seamless, deeply customized and personalized digital experience for wide portfolio of different services. We have already experienced substantial synergies between telecommunication, banking and media services which allow us effectively utilize our online and offline marketing capabilities and deep customer knowledge. We clearly see that customers who use a few different services from us bring higher value and have high level of brand loyalty and services satisfaction.Our key priorities in terms of the ecosystem development for the next few years are: growing the ecosystem client base, developing high-quality digital products, expanding the pool of partner companies.
In 20212022 on top of the transition to the full-scalefull scale operational model within CLV 2.0 concept we have also focused the efforts of senior management and corporate governance bodies on the issues of the optimal “format” of key business areas and appropriate distribution of financing among them to intensify their development and reach fair evaluation.
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As a result of a comprehensive analysis, we came to the conclusion that some of our business areas have reached such a scale and a level of maturity that they can become a driver of an increased fundamental value of MTS Group. Therefore, we intendstarted to gradually separate such areas into independent structures and independent companies that in the future will operate freely on the market, attract external financing on their own and have potential to become full-fledged entities with separate and attractive investment story for the investment community.
We believe that this approach will provide high motivation for the teams of business areas, will allow them to set up their business processes in an optimal way, considering the specifics of each area, and will simplify the process of attracting additional financial resources. As a result, this will ensure the high dynamics of products development and keeping their quality at the level of the market leaders. In addition, we hope that new promising businesses will be freed from traditional telecom multiples and will be able to fully unlock the potential for the growth of shareholder value. In this sense, we are striving to move from the investors’ perception of the Group as a single and indivisible entity to the perception of the “sum of the parts”, where each of the parts is evaluated fairly in accordance with its own performance and multiples accepted on the market for each specific type of business.
In 2022 we adopted a new logic for structuring the MTS Group's business into “Core” and “Growth areas”. The
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first step towards the implementation of these strategic initiatives is the separation and mid-term sell-off of the tower infrastructure, which we currently perceive as a passive element of the business, making minimal impact on ourstructure is the Core, which includes a number of areas: B2C and B2B telecom (our historical competency) and corresponding telecom and cloud infrastructure, ecosystem agenda. The resulting funds can be invested into the development of dynamically growing business areas with high financial returns.
The proposed spin-off of tower assets into Tower Infrastructure Company LLC (“TIC”), a 100% subsidiary of MTS, would allow TIC to possess a large portfolio of antenna mast structures (23 thousand estimated asdigital products and functions that ensures unity and proper interactions of the endecosystem elements and joins. The Core is an indivisible whole, which in our vision will stay under our direct control in the long term. As for second structural element, we identified 10 product lines of 2021), making it potentially attractive businessvarious sizes and levels of maturity working at the adjacent and complementary to the Core markets, which we consider as growth and value creation points. Young areas (for example, Smart Home and Travel) have great growth potential, but at the current stage, they are not yet material for sector-specificthe Group. The larger areas (for example, Fintech and Media) are already material and have an independent value for investors. Given the tower footprint, it is hoped that TIC could become a partner of choice for other mobile network operators for network equipment installation. It is hoped that increasing tower tenancy could enable TIC to grow incremental revenue and further drive business performance.
Also in 2021 we launched a process of spin-off of infrastructure and cloud assets, followed by their transfer into Mobile Web Services JSC (“MWS”), a 100% subsidiary of MTS. This was a response to emerging global trends including the surging cloud market, edge computing and convergence of mobile networks and edge cloud infrastructure on the wave of mobile networks virtualization and 5G development. All these trends give mobile operators a chance to develop a strong cloud business especially in Russia where we believe there will be a limited competition from global cloud leaders (“hyperscalers”).
In the next several years depending on the situation inon financial markets, we aim to bring to the investment market MTS Bank, which has been demonstrating high dynamics over the past 2 years, approaching the sector leaders not only by size, but, which is even more important, in terms of a product portfolio and degree of business digitalization. Other businesses of MTS Group (e.g. Retail, Media, Cloud & Infrastructure or Entertainment) in long term can also potentially follow this track of attracting co-investors on the market or through strategic partnerships.
We want to underline that shifting to the logic of “sum of the parts” does not mean our transformation into a holding of loosely connected businesses. We remain a Group and maintain strong ecosystem connections between areas. The main connecting forces in our opinion are: ecosystem marketing and brand management (not necessarily a unified brand); sharing knowledge about the client and following the unified CLV logic; centrally developed and managed capabilities. All of them are supported by clear and detailed agreements on interaction between the companies and parts of the Group.
It also must be emphasized that to enjoy synergies and effective interactions within the Group, besides ecosystem connections, we need also mutual reinforcement (from business to business and from Corporate Center to businesses) through strong / unique competencies and capabilities. Strong capabilities in digital, IT and adjacent areas in modern world are obviously sources of strategic competitive advantages. So we are going to pay special attention towards cultivation of competencies and capabilities necessary for developing digital products and overall ecosystem.
We carefully monitor the dynamics of internal conditions in our target markets in Russia, including economic, legal and regulatory, as well as the impact on our business of external factors related to access to technological equipment, securing financing and debt servicing and meeting obligations to external and internal counterparties. In this context, we consider our strategy relevant to the current moment. Nevertheless, we pay increased attention to risk mitigation, and on the other hand, we are ready to use dynamically opening windows of opportunities. Such opportunities include, in particular, a significant weakening of the positions of foreign players in Russia, a general decrease in competitive pressure, an expanding field of M&A activity, and an increase in mobility of personnel. It is worth noting that, given the current conditions, the fundamental role of partnerships in the formation and development of the product content of the ecosystem offer becomes even more obvious to us. We will strive to ensure the long-term sustainability of partnerships with products we consider to be the most significant for our ecosystem offering. In order to achieve this we are going to make investments in partner companies, participating in them as a minority shareholder.
Implementation of the strategy is subject to a number of risks. See “Item 3. Key Information—D. Risk Factors” for a description of these and other risks we face, in particular “Item 3. Key Information—D. Risk Factors —Political and Social Risks—— Risks Relating to Economic Risks in Our Countries of Operation — Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesgeopolitical situation and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”shares”.
Current Operations58
Subsidiaries
For a list of our major subsidiaries and our ownership percentages in these subsidiaries, see “Item 4. Information on our Company—C. Organizational Structure.”
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Mobile Operations
Network Infrastructure—Mobile Core
As of December 31, 20212022 MTS Mobile core network in Russia includes the following nodes:
● | Mobile switching centre-server (MSC-S): |
● | Media gateway (MGW): |
● | Subscriber Data Management (SDM) includes 21 nodes (Home Location Register (HLR) / Home Subscriber Server (HSS)); |
● |
● | 16 Signalling Relay Function (SRF) nodes deployed on network for handling Mobile Number Portability (MNP) services. |
The following network expansion and modernization projects were executed during the course of 2021:2022:
● | Installation of geo-redundant MSC-S/MGW nodes in the cities of Vladivostok, Nizhny Novgorod and |
● | Installation of |
● | SWAP |
● |
Services Offered
Network Access
We primarily offer mobile cellular voice and data communication services to our subscribers on the basis of various tariff plans designed for different market segments. In general, most of our tariff plans combine voice and data usage for a fixed monthly charge. See “Item 4. Information on Our Company—B. Business Overview—Mobile Operations—Tariffs.”
Automatic Roaming
Roaming allows our customers, both subscribers and guest roamers, to receive and make international, local and long-distancelong distance calls while traveling outside of their home network. Roaming is provided through the agreements between us and other operators.
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As of December 31, 2021,2022, we had bilateral roaming contracts with 873876 wireless operators/networks in 232 countries, including 15 regional operators/networks in Russia. We continually seek to expand our roaming capability and are currently in negotiations with additional operators. One roaming contract with regional operator/network is determined to be terminated as of March 25, 2022.
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Value-Added Services
We offer various value-addedvalue added services to our customers. These services may be included in the tariff plan selected by the subscriber, or subscribers may pay additional monthly charges and, in some cases, usage charges for them. SomeThese basic value-addedvalue added services that we offer include:range from matters such as basic telephony, messaging, mobile internet, customer care and other services (e.g. GEO services).
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We also provide many voice and SMS-based value-added services in cooperation with various content providers.
GPRS, EDGE services
We launched our commercial 2G network in 1994 based on GSM-900 technology. From 1999, we significantly improved our 2G network capacity based on GSM-1800 technology. From 2001, we implemented wireless data communication services based on GPRS technology with download data rate of up to 85.6 Kbit/s. In 2005, we modernized our GSM network to support EDGE technology and tripled data services rates. Today we continue supporting and modernizing our 2G network and we put the prime focus at the development of our LTE networks in order to provide our subscribers with high-speedhigh speed broadband wireless services.
As of December 31, 2021,2022, we provided GSM, GPRS and EDGE services with 60,50059,815 2G BTS over the geographic area with more than 97%96% of population of Russia.
3G Technology
InSince April 2007, we obtainedhave operated under a nationwide 3G/UMTS (Universal Mobile Telecommunications System) license in Russia. The license wasRussia which is currently valid tilluntil May 21, 2017 and covered the entire territory of Russia with frequencies 1950 1965 MHz and 2140 2155 MHz. In 2017 we prolonged the 3G/UMTS license until August 25, 2022. We are planning to prolong the 3G/UMTS license till 2027.
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Currently we have commercial 3G networks launched in all regions of Russia. In addition, we use UMTS900 in Moscow region and Habarovskiy kray where we have 2100 MHz restrictions. As of December 31, 2021,2022, we installed 52,34252,489 3G base stations over the geographic area with more than 88%86% of population of Russia.
In 2010, we started implementation of a high-speedhigh speed technology known as HSPA+ on our 3G network. This technology supports up to 21 Mbit/s per carrier data transmission speed. In addition, we launched second and third 3G carriers to improve capacity and activated Dual Carrier technology, which supports up to 42 Mbit/s data transmission speed.
Since 2011, we use 3G femtocell network. Femtocells are small low-powerlow power wireless base stations in the licensed 2100 MHz spectrum. They connect to a mobile operator’s network using residential DSL or cable broadband connections and can support 3G/HSPA+ mobile devices. We use femtocells to deliver a 3G/HSPA+ services inside building for business clients. In 2016, we launched offer of femtocells for consumers at B2C market segment. As of December 31, 2022, we installed 8,439 3G femtocell.
Frequencies for 3G services were allocated to MTS Armenia in October 2007, and the commercial UMTS network was commercially launched in 2009. Staring fromFrom 2011 MTS Armenia gradually implementedstarted to provide telecommunications services based on HSPA+ technology 64QAMwith QAM64 and Dual Carrier features making it available to almost 99% of the Armenian population. UMTS network expansion and upgrades are being done yearly to improve network quality and capacity. In 2018 during a major network upgrade project, frequency refarming (repurposing of frequency bands) was done in 900 MHz band to allocate bandwidth for UMTS900 operation which led to UMTS network capacity and coverage significant improvement. Also 2 pairs of RNCs-in-pool from were put in operation in 2019 increasing UMTS network reliability.
LTE Technology
In December 2011 we gotobtained an LTE TDD license in 2595-26202595 2620 MHz frequency band for Moscow only. In July 2012, we won Russian Ministry of Communications and Mass Media tender forobtained a nationwide LTE-FDDLTE FDD license in the following frequencies: 720-727.5720 727.5 / 761-768.5761 768.5 MHz, 798.5-806798.5 806 / 839.5-847839.5 847 MHz and 2540-25502540 2550 / 2660-26702660 2670 MHz. Since September 2012, we offer LTE-basedhave offered LTE based commercial service in the Moscow region, where we initially deployed more than 800 LTE TDD base stations.region. As of December 2021,2022, we had 2,9853,423 LTE TDD and 18,18620,910 LTE FDD base stations in the Moscow region.
In December 2013, Russian regulator allowed re-farming of existing 900 and 1800 MHz spectrum to UMTS-900 and LTE-1800. In 2014, we started DCS 1800 spectrum re-farmingre farming to LTE and deployment of LTE-1800LTE 1800 network, while expanding LTE 800/2600 coverage. In February 2016, MTS won Russian Ministry of Communications and Mass Media tender forobtained a nationwide LTE-TDDLTE TDD license and obtained LTE-TDDLTE TDD frequencies in the following bands: 2595-26202595 2620 MHz for the whole territory of Russia, except Moscow region (obtained earlier). We are using LTE-TDDLTE TDD as a capacity layer to cope with increasing network utilization due to growing data traffic. In August, 2021 we prolonged theOur license for frequencies 798.5-806 / 839.5-847 MHz and 2540-2550 / 2660-2670 MHz is valid till 2031.
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As of December 2021,2022, we implemented Carrier Aggregation functionality at 48%51% of our LTE sites.
As of December 2022 , LTE 2100 networks are deployed in more than 22 regions of Russia. In 2018, we started re-farming of existing 900 and 2100 MHz spectrum to LTE-900 and LTE-2100. In 2021 we finished re-farming the 2100 MHz band in St. Petersburg and in the first clusters of Moscow. In 20222023 we plan to continue rolling out LTE2100 in Moscow and other regions of Russia.
In 2018,As of December 2022, we launched IoT services based on NB-IoT technology (Narrow Band IoT) in 20 largest Russian cities, including Moscow, Saint Petersburg, Novosibirsk, Kazan, Nizhny Novgorod, Vladivostokhad 17,946 LTE TDD and others. MTS is IoT leader in the Russian market, with large-scale narrow-band coverage provided by 45,055105,182 LTE FDD base stations over the geographic area with more than 85%84% of population of Russia, atRussia.
MTS is the end of 2021. We plan to continue NB-IoT rolloutIoT leader in the remaining regionsRussian market, with large scale narrow band coverage provided by 53,351 base stations over all of Russia in 2022.Russia.
In 2019 we started to modernize our network in 7 North West regions to support LTE Evolution and 5G ready technologies. At the end of 2021 we’ve completed modernization of more than 95% of the radio network in these regions.
In 2020 the modernization of our radio network in Moscow and the Central Regions began, the estimated project implementation period is 3 years. At the end of 2021 the modernization of the network in Moscow was completed with more than 50%.
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In September 2019 we launched two 5G pilot zones in Moscow and Saint Petersburg in 27GHz and 4.9GHz frequency bands. The pilot zone in Saint Petersburg is located in Kronshtadt. In October 2019, MTS StartUp Hub has unveiled the 5G Lab an open incubation platform where startups and other companies can develop new 5G use cases using expertise, grants and other support from MTS. In 2020 5G test zones have been launched in the cities of Kazan, Ufa, Tomsk and Vladivostok.
In 2021 MTS launched the Russia’s first multi-location pilot 5G network for end consumers in Moscow and in Saint Petersburg. 5G network covers hot spot public areas and provides 5G connectivity at speeds of up to 1.8 Gbps for subscribers with compatible 5G smartphones. In 2022 we plan to further expand 5G pilot zones for public and corporate users.
Research work has begun with OpenRAN (LTE and 5G). At the end of 2020, we launched at VDNKh the OpenRAN laboratory for testing OpenRAN equipment and software, and collaborating with software developers and hardware vendors. In 2021 the first samples of hardware and software were tested on the basis of the OpenRAN laboratory. Since 2021 we started to include in the new tenders for RAN vendor selection additional requirements and separate lots on Open-RAN technology support.
In 2021 we’ve established a subsidiary company MTS Electronics with the target at development and manufacture of 4G and 5G hardware and software solutions’ components.
We launched our firstFirst LTE base stations were launched in MTS Armenia network in 2011 in 2600 MHz band and expanded the number of sites and coverage with new base stations installation every year. In 2018, after the refocusing on 1800 MHz band, LTE sites were activated in 1800 band with Carrier Aggregation technology.band. In 2019 MTS Armenia obtained the licensefrequencies to operate LTE network in 800 MHz band, as well as licensesadditional spectrum in for 1800 MHz band additional spectrum to increase L1800 network capacity. More than 370210 new LTE base stations were launched in 2021.2022. By the end of 20212022 the number of L800/L1800/L2600 base stations in operation is more than 2180,2310, providing LTE services all over Armenia. VoLTE and WiFi Calling services are commercially available from 2018. As total atof the end 2021 MTSof 2022 in Armenia network has 1,304 2G BTS, 2,561 3Gwe had 1248 base stationsstation sites equipped with LTE, 1287 sites with UMTS and 2,171 4G BTS.1260 sites with GSM base stations.
For 2022Due to longer than expected vendor selection process MTS-Armenia was slightly behind schedule with its IMS upgrade project which is now planned for completion in the company plans for additional network capacity increase following continued data traffic growth. IMS platform will be expanded as we observe higher customer demand for VoLTE services. As soon as more circuit switched voice traffic migrates to VoLTE MTS Armenia will continue to demount 2G base stations freeing the frequencies for use by LTE technology.second quarter of 2023.
5G Technology
Over the past few years, we launched agreements with leading global vendors to lay the foundation for cooperation on fifth-generation equipment and solutions.
In August 2019, we together with Huawei launched Russia’s first large-scale urban 5G coverage on Saint Petersburg’s island of Kronshtadt, and made a 5G cell in Moscow near the Smart City pavilion in one of the city’s most historic parks, VDNKh. In the early stages, the networks will be used for testing and to connect certain public facilities to the Internet, with plans for broader rollout to subscribers in the future. Coverage includes both 4.9GHz mid-band and 28GHz millimeter-wave frequencies.
In addition, we tested a preproduction Samsung 5G smartphone. Tests were carried out in Moscow at the Nokia laboratory within the pilot MTS millimeter-wave network based on Nokia’s commercial equipment, using MTS SIM cards and the Samsung S10 5G pre-commercial smartphone based on the Snapdragon 855 platform with Snapdragon X50 modem.
In October 2019, we opened a 5G Lab at the Moscow pilot zone that will provide a platform for startups to develop new products and solutions based on fifth-generation connectivity. Potential 5G applications include smart city solutions in transportation, as well as new use cases in IoT, cloud computing, telemedicine, autonomous vehicles, and virtual and augmented reality (VR/AR).
In January 2020, we demoed private 5G network at the country’s largest heavy truck manufacturing facility, the KAMAZ plant in Naberezhnye Chelny.
In July 2020, MTS together with Motorola and Qualcomm Technologies, Inc. have successfully completed testing of the flagship motorola edge+ smartphone, which supports the specific mmWave frequencies that have been allocated for 5G in Russia.
During 2021, we have increased the coverage of the 5G network and launched new test sites in popular places in Moscow and St. Petersburg.
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In September 2021, we deployed two 5G pilot networks in Moscow for Sberbank, the largest bank in Russia, Central and Eastern Europe, in order to test the wireless services of the Sber ecosystem.
In September 2021, we have completed the construction and put into pilot operation private LTE/5G-ready network at the Nezhdaninskoye gold deposit in the Republic of Sakha (Yakutia) for Polymetal International plc.
In November 2021, MTS together with Ericsson launched test 5G network at the Ural Federal University (Yekaterinburg). Also, MTS joined the international association of telecom operators 5G Future Forum (5GFF).
Currently, the MTS 5G Center has a strong lineup of startup participants as well as corporate partners, counting among its members Nokia, Sony, Samsung, Qualcomm, and Telit. We are looking forward to welcomingis the next dozen residents as we move forward on charting the coursemajor step for 5G in Russia.
In 2022, we are continuing to carry out 5G test projects, with all of the necessary in-house capabilities, technologies, and resources. With respect to further testing and development of 5G technology, we are closely monitoring the ongoing situation and are considering various options to continue our progress in fifth-generation connectivity.telecommunication companies.
Artificial Intelligence
In 2017, we created an artificial intelligence center, the main focus of which is the creation of innovative products and the addition of existing services to the company with new functions based on technologies for processing natural language, computer vision and speech recognition.
The key focus of theour artificial intelligence center is the development of virtual assistants, as well as the development of products in the areas of customer service, medicine, law, and other areas.among others.
In June 2019, we started selling customer service robots—automated dialogue systems that allow you to interact with a client without involving people.human involvement. The solution, based on artificial intelligence technologies, processes any typical requests, requests—for example, talks about products and services, answersanswering popular questions, connectsconnecting and disconnectsdisconnecting services.
In November 2019, we, together with Sberbank, Yandex, Mail.ru Group, Gazprom Neft and the Russian Direct Investment Fund (RDIF),other major companies, developing artificial intelligence, established an artificial intelligence alliance that will develop AI technologies in Russia. We believe that the sanctions placed upon RDIF imposed due to the geopolitical situation will not have an impact upon MTS's business. To develop solutions based on speech technologies, we have also opened a research center in Skolkovo. Center experts intendSkolkovo to create the largest voice database in Russian, collecting and marking more than 15,000 hours of Russian speech.
In December 2019, we started selling a virtual lawyer-the automatic document management and life cycle management system Norma. The solution is based on artificial intelligence technologies such as natural language processing and computer vision.
In September 2020, we launched SaaS version of Norma for small and medium businesses and individuals who want to draft a customized legal document for personal needs. We believe that legal services can be affordable, user-friendly and quick.Russian.
In 2021, we focused on the consolidation of AI properties such as competences, products and RnD. The product portfolio was reconsidered under the increasing technological demand from the ecosystem and highly competitive environment altered by other deep tech players. We concentratedR&D, concentrating on two major product directions such as directions—conversational AI and video computer vision emergedmerged with video surveillance.
By the end of 2021, we released MVPs of three major cloud-based B2B platforms:
1) Voicea voice platform (so-called “Audiogramm”(the so-called “Audiogram” TM) – a service that, which recognizes and synthesizes speech;
2) an NLP (natural language understanding and processing) platform, which allows users to create multimodal bot’sbot (both voice-based and text-based) scenarios via low-code design tools and manage bots to automate customer service, employee’semployee onboarding and CX across digital channels;
3) a VSaaS (video surveillance as a service) platform (the so-called “TenVision”), which allows for the implementation of video surveillance and AI analytics into other digital products.
We have continued working with leading Russian universities in the field of AI technologies, which has resulted in the development of USB cards. Such a device can be used by students to learn AI basics and in cloud video surveillance.
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3) VsaaS (video surveillance as a service)In 2022, we completed the commercial launch of our VSaaS platform – a service that(the so-called “TenVision”), which allows to implement video-for the implementation of video surveillance and AI analytics into other digital products.
SaaS version We also increased the penetration of product Norma was terminated due to low customer’s demand.our voice platform (the so-called “Audiogram” TM) — a service that recognizes and synthesizes speech — into the company’s products, began piloting this platform in the international market, and released an MVP of the platform for AI analytics of text and voice communications.
We continue cooperation with leading Russian Universities in the field of AI technologies, which resulted in USB card development based on Kneron chip. Such device can be used to learn AI basics by students and in cloud video surveillance.
We plan to dedicate 2022 to the development deep tech products based on conversational AI, computer vision and edge computing that will provide a competitive advantage to the ecosystem, especially in superior customer experience. VsaaS is launching as a part of Smart Home service on the external market, while conversational AI bunch of products are becoming enablers of the ecosystem. The planned launch date is April 5, 2022.
We are going to developcontinued developing our Accelerator (a platform for(for creating start-up projects), the main goal of which is to gather start-ups and offer them resources for development – development—training, investments and technologies.
In 2023, we will be developing and commercializing VSaaS products (the so-called “TenVision”), in external markets and creating and commercializing industry-specific customer service robots for text and voice channels based on a bundle of conversational AI products, including the launch of a Virtual Assistant product for the ecosystem.
Banking Services
In July 2018, we started providing banking services made possible by the acquisition of control over MTS Bank. MTS Bank has accelerated the sale of its retail product with the help of MTS’ Big Data capabilities and MTS’ digital sales channels. The bank’s financial products are complementary to our core business and fully integrating the services under the Group umbrella allows us to offer our customers new integrated services, unlocking new revenue streams and consolidating our brand in the wider consumer space.
MTS Bank carries out its activities in the following areas:
● | Retail business. Serving individuals, including maintaining current accounts, receiving deposits, providing saving and investment products, custody services, servicing credit and debit cards, consumer and mortgage lending. |
● | Small and medium-sized businesses. Serving small and medium-sized businesses, including maintaining current accounts, accepting deposits, providing overdrafts and lending services. |
● | Corporate business.Serving corporate clients, including cash settlement, maintaining current accounts, accepting deposits, lending, including overdrafts, providing documentary products, including guarantees, letters of credit. |
● | Investment business.Providing investment banking services, including trading in shares and bonds, precious metals and derivative financial instruments, placement of fixed income securities, issuing debt securities and attracting subordinated loans, operations with foreign currency. |
Other Services
In addition to cellular communication services, we offer corporate clients a number of telecommunications services such as design, construction and installation of local voice and data networks capable of interconnecting with fixed line operators, installation and maintenance of cellular payphones, lease of digital communication channels, access to open computer databases and data networks, including the Internet, and provision of fixed, local and long- distance telecommunications services, as well as video conferencing.
We also developed our ecosystem to offer our customers quality services in related sectors such as Telecom, Media, Fintech.
Strategic Partnership with Vodafone
In October 2008,2022, we announced a strategic agreement with Vodafone aimed at drawingpaid attention to new areas: the development of products based on Vodafone’s expertise in buildingcomputer vision and developing 3G networksnatural language processing technologies, the development of solutions for the tourism industry, the development of navigation and mobile broadband products, working with leading global equipment providers and deploying innovative client relationship management (“CRM”) practices to enhance quality and further improve the efficiency of our operations.cartographic solutions for vehicles.
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In addition, the agreement allows us exclusive access to a range of products, services and devices from Vodafone for our markets of operation in Russia and Armenia.
In 2020, the agreement with Vodafone was extended until December 31, 2023.
Sales and Marketing
Target Customers
Our service model is based on the provision of services to customers to meet the needs of distinctive customer segments. We are not just a mobile operator. Our strategy is to build an umbrellaecosystem brand which provides digital services and innovative products.products in different product segments. We continued to work with mass and youth audience keeping our focus on digitalaudiences using relevant channels such as social media, banners, pre-rolls and branded content.creative language.
In 2021,2022, we focused our efforts on the following:
● | Building knowledge about MTS as an |
● | Continuing to build knowledge about MTS as an innovative and technological company with state-of-the-art solutions, including in the main |
● | Promoting ecosystem subscription on digital services |
● | Launching digital products outside the telecom scope |
● | Promoting the MTS Bank with different offers |
● | Promoting strategic partnerships |
● | Promoting our services aimed at the youth |
● | Promoting B2B |
Advertising and Marketing
The key subjects for our advertising ecosystem campaigns in 20212022 included promotion of the MTS Premium innovative service– ecosystem subscription, digital services special outside the telecom scope, financial offers and special offers on devices in our retail stores.technologies of MTS Bank and B2B offers. In addition, in 2021,2022, MTS continued to develop subscriptions along withinstead of billing plans to expandcommunicate our ecosystem services.
In order to build brand awareness and stimulate demand, we used a combination of various advertising formats, including television, outdoor, retail and radio. We also stepped up our online advertising in desktop and mobile. We also coordinatedcoordinate the advertising policiesapproach of all our products, dealers, partners and partners, such as MTS Bank,retail to capitalize on the increased volume of joint advertising and preserve the integrity and high-qualityhigh‑quality image of the MTS brand.
In line with our strategy to find new ways to communicate effectively especially throughwe used wide range of digital channel, wechannels, social media, banners, pre‑rolls, bloggers, branded content and launched special cooperationsactivations with partner websites and several collaborations with popular Russian bloggers, trending Internet shows and other formats of online advertising (branded content, collaborations with bloggers; social media integrations, etc.) in 2021.2022 campaigns.
In 2021,2022, we focused on advertising various products of our ecosystem using all available communication channels proved to be effective.
Youth audience
As part of our engagement with the younger audience (ages 14-24), we launched two new products:
1. Stroki - service for digital books with the intellectual data mining system.
2. MTS launched the following campaigns:Defender - intellectual system which blocks spam based on Big Data analysis.
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Promoting the innovative “Non-billing plan” (“Netarif”) subscription
On New Year’s Eve we launched a special offer for new users – for 2.5 months we opened our most advantageous internal tariff for connections under the conditions that were previously available only to company employees and their relatives . For 250 ₽/month, the user gets: 500 minutes and unlimited on-net minutes, 20 GB of Internet, 200 SMS.
The MTS Premium loyalty program
In 2021, we launched two federal promotional campaigns in support of MTS Premium subscription.
The first campaign took place in February 2021 and was timed to coincide with the relaunch of MTS Premium, which ceased to be a loyalty program and became a subscription to MTS ecosystem products and services. The new subscription included an unlimited mobile Internet package, a KION online cinema subscription and MTS Music streaming service. The subscription price was 199 rubles/month.
The second campaign was launched in June 2021 in support of MTS Premium family subscription. As part of the family option, 3 persons can get access to the subscription and use the services included in the package independently of each other. The price of family subscriptions was 299 rubles/month.
Image and quality
In 2021, we launched a large-scale federal campaign to support 5G, AI and other technologies and products of MTS. Campaign ‘Future with MTS’ worked for the brand’s innovative and high-tech image. The campaign improved the image perception of MTS communication services —it emphasized the high-tech services of MTS and variety of products in different areas of consumers’ lives. Noticeable and technological campaign materials got many PR mentions in media and became the benchmark for other brands on the market: 1. AR portal - using a smartphone camera, a consumer could open the door to the world of the future, to walk along the streets of a technological city with MTS services and products all over the way; 2. 3D digital Cube - huge construction with UHD screens placed in one of the popular parks with image content creating the effect of live presence and immersion while telling about technological MTS products.
Ecosystem
In 2021, as part of a partnership with Daichi, MTS launched a pilot project with a subscription to smart air conditioners. The product was launched and promoted in two regions: Moscow and the Moscow Region, as well as Rostov-on-Don and the Rostov Region. By subscribing for 4999/5999 rubles per year (the price varied depending on the region), the customer received a comprehensive offer: a smart air conditioner with smartphone-based control, free delivery, assembly and installation of an air conditioner (the service is available only in Rostov-on-Don) and technical support (online monitoring of the air conditioner operation). The subscription varies depending on the region.
Entertainment
In 2021 we launched a big federal campaign where we combined several main entertainment services such as MTS Live, KION, MTS Music and MTS Library into an ecosystem of entertainment and promoted them with one common slogan “All types of entertainment - are at MTS”. This helped MTS to set up on a new territory and to increase knowledge about it.
MTS Live
MTS developed and launched a new sign, logo and style for the MTS Live umbrella brand combining a platform for selling tickets to events, its own concert venues and online concerts. The graphic mark is the letter L, the first letter of Live. The communication style is bright poster aesthetics.
Financial services
In 2021, three advertising campaigns were launched in support of MTS Bank's priority products. Two large-scale federal campaigns included promotion on TV, digital channels, social networks and special projects, bloggers. In second quarter, we launched
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the MTS bank innovative product promotion — MTS CASHBACK credit card, the terms of which are selected personally by artificial intelligence on the basis of the client’s profile — the maximum limit and the minimum rate. The fourth quarter saw the launch of MTS CASHBACK credit card with increased cashback of 5 % on any purchase in supermarkets with MTS Premium subscription. We also held a digital federal campaign with the use of OLV and social networks at the end of the fourth quarter in support of a deposit from MTS Bank with an increased rate (9.2%), which can be made both offline and online.
GPON
In spring 2021, MTS launched a regional campaign for Moscow and Moscow Region with a special advantageous offer for GPON high-speed home Internet: 500 Mbit/s for only 390 rubles/month (for a promotional period of 3 months).
The emphasis in communication was made on MTS’ leadership in home Internet speed among the broadband providers in Moscow for the campaign period (leadership was supported by an independent research).
Devices
In 2021, the majority of devices-related communication campaigns were targeted at supporting smartphone sales (of various price categories, vendors: Honor, Samsung, Xiaomi, ZTE) in MTS retail.
The main mechanics used in promotion (and communication) were: cashback, price offers, loans, as well as trading-in and package offers (device and phone accessory or billing plan).
Promoting our services specifically for teenage audience
In 2021 MTS continued its communication to the youth segment. We supported MTS flagship products relevant to youth audience with special campaigns: MTS Premium & MTS Family Premium, MTS Live, Tarifishe and special limited tarif “Smart for ours. New Year's”.
We released four short films “Musicians Nightmares” with famous Russian artists (Ivan Dorn, Morgenshtern, Husky and Ilya Naishuller) for a new MTS streaming service and production company “KION”.
For the gaming audience, we promoted our WASD streaming service with new “relaunch” campaign. We positioned WASD towards a wider audience with new IRL content.
Furthermore, we continued supporting modern art: sponsorship of Multimedia Art Museum and “ArtLife” exhibition in Moscow.
MTS products and services for children
In 2021, the line of products and services for children started to be actively developed and expanded, and a separate segment MTS Junior was introduced. We were the first brand on the market to launch an integrated comprehensive offer for children and parents - a NETARIF Junior subscription including all the most necessary digital services based on the needs and interests of both audiences. The subscription includes unlimited access to popular messengers, customizable minutes and gigabytes packages, KION online cinema, MTS Music and MTS Library with children-friendly modes through which a child will not encounter anything that is not suitable for his/her age, and school textbooks in digital format for a year free of charge as part of the “School” service.
To support the new product, several TV and digital campaigns were launched throughout 2021 targeting both audience segments: parents and childrenIn order to engage with the children’s audience, we strengthened the emotional component by using popular cartoon characters in advertising materials and as part of limited tattoo stickers that customers received when signing up a child to a NETARIFF Junior subscription. Especially for New Year’s, MTS continued advertising subscription communication and launched new non-standard activations with the characters of the children's target audience favorite cartoons: a music video was created with the characters of the “Fantasy Patrol" cartoon, as well as mini-series of "Mi-mi-bears" and "Masha and the Bear" cartoons with native product integration that the characters use for their tasks, development, education and entertainment. Moreover, a landing page was developed to produce personalized video greetings from the characters of “Fantasy Patrol” and “Mi-mi-bears” cartoons
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specifically for MTS subscribers and their children. Also, within the Junior segment, the promotion of smart children watches went on, for which two digital campaigns were launched in support.
Partnerships
In 2021, we proceeded with our partnership collaboration with Spotify (this time for mass segment), offering them “4 months of Spotify Premium for free for MTS users”, which ended in 2021.
In 2021, as part of a partnership with the Lukoil filling stations, MTS launched the first fuel subscription in Russia. The pilot project was implemented in four regions of Russia: Sverdlovsk and Saratov regions, the Republics of Tatarstan and Bashkortostan. The subscription integrated with MTS Cashback allowed the customers to fill the tank at partner gas stations with 10% discount.
B2B offers
MTS continued supporting the SME & BB segment with the smart advertising platform “MTS Marketolog”, which helps companies to launch advertising and marketing campaigns without agencies while retainingand being on full high control of all the process and budgets. The product was promoted on TV and in digital media.
MTS launched a federal promotional campaign for the MTS Your Business, a line of productsmedia and services for entrepreneurs. The campaign promotes three flagship products of the line the workzen task tracker for keeping a client database and controlling orders; the InsideReport counterparty verification service and the MTS Kassa mobile online cash register.radio in 2 flights per year.
Sales and Distribution
We have historically enrolled the vast majorityIn 2022, MTS continued development of our subscribers through a network of independent dealers that operate numerous points-of-sale in places with high consumer activity, such as supermarkets, shopping centers, transportation hubs and markets. In 2009, in response to changes in the independent retail market, we began to develop our own proprietary retail network to more effectively control sales of SIM-cards and provide a platform to sell handsets and accessories. We organized our retail operations under a wholly owned subsidiary, RTC. RTC handles all functions relating to our retail operations, including the management of points-of-sale, the purchase and sale of handsets and accessories and subscriber enrollment at our retail outlets. It also requires us to secure optimal locations for our points-of-sale and monitors the effectiveness of their operations.
In 2017, sales in the Russian market decreased for the first time and continued decreasing at a higher rate in 2018. Moreover, the churn rate also decreased, which confirmed the improvement of the mobile retail market.
In 2018, our competitors VEON Ltd. and MegaFon agreed on the termination of their joint ownership of Euroset outlets. MegaFon purchased the brand and the business with VEON Ltd. purchasing 50% of points-of-sale.
In 2018, VEON Ltd. rebranded points-of-sale and they began to work under the “Beeline” brand. MegaFon and SLV Group (Svyaznoy owner) have signed an agreement on merging Euroset and Svyaznoy into one retail network, which currently operates under Svyaznoy brand. These transactions marked the beginning of the transformation from the multibrand retail network to the monobrand retail network.
In 2019, we signed a partnership agreement with Svyaznoy. Now Svyaznoy retail network consumers across the country can sign contracts and get information about our tariffs and services. Moreover, in 2019 we and M.Video-Eldorado group, which is the largest household appliance and electronics retail network in Russia, also signed a partnership agreement. We placed stands in large M.Video stores. In addition, joint retail electronic stores, where consumers can obtain our services, have been opened. Furthermore, in 2019, we launched a pilot project to sell smart watches in the largest children goods retailer Detsky Mir. Special zones with wearable devices were installed in several dozen stores, where customers can get acquainted with the watches models and get advice from our specialists.
Such partnerships with market leaders allow us to optimize retail costs and reduce the planned number of own retail points-of-sale.
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In 2020, the outbreak of COVID-19 accelerated the trend of retail chain reduction, which concerned all telecommunication market players and pushed the transition to online channels. In April 2020, MTS launched the mobile application for a SIM-card self-registration by a subscriber. This technology allowed launching distribution in new sales channels, for example, online stores, online platforms and aggregators, supermarkets, delivery services. Our proprietary distribution network, which consists of MTS branded franchise points of sale (third party dealers operating under the MTS brand) and MTS branded points of sale owned by us, has decreased by 73 points of sale year to year. As a result, as of December 31, 2021, MTS operated 5,167 points of sale, including 1,754 franchise points-of-sale and 3,413 points of sale owned by us, as compared to 5,240 points of sale, including 1,734 franchise points of sale and 3,506 points of sale owned by us in 2020.
In 2021, we continued to expand our online sale channels, developed a concept and allocated the necessary resources to the online channels, including additional investments in setting up of SIM-card delivery and self-pickup processes. We redesigned and launched a standard customer journey map, including mobile number portability, mobile number selection, eSIM (virtual SIM Card technology) and focused our IT resources on developing self-service registration processes.
The foundation of the prospective online basic telecom product customer acquisition is "Device + SIM" bundling consolidated with subscription, installment and trade-in options. In 2021, we have developed and tested the product component of the bundle and developed the prospective online Customer Journey for the bundle. Launching of the operator mechanics such as bundling with devices will provide an increase of basic telecom products sales in the online channel.
MTS maintains and strengthens its leadership positions in the offline sale channels. In 2021, MTS developed the franchising sale channel, being able to transfer expertise, process methods and market conditions to the partners while using the opportunity to reduce commission costs for SIM card sales. In the franchising sale channel MTS launches new format points of sales in cooperation with digital technology manufacturers.
We follow the digital solutions market leadership strategy. Development of own digital ecosystem is theas a base of digital leadership strategy. Connected sales are one of the points of our own ecosystem.Inecosystem. In 2022, we plan to increaseincreased the share of convergent sales by launchingfocusing on convergent products.
We continued to develop the Franchising sale channel. We have implemented a unified software for the Franchise network and scaled it to the regions. We launched operator mechanics in our own and partner sale channels and organized the supply of hardware to the Franchise network.
This significantly increased the share of online sales, having implemented projects that allowed us to increase the expansion of online sale channels: we developed a federal SIM card that is not tied to a specific region and does not have a preset tariff and mobile phone number, introduced a subscription to a “Device + SIM” bundle. Launching of the operator mechanics such as bundling with devices provided us with an increase of basic telecom products sales in the online channel.
In 2023, we plan to maintain the leadership in converged products among telecom companies by increasing penetration and geography. Further development of the online channel is planned: bundles with new convergent products.ecosystem products, bundles with equipment on marketplaces, launch of a new communication compensation mechanic.
Competition
The Russian wireless telecommunications market
Until 1998, mobile communications developed slowly, penetration was less than 0.5%. However, this changed, as a result of explosive demand in 2006, the number of subscribers registered in networks exceeded the country’s population. Three market leading operators, MTS, Beeline and Megafon, served 85% of the subscriber base. Over the past decade, the Russian market has stabilized; further growth is associated with the development of the IoT services market and M2M devices. As of December 31, 2021,2022, overall wireless penetration in Russia was approximately 178%about 175%, or approximately 258256 million subscribers.
The following table sets forth key data on Russia’s wireless telecommunications market as of the dates indicated:
| | | | | | | | | | | | |
| | As of December 31, | | As of December 31, | ||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2022 |
| 2021 |
| 2020 |
Subscribers(1) |
| 258.5 |
| 252.2 |
| 260.7 |
| 256.2 |
| 258.5 |
| 252.2 |
Subscriber penetration (%) |
| 178 |
| 172 |
| 178 |
| 175 |
| 178 |
| 172 |
According to AC&M-Consulting data and our estimates based on our subscriber data and reports of other national operators.
(1) | Based on registered subscribers (SIM cards only) including MVNO networks. There is no uniform definition of active subscribers in the Russian wireless market. |
The primary mobile providers in Russia include us, MegaFon, and VEON (VimpelCom), and Tele2, each of which has effective national coverage in Russia. Competition is based on network coverage and quality, the level of customer service provided, roaming and international tariffs, local tariff prices and the range of services offered. For a description of the risks we face from increasing competition, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We face increasing competition in the
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markets where we operate, which may result in reduced operating margins and loss of market share, as well as different pricing, service or marketing policies.”
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The following table illustrates the number of wireless subscribers for each network operator in Russia as of December 31, 2022, 2021 2020 and 2019:2020:
| | | | | | | | | | | | |
| | As of December 31, | | As of December 31, | ||||||||
Operator |
| 2021 |
| 2020 |
| 2019 |
| 2022 |
| 2021 |
| 2020 |
| | (amounts in millions) | | (amounts in millions) | ||||||||
MTS |
| 80.4 |
| 78.5 |
| 79.1 | | 80.0 |
| 80.4 |
| 78.5 |
MegaFon |
| 74.4 |
| 70.4 |
| 75.2 | | 74.5 |
| 74.4 |
| 70.4 |
VEON Ltd. (VimpelCom) |
| 49.4 |
| 49.9 |
| 54.6 | ||||||
VEON Ltd. (Beeline) | | 44.8 |
| 49.4 |
| 49.9 | ||||||
T2 RTK Holding (Tele2+Rostelecom) |
| 47.5 |
| 46.6 |
| 46.0 | | 48.3 |
| 47.5 |
| 46.6 |
Others & MVNO |
| 6.8 |
| 6.8 |
| 5.8 | | 8.7 |
| 8.7 |
| 6.8 |
According to AC&M-Consulting and operators’ press releases.
MegaFon. MegaFon, which operates GSM 900/1800, UMTS (3G) and LTE (4G) networks, is one of our primary competitors in Russia, and it is the second largest GSM wireless operator in Russia in terms of subscribers. The operator changed the method of calculating the subscriber base in the fourth quarter of 2020 and applied stricter requirements for monitoring customer activity. MegaFon had a subscriber base of approximately 74.474.5 million subscribers in Russia, which represented a 29% market share as of December 31, 2021.2022.
VEON (Beeline). In addition to MegaFon, we also compete with VEON (Beeline), which is the third largest GSM 900/1800/UMTS (3G)/LTE (4G) wireless operator in Russia in terms of subscribers.
According to its own estimates, VEON (Beeline) had a subscriber base of approximately 49.444.8 million in Russia at December 31, 2021.2022. At December 31, 2021,2022, VEON (Beeline) had a 19%18% market share of total wireless subscribers in Russia, based on the number of subscribers disclosed by VEON (Beeline) and our estimate of total number of subscribers.
T2 RTK Holding. In February 2014, Tele2 and Rostelecom announced a merger which created a new federal wireless provider. The license portfolio of the new company covers all Russia which effectively permits the roll out of federal-scale networks. The most important event for operator was the launch of 3G/4G network in Moscow region in October 2015. The operator’s services are now available on the territory where 97% of Moscow Region residents live. In 2018 - 2019, Tele2 have actively rolled out 3G and 4G networks, launched new tariffs, options and services which enabled to provide customers with services similar to those of the market leaders. In 2019, the operator launched a network in the Ivanovo and Yaroslavl regions in the 2G / 3G / 4G standard. By the end of 2020,2022, Tele2 LTE networks were launched in all 6869 regions.
Tele2 had a subscriber base of approximately 47.548.3 million in Russia and 18%19% market share as at December 31, 2021.2022.
Other Operators. The number of subscribers of other operators, including MVNO operators, which were not indicated above is about 6.88.7 million customers as of December 31, 2021.2022.
The Armenian wireless telecommunications market
AsAt the end of December 31, 2020, overallthe reporting year of 2022 the wireless penetration in Armenia was around 126%—about 3.73131% for the population of 2.97 million active subscribers, according to the published figures of the operators and Socio-Demographic Data report(2011 Census, published by Statistical Committee of RA (about 2.97 million population)in October 2022).
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Table Total number of Contentsactive users of mobile services in RA was about 3.88mln.
The following table illustrates number of 3-month active subscriber bases and the coverage area of MTS Armenia and competitors—Beeline (VEONcompetitors – Team (Telecom Armenia) and Ucom, as of indicated dates.
| | | | | | | | | | | | |
| | As of December 31, | | As of December 31, | ||||||||
Operator |
| 2021 |
| 2020 |
| Coverage Area |
| 2022 |
| 2021 |
| Coverage Area |
| | (amounts in thousands) | | (amounts in thousands) | ||||||||
MTS Armenia | | 2,231.84 |
| 2,146.89 |
| Nationwide | | 2,266.98 |
| 2,231.84 |
| Nationwide |
Beeline | | 908.17 |
| 904.68 |
| Nationwide | ||||||
Ucom | | 593.89 |
| 594.60 |
| Nationwide | ||||||
Team* | | 952.45 |
| 915.53 |
| Nationwide | ||||||
Ucom* | | 663.45 |
| 593.06 |
| Nationwide |
Sources: https://beeline.am; https://www.ucom.am; http://mts.am.Source: telecomarmenia.am; ucom.am; mts.am
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MTS Armenia reportedsaw an increase of 3-month active subscriber base by 3.96% y-o-y. According to our subscriber data and operators’ public releases, our1.57%, year-on-year. The operator reported about 58.4% market share is about 59.8%.at the end of 2022.
Tariffs
We customize our marketing efforts and pricing policies in each region of Russia and our other countries of operation by considering such factors as average income levels, the competitive environment and subscriber needs, all of which vary from region to region. Consistent with our marketing strategy, we have developed tariff plans to appeal to a broader market. The following table shows the mix between prepaid and other subscribers, such as contract and corporate customers, for Russia for the periods indicated:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | As of December 31, |
| ||||||||
|
| 2021 |
| 2020 |
| 2019 |
|
| 2022 |
| 2021 |
| 2020 |
|
Russia |
|
|
|
|
|
| |
|
|
|
|
|
| |
Prepaid |
| 24 | % | 28 | % | 31 | % |
| 21 | % | 24 | % | 28 | % |
Contract and corporate |
| 76 | % | 72 | % | 69 | % |
| 79 | % | 76 | % | 72 | % |
We currently have a unified system of tariff plans offered to subscribers throughout Russia. The unified system is aimed at achieving such benefits as clarity, simplicity and transparency for prospective subscribers by offering the same set of tariff categories throughout Russia. Under each tariff category, we offer different tariff plans with different connection fees, per minute call charges and a wide range of value-added services.
By advertising on a national rather than regional or local level, we have been able to streamline and reduce our advertising and marketing expenses through unified advertising campaigns throughout Russia. Furthermore, we are able to convey to consumers a more uniform perception of our brand and services.
Tariff Plans in Russia
Currently, each of our tariff plans in Russia combines per minute usage charges, value-added services in packages and different monthly network access fees (with the exception of the prepaid tariff plans) designed for different market segments. Our tariff plans are currently divided into several categories - “Prepaid,” “Smart,” “Premium,” “Data,” “IoT”, “Corporate” and “Convergent” - with each category designed to target specific segments as follows:
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Our tariffs vary from plan to plan. The description of tariffs and charges are, in each case, exclusive of VAT. As of December 31, 2021, the per-minute tariff for local calls within the MTS network varied from zero per minute to RUB 2.17 per minute. Different rates apply to local calls to other networks and vary from RUB 0.82 per minute to RUB 3.67 per minute. Higher rates apply to domestic long distance calls and rates for international calls vary from RUB 1.25 per minute for calls to the China and South Korea to RUB 70,8 per minute for calls to other parts of the world. Periodically, we run various promotional campaigns, either on the federal or regional level, in which we provide temporary discounts to our regular prices.segments.
Customer Payments and Billing
We enroll new prepaid subscribers in an advance payment program. As of December 31, 2021, 73%2022, 72% of our consolidated subscriber base was enrolled in the advance payment program and 27%28% used a credit based system.
Our advance payment system monitors each subscriber account and sends an advance warning on the subscriber’s mobile telephone when the balance on the subscriber’s account decreases below a certain threshold.
Under the credit payment system, customers are billed monthly in arrears for their network access and usage. We limit the amount of credit extended to customers based on the customer’s payment history, type of account and past usage. As of December 31, 2021,2022, subscribers using the credit system of payment had credit limits of up to RUB 2.87 million for key corporate customers in Russia. When a credit limit is reached, we block the telephone number until the balance is settled. There are no credit limits established for certain exceptional, high loyalty customers.
We provide “in full confidence” service, which allows our prepaid customers who subscribe to this service to continue using services when the balance on the subscriber’s account becomes negative. As of December 31, 2021,2022, subscribers using the “limit on communication” service had a maximum credit limit of RUB 3 million. Customer service representatives can set individual credit
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limits for subscribers based on their payments and charge history (i.e., average balance usage) during the prior three months. When the credit limit is reached, our billing system blocks the phone number until the balance is settled. Similar to the credit payment system, the subscribers are billed monthly in arrears for usage. The invoice, which can be delivered to the customer by e mail, fax, regular post and Internet, should be settled within 24 days. If the invoice is not paid five to seven days prior to the due date, the system sends an additional reminder. The telephone number is blocked on the 25th day if the invoice is not settled.
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In Russia, we offer our subscribers various ways to pay for our services, including cash or credit card, wire transfer, prepaid cards and express payment cards.
We implemented Foris billing system in Russia in 2008. The Foris billing system allows us to offer all of our subscribers a uniform and consistently high level of service. It also supports the monitoring of account usage in real time. In addition, the system provides us with the ability to offer flexible tariff plans with various usage discounts and subscriber loyalty bonuses. Furthermore, we are able to provide our corporate subscribers with more sophisticated customized billing solutions. For example, our corporate subscribers who use multiple phone numbers in different regions of Russia now receive a single invoice, whereas our previous billing system could not support such a service.invoice.
In Armenia, we use the “Eskadenia” billing system.
Customer Service
Russia
In order to attract2022, we actively developed tools for the work of the Company’s employees and retain customers, we must ensureself-service for customers. We continue following this trend with a high level ofgreater focus on the ecosystem, omnichannel and seamless customer journey.
We have already created an ecosystem seamless service at all points of contact between the customer assistance, care and billing. In each region where we operate,the Company. We have implemented a seamless service when transferring calls. A customer is no longer required to introduce himself and repeat his question when making a transfer call within the Company. With respect to most procedures, a remote receipt of missing information from a customer has been launched. Now customers need to visit the Company's offices less often. Moreover, we have contact centers that providestarted to develop the Unified Ecosystem MTS Customer Card. This workplace of an employee will be a convenient and user-friendly tool for MTS ecosystem customer service 24 hoursservice. The information about products will be provided in one place, thus helping to enhance customer service. An employee will make less tab stops and see the information requisite for resolving a day, seven days a week. Contact centers provide different services to our clients through various channels (telephone, email, chat). Customer service representatives respond to various issues such as phone lockage due to lack of payment, handset operation, roaming capabilities, service coverage and billing. A particular group of customer service representatives handles customer complaints and helps those who want to change their service terms. We use automatic systems and independent analysis for monitoring availability and customer satisfaction level of service in our contact centers regularly. We conduct outbound campaigns with the assistance of our employees in the outbound contact center and the laboratory of the customer relationship management inasmuch as we need to improve customer loyalty and promote our services.customer’s issue.
In 2021,2022, we saw an active organization of the ecosystem-based seamless service in all channels of customer interaction with the company.
We implemented speech and text analytics tools based on AI technologies thatfor customer service. The implementation of these tools helped to increase a numbershare of analyzed requestsdialogs to 20% (previously, it was less than 1%). We already see a positive impact on the customer service indicators: the operator tNPS has increased by 3 p.p. in average. Early in 2023, we plan to increase the share of the analyzed dialogs up to 100%. In 2022, we finalized the operators’ working tools for enhancing the service quality and improving customer experience.
In 2021, we witnessed an active retail service development: a chat with embedded chat bot was implemented for additional supportsecure remote work of employees. New MTS ecosystem customer service scenarios were also developed for retailAt the moment, about 50% of employees work totally remotely. In 2022, we switched to Zoom allowing us to safely and effectively train and mentor our employees. In 2022 we have also faced the SMS traffic transfer to a paid service ensuring delivery to customers’ numbers of other operators. This made it possible to reduce the share of repeated requests by 1 p.p. We continued developing actively our Knowledge Base – Knowledge Management System. Over 20 000 employees use the KMS every month, enjoying advantages of parametric scenarios and updated search.
In 2022, we continued developing customer service in MTS stores. We have launched a pilot project of providing service in stores using biometrics. Early in 2023, we will seelaunch a further developmentpilot project on speech analytics in MTS stores. The implementation of intelligent systems to improve efficiency of sales and service in our stores.
IVR development continued in 2021. Integration with an internal intelligent platform was implemented, which allowed us to offer clients the most relevant scenarios. It helpedtools is designed to improve the IVR efficiency without customer experience deterioration. We havein MTS stores.
In 2022, in conjunction with MTS AI Center, we launched MTSa Voice Bot in the Moscow region.
The product is focused on simplifying interactionpilot regions of customers with the company’s services in the automatic telephone menu maintaining the IVR current efficiency. It is no longer necessary to selectmobile and fixed business. Currently, we are updating recognition models and launching a topic of application in the menu, instead customers will be able to create an open question and receive a response immediately. A share of unique customers completed the service in the IVR with the help of the Voice Bot without being switched to the operator is about 40%. NPS of users is approximately 45%.new empathic voice. In 2022,2023, we plan to roll out the solutionVoice Bot for the whole customer service. At the same time, the Voice Bot will be a real assistant to all regions.the Call Center operators, redirecting customers’ questions to the operator.
2022 saw an active development of intelligent Smarty Chat Bot that resolves certain issues and serves customers without a referral to the chat operator. We have implemented a notification of customers of the status and timeline of settlement of the previously registered requests/incidents/claims. We have automated the provision of bonuses to customers suffered from failures in the network. In 2023, in conjunction with the AI Center, we plan to transfer the chat bot to the updated NLP platform; this enabling us to reduce the time-to-market implementation of new service scenarios and enhance ecosystem customer experience.
In 2021,2022, we witnessedcontinued developing actively a launchtool of technical diagnostics of Russian fixed communication customers (Inetcore). Inetcore has become a tool for diagnosing not only the CSC employee, but also the Customer directly. We have configured integration with key SSS: IVR, Voice and Chat Bots. Now a customer servicecan receive a technical advice and register a single incident in such popular messengers as WhatsApp, Telegram, and Apple Messages. An allocated support for new digital productscase of MTS ecosystem was launched.problems in the network without applying to the specialists.
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WeThus, in 2022, we continued developing tools for technical diagnosticsimproving the quality of fixed-line customers, set up integration with key self-service services: IVR and chat bot. Now a customer can receive a technical advice and register an incident in case of problems in the network without contacting specialists.
Thus, all customer service projects and activities are aimed atservices, this contributing to implementation of the MTS customer-focused strategy -Company’s CLV 2.0.2.0 strategy.
Network Infrastructure—Technology Strategy
Our technology strategyprimary goal is formed in accordance withto launch Cloud RAN, migrate core network platforms to the overall company’s business strategycloud and intended to supportfurther increase fiber penetration.
To manage the existing business operations,unified infrastructure, we are developing the Infrastructure Platform - an artificial intelligence platform that analyses infrastructure elements, subscribers and their behavior as well as to introduce new technologies allowing us to launch new services in the future. Our technology strategy considers world technology trends in telecommunications.
The main focus of the technology strategy is the consistent development of themanages traffic, network meeting future technology requirements: higher throughputs, lower latenciesconfiguration and flexible network core as enablers of the new services.field service.
LTE is our the maintop priority while deploying Radio Access Network (82% of the RAN deployment was LTE in 2021) and 2G/3G investments decreaseare gradually decreasing in accordanceline with changes in network UE penetration structure and traffic migration.
According to the Technology Strategy, in 20212022 we continued to re-farm frequencies re-farming in 1800 MHz , 2100 MHz and 900 MHz bands from 2G/3G to the most efficient technology—LTE. Besides,In addition, we use Carrier Aggregation, 256 QAM, high orderhigh-order MIMO, and other cutting edge technologies to provide a better user experience for our customerscustomers.
5G is the next keymajor step for telecommunications companies, and in 2021 MTS launchedtelecommunication companies. In 2022 our subscribers could test 5G-capabilities through the Russia’s first multi-locationdistributed 5G pilot 5G network for end consumers. Our subscribers now can test 5G experience at speeds up to 1.5 Gbps.
We strongly believe that Open RAN architecture is the future of Radio Access Networks, and in 2021 we launch Open RAN lab to test new solutions functionality and raise in-house Open RAN integration expertise.
We continue using modular architecture for Data Centers construction and, in 2021, we launched a new data center in Novosibirsk
Our strategy is to develop distributed computing network with high scalability. That is why we are not limited to building large data centers, but we also build small Far Edge DC’s. In 2021 we launched 2 Far EDGE data centers.network.
Network Infrastructure—Site Construction and Sharing
In October 2014, MTS and VEON Ltd. (VimpelCom) had signed a contract about shared LTE networks deployment and operation. According to this contract, one shared LTE network should be deployed for servicing subscribers of both companies in several regions of Russia.
By the end of 20212022 we had 10,61711,424 LTE base stations shared with VEON Ltd. (VimpelCom) in 22 regions and VEON Ltd. (VimpelCom) had 8,2125,242 LTE base stations shared with MTS in other 20 regions of Russia. Total amount of shared infrastructure nodes is 18,82916,666 base stations servicing in 800 MHz, 1800 MHz and 2600 MHz bands FDD&TDD networks.
In addition to network deployment investments and operational costs savings target architecture of the site sharing project includes frequency resources shared usage: by the end of 20212022 networks in 34 regions of Russia ran in shared 2600 band spectrum usage mode (MOCN concept). The project is being completed in 7 regions.
Network Infrastructure and Frequency Allocation
We use switching and other network equipment supplied by Nokia Solutions and Networks, Ericsson, Huawei, Alcatel Lucent, Samsung and other major network equipment manufacturers.
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In Moscow and Moscow region license area, we have been allocated frequencies spanning 2 × 12 MHz of spectrum in the 900 frequency band and 2 × 24.8 MHz of spectrum in the 1800 frequency band for operation of a dual GSM 900/1800 network and UMTS900 network, LTE900 and LTE1800 networks. In St. Petersburg and the Leningrad region, we have been allocated frequencies spanning 2 × 9.8 MHz of spectrum in the 900 frequency band (including 2 × 1.6 MHz in the E GSME-GSM band) and 2 × 18.6 MHz of spectrum in the 1800 frequency band for operation of a dual GSM 900/1800 network, UMTS900 network, LTE900 and LTE1800 networks.
We have different amounts of spectrum in the 900 MHz band for GSM 900 and UMTS and LTE networks and in the 1800 MHz band for GSM and LTE networks in almost every region of the Russian Federation.
We have been allocated frequencies 1950 19651950-1965 MHz, 2010 20152015-2020 MHz and 2140 21552140-2155 MHz for UMTS and LTE network deployment for the entire territory of the Russian Federation.Federation, excluding territories that became part of the Russian Federation after 2014.
In addition, we have been allocated frequencies 453 457,4453-457,4 MHz/463 467,4463-467,4 MHz for IMT MC and LTE networks and 1920 19351920-1935 MHz/2110 21252110-2125 MHz for UMTS and LTE networks in Khanty Mansi Autonomous Okrug and Republic of Bashkortostan.
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We have been allocated frequency bands 2540 25502540-2550 MHz and 2660 26702660-2670 MHz spanning 2 × 10 MHz and frequency bands 798. 5 806798.5-806 MHz and 839.5 847839.5-847 MHz spanning 2 × 7.5 MHz for LTE FDD network deployment for the entire territory of the Russian Federation. In addition, we have been allocated frequency band 2595 26202595-2620 MHz spanning 25 MHz for LTE TDD network deployment for the entire territory of the Russian Federation.Federation, excluding territories that became part of the Russian Federation after 2014.
We believe that we have been allocated adequate spectrum in each of our license areas.
Network Infrastructure—Virtual Infrastructure
The followingWe launched various virtual network infrastructure projects have been launchedthroughout 2022. In addition, we commenced the design stage of the data-centers construction project in 2021:
The following projects were finished in 2021:
TwoEkaterinburg and Rostov and construction of a new multi-purpose modulesmodule of data-center started operating in Novosibirsk for deployment of virtual platforms for telecommunication services and cloud services in 2021.St-Petersburg.
Network Infrastructure—Energy Infrastructure
One of the main goals in energy infrastructure is to decrease operational costs for electric energy.
Under the legislative acts of Russian Federation electric energy payment categories were introduced in 2012. This payment category can be chosen by a consumer in case of introduction of the electric energy accounting system, which allows to hourly monitor an electric energy usage and to report this information to the power supply companies with an accepted procedure.
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Considering these conditions we decided to deploy Electric Energy Accounting Automatic System (EEAAS).
Introduction of the EEAAS allowed to:
The project is now finished and the EEAAS is successfully working allowing to reduce costs of electric energy
payments.
In 2022 we are planning to deploydeployed the Hardware and Software Complex (HSC) of power storage based on Li-Ion battery packs for base stations. The purpose of this Complex is to switch power supply from an external power source to a Li-Ion battery pack during the time when an electrical power has the most expensive cost and to charge up the batteries in those hours when an electrical power has the least expensive cost. Trial tests, which were implemented in Moscow, have shown
Besides that the Complex is fully functional and is able to ensure about 18%HSC also serves as a power reserve system that can supply base stations with an electric energy cost reduction. in case of emergencies on an external power source.
Throughout 2022 we plan to provide more than a thousand1000 base stations were provided with the Hardware and Software Complex.
Complexes are already implemented and in a fully functional state. Introduction of the HSC allows to reduce electricity payments and to reduce operational costs. Data shows that depending on the region payments decreased by 8-15%.
Development and maintenance of the network
The process of obtaining appropriate sites requires that our personnel coordinate, among other things, site-specific requirements for engineering and design, leasing of the required space, obtaining all necessary governmental permits, construction of the facility and equipment installation. In Russia, we’vewe have used special radio planning toolstool Atoll supplied by TEOCO Corporation and radio propagation models supplied by Siradel SASForsk to assess new sites so that the network design and site development are coordinated. This software could create digital cellular coverage maps of our licensed areas, taking into account the specifics of the urban landscape, including the reflection of radio waves from buildings and other obstacles, and support all necessary technologies, such as 2G, 3G, LTE and NB-IoT. In 2021 we’ve replaced the TEOCO radio planning tool with the new one, Atoll, which is provided by Forsk. This new tool allows us to make calculations of 5G networks and has better performance.obstacles. In addition we improvedcontinued improving our customized tool SOCRAT for investment planning to speed up the process of RAN development planning and make it more accurate. Used together, these software tools enable us to plan base station sites without the need for numerous field trips and on-site testing, saving us considerable time and money in our network build-out.
We also continued employing the functionality that allowed us to increase the speed of data transmission and improve customer experience for our subscribers. The carrier aggregation functionality is activated at 98%98.6% of base stations where it is technically possible. It accounts for 48%51% of the MTS entire network base stations.
We continuecontinued our work of refarming the frequency spectrum. The refarming ofspectrum to refarm the remaining regions in 1800 band has been completed by 54% of the network. In 2022, we planalong with expanding already reframed LTE channels from 10 to additionally refarm 14% of the network. The feasibility of refarming the remaining network is under study.15 MHz bandwidth. The refarming of 2100 band is carried out gradually, starting from the most strategic regions, following the market demand and customer base migration from 3G to LTE-based services.services and took place at 21% of all our UMTS base stations.
In 2021,2022, we continued expanding our network coverage. At the end of 20212022 the 2G network coverage was provided for 97%96% of the population, 3G for 88%86% of the population, 4G for 86%84% of the population and IoT coverage was provided for 85%88% of the population of Russia. Small decrease in percent by comparison of previous year is due to using new propagation model and improving accuracy of network data in the planning tool.
Base station site contracts are essentially cooperation agreements that allow us to use space forNetwork Monitoring Equipment
We constantly control and monitor the performance of our base stationsnetwork, calls setup ratio and other network equipment. The terms of these agreements range from one to 49 years, with the term of the majority of these agreements being one to five years. Under these agreements, we have the right to use premises located in attics ormajor key performance indicators and key quality indicators. These processes are centralized on top floors of buildings for base stations and space on roofs for antennas. In areas where a suitable base station site is unavailable, we construct towers to accommodate base station antennas, mainly on leased plots of land. In 2018 we started the NB IoT technology During 2018-2021, NB IoT technology was implemented on 45,055 base stations of LTE.several Network Operation Centers.
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Network Monitoring Equipment
We constantly control and monitor the performance of our network, call completion rate and other major key technical performance indicators. We use monitoring systems to optimize our network and to locate and identify the cause of failures or problems, and also to analyze our network performance and obtain network statistics. We have agreements with different suppliers for technical support services that allow us to obtain their assistance in trouble shooting and correcting problems with our network within the warranty period.To provide high quality service to our subscribers in Russia, we have a global network operation centerGlobal Network Operations Center (“GNOC”) in Krasnodar The GNOC experts have the technical ability to monitor network problems and unusual situations online inthat serves all MTS regional branches of MTS in Russia around the clock. Our maintenance department, staffed 24 hours per day, performs daily network integrity checks and responds to reported problems. Our technicians inspect base stations and carry out preventative maintenance at least once every six months.
TheRussia. GNOC in Krasnodar allows us to centralize functions such functions as equipment monitoring and controlling of equipment, network control, planning and optimization, and also helps to solveas well as help resolve incidents related to service interruptions. The GNOC strengthens our network’s reliability and safety, as well as creates the necessary conditions to launch and implement new technologies and network standards.outages or reduced quality of services.
In November 2015, aThe Global Fixed Network Operation Center (“GFNOC”) was launched in Nizhny Novgorod thus completing the centralization process of the MTS mobile and fixed network management. The GFNOC combined functions of monitoring and controlling the equipment incovers 55 regions of Russia where we offer broadband Internet access, TV and fixed line telephony services. For the subscribers connected to these services the GFNOC acts as a single entry point for technical support. Under the GFNOC projectWe have a centralized unit was also set upin the GFNOC, which is responsible for the quality of the services provided to corporate customers with bundled packages of mobile and fixed communications.communication services. Our subsidiary company MGTS performs these functions in Moscow region of Russia.
With the Global Fixed NetworkWe have also Operation and Maintenance Center deployed, we put together all resources for management of the quality of provided mobile and fixed line voice services, data transmission via mobile and fixed networks, leased dedicated digital circuits and VPN channels and digital TV.
In 2016, we also opened satellite TV operation and maintenance center in Moscow, which is used for monitoring head endTV head-end station and ours satellite TV services.
Our networks in Armenia and Belarus are monitored by our local operation and maintenance centers in each country. In addition to the monitoring of network performance, those centers analyze network quality parameters, provide troubleshooting, regular and extraordinary reporting to the management and our headquarters.
The handling of any significant network problems and outages isare monitored and coordinated at our headquarters, where we also manage the cross functional coordination of our networks in all countries of operation.
Our principalAll of our equipment is supplied through authorized dealers. We have agreements with different suppliers are Huawei, Iskratel, Oracle - PSTN switching equipmentfor technical support services that allow us to obtain their assistance in trouble shooting and SBC; Ericsson, Harmonic, SumaVision, Cisco Systems - equipment of Digital TV station; Irdeto, Verimatrix - CAS TV systems; MediaKind, Huawei - Hybrid TV platform; Cisco Systems, Huawei, D Link, Fibercom, EdgeCore - FTTB core and access; Juniper Networks, Huawei, ECI Telecom, Tellabs and Alcatel Lucent for transportcorrecting problems with our network equipment. within the warranty period.
Please see also “Item 3. Key Information—D. Risk Factors—Political and Social Risks—Factors — Risks Relating to Economic Risks in Our Countries of Operation — Further deterioration in relations between Russia and other states that were parts of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesgeopolitical situation and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”shares” for the risks connected with sanctions.
AllThe sanctions may adversely affect the ability of ourdealers to provide technical support due to the restrictions on access to the necessary tools and the knowledge bases of the manufacturers of the equipment is supplied directly through authorized dealers.we use.
Interconnect Arrangements and Telephone Numbering Capacity
We operate various types of communications networks, including mobile cellular, DLD/ILD and local fixed line and zonal fixed line networks.
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Cellular operators must interconnect with fixed zonal, wireless, long distance and international telephone operators to obtain access to their networks and, via these operators, to the networks of other operators around the world. Cellular and fixed line operators must also obtain telephone numbering capacity to allocate to their subscribers. There are two categories of telephone numbers: “federal” 11 digit numbers (non geographical(non-geographical numbering plan for cellular operators) and “local” seven digit numbers (geographical numbering plan for fixed line operators which can also be used as additional numbering capacity for mobile operators). In Moscow, both “federal” and “local” numbers have been used in the 11 digit format since the beginning of 2011. We have entered into various agreements for the provision of local telephone numbering capacity with several local telecommunications operators in Moscow and in other regions of Russia. We have also built our own local networks in certain cities within Russia (including Moscow) to provide local telephone numbering capacity to our subscribers. Telephone numbering capacity is allocated by the government and we provide interconnect services to other operators in all regions of Russia. Our fixed line zonal and local networks in Russia are interconnected with other operators. Zonal/local interconnect typically entails payment of a one-off connection fee per each point of interconnect (“E1”) and a usage charge based on minutes of traffic. Operators with a substantial market power may also charge a guarantee monthly usage fee in case traffic is less than 30 kmin per E1.
The Ministry of Communications and Mass Media has allocated special numbering codes for federal 11 digit telephone numbers on a non geographicalnon-geographical basis to all the cellular operators. We believe that sufficient numbering capacity has been allocated to us for the development of our network. However, a combination of regulatory, technological and financial factors has led to the limited availability of local 7 digit telephone numbering capacity in Moscow and the Moscow region. Moscow’s “495” code and the Moscow region’s “496” code have already reached numbering capacity limits. As a result, the new “499” code was introduced in order to increase the Moscow numbering capacity, the “498” code was introduced to increase Moscow region numbering capacity and since 2011 “local” numbers have been used in Moscow in 11 digit format.
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To meet subscriber’s demand and provide for an adequate inventory of numbering capacity, we previously entered into contracts with local fixed line providers for allocation of numbering capacity to us. However, the Ministry of Communications and Mass Media subsequently took the view that numbering capacity assigned to one operator could not be rented to other operators. Accordingly, we have entered into arrangements whereby fixed line operators make their numbers available to our subscribers via agency contracts between the subscribers and us acting on behalf of such fixed line operators. Our right to use numbering capacity is for an unlimited period of time. As of December 31, 2021,2022, we had numbering capacity (federal and local) for approximately 39.16*41,86 million subscribers in the Moscow license area.
To provide our subscribers in Russia with DLD/ILD services, we have interconnect agreements with national operators Rostelecom, VEON Ltd. (VimpelCom) and other national transit operators. We have also built and operate our own DLD/ILD network, which allows us to interconnect directly to foreign operators and thereby decrease our interconnect costs. Most interconnect fees for connecting users of other operators’ fixed line and wireless networks to our network are based on a one-off connection fee and charge for usage by minute which varies depending on the destination called.
Russian legislation provides that fixed line operators with a substantial market power cannot refuse to provide interconnect or discriminate against one operator in relation to another, and the interconnect rates of operators with a substantial market power are regulated by the government. See “Item 4. Information on Our Company—B. Business Overview—Regulation of Telecommunications in the Russian Federation—Regulation in the Russian Federation—Competition, Interconnect and Pricing” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we cannot interconnect cost effectivelycost-effectively with other telecommunications operators, we may be unable to provide services at competitive prices, which may diminish our market share and result in a loss of revenues and margins.”
Interconnect and traffic transit between the networks of mobile operators in Russia occurs through direct channels connecting the switches of the different mobile operators within the same city; through the network of transit long distance operators, which connect the networks of different mobile operators in different cities or through our own DLD/ILD network. For domestic long distance traffic transit we use our DLD/ILD network and networks of different national operators, including among others: Rostelecom and VEON Ltd. (VimpelCom). For ILD traffic transit we primarily use our DLD/ILD network which is interconnected with 52 international carriers. We also have an interconnect between the DLD/ILD MTS network and the ILD networks of our subsidiary, MTS Armenia, in order to provide transit for international traffic.
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Handsets
Nearly all of our handset sales consist of tri-band GSM 900/1800/1900 and dual-band UMTS 900/2100 handsets, except for certain models in the low cost segment. Those handsets, which function in accordance with the GSM 900, GSM 1800 and PCS-1900 standards, provide users with greater automatic roaming possibilities in Russia, Europe, the United States and Canada. All LTE handsets support bandwidth LTE-FDD 2100 MHz (band 1), LTE-FDD 1800 MHz (Band 3), 2600 MHz (Band 7), LTE-FDD 900 MHz (band 8), 800 MHz (Band 20) and LTE-TDD 2600 MHz (band 38), also there are smartphones in our sales with LTE Advanced support. In 2021,2022, we continued the process of implementation Voice over LTE and Wi-Fi Calling functions.
From 2009, RTC, our wholly-owned subsidiary, started handling all functions relating to our retail operations, including the purchase and sale of handsets and accessories and subscriber enrollment at our retail outlets. RTC has entered into arrangements with Apple, Samsung, Oppo, Vivo, Realme, Nokia, Alcatel, Xiaomi, Philips, Huawei, Honor, ZTE and others to purchase handsets. In 2021, we continued our cooperation with A-brand smartphone vendors. We also offer an array of mobile telephone accessories. In February and March 2022, a number of handsets vendors, including Apple and Samsung, paused their product sales in Russia. Further limitation of handsets supplies may lead to the decrease in turnover of our retail operations and reduction in the range of products offered. Please see “Item 3. Key Information—D. Risk Factors —Political and Social Risks—Further— Risks Relating to Economic Risks in Our Countries of Operation —Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesgeopolitical situation and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”shares” for the impact of sanctions on relations with the suppliers.
Fixed Line Services
We offer fixed-line communications services in 5660 regions across Russia, covering about 2530 million households.
Our other fixed line operations include the following communication services: voice, data and broadband Internet and pay TV services for corporate and residential subscribers, as well as the provision of interconnect services to other communications operators and numbering capacity to their subscribers. Based on TMT Consulting data, as of December 31, 2021, we were the largest operator in the Moscow residential broadband market in terms of subscribers, with a 38% market share. We also operate in Armenia, where we provide digital telephony communications services, data transmission, Internet access and the renting of channels.
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Customers and Services Offered—Moscow Fixed Line Operations
We provide fixed line communications services through our subsidiary, MGTS, which is the incumbent fixed line PSTN operator in Moscow. MGTS owns Moscow’s PSTN infrastructure, including switches, a transmission network, underground ducts, and owns or holds leases to properties housing its offices and equipment.
As of December 31, 2021,2022, MGTS had approximately 3.723.63 million active lines in service, a cable network of over 42,40945,121 km, a fiber optic network of over 46,19347,717 km and 1 321116 payphones. Currently, MGTS has focused its efforts on the deployment of GPON, IP/MPLS technologies and an IMS core. The old SDH equipment is being removed which results in the decreased number of E1 streams, a reduction in the copper network and the respective extension of the fiber optic network. MGTS also develops new services for IP TV, and MVNO as the convergent service for mobile and fixed telephony.
The total installed capacity of the telephone network reached 0.3672.130 million numbers on the TDM area (Time Division Multiplexing) and 5.187.989 million numbers on the IMS area (IP Multimedia Subsystem) as of December 31, 2021.2022.
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Moscow fixed line operations customers consist of the following subscribers:
| | | | | | | | | | | | | | |
| | December 31, |
| December 31, |
| December 31, |
| | December 31, |
| December 31, |
| December 31, |
|
Moscow fixed line operations | | 2021 |
| 2020 |
| 2019 | | | 2022 |
| 2021 |
| 2020 | |
Residential subscribers | | 84 | % | 84 | % | 84 | % | | 8,334 | % | 8,355 | % | 836 | % |
Corporate subscribers | | 7 | % | 8 | % | 8 | % | | 714 | % | 725 | % | 78 | % |
Public sector subscribers | | 9 | % | 8 | % | 8 | % | | 952 | % | 920 | % | 85 | % |
MGTS holds licenses and regulatory approvals to provide, among others, the following services:
● | local telephony; |
● | DLD/ILD voice telephony through licensed DLD/ILD operators, including us; |
● | interconnect to other operators; |
● | Internet and data transmission, including leased DLD/ILD services; |
● | IP TV for B2C and B2B subscribers; |
● | MVNO mobile telephony and Internet; |
● | inquiry and information, including telephone directories; |
● | local telephony with use of payphones; |
● | telematic communications services; |
● | telecommunications services associated with providing of communication channel; |
● | telecommunications services associated with voice data transmission; |
● | telecommunications services associated with cablecasting; |
● | movable radiotelephony services; |
● | measures and (or) services for the protection of State secrets; |
● | capital construction projects engineering. |
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As the only licensed PSTN operator in Moscow, MGTS is considered a natural monopoly under Russian antimonopoly regulations. Consequently, substantial partparts of services provided by MGTS are subject to governmental regulation. The Federal Antimonopoly Service of the Russian Federation regulates MGTS’ tariffs for voice telephony services provided to its PSTN subscribers, including monthly subscription fees, installation fees and local call charges. Revenues from regulated services are accounted for approximately 28%24.5% of service operating revenues of our Moscow fixed line operations in 2022, 28% in 2021 and 32% in 2020 and 33% in 2019.2020.
The percentage decline is connected with gradual growth of operating revenues from non regulated services as a proportion of the overall operating revenues in 2022, 2021 2020 and 2019.2020. The Federal Antimonopoly Service of the Russian Federation sets the tariffs MGTS can charge taking into account cost of services, network investment and a certain profit margin, and the current tariffs fully compensate MGTS for the cost of services provided to residential and government subscribers. According to Russian legislation, MGTS is allowed to petition the Federal Antimonopoly Service of the Russian Federation for tariff increases upon certain conditions, such as inflation or increases in the cost of services. Historically, MGTS has petitioned the relevant Russian government agency for tariff increases once per year. The Federal Antimonopoly Service of the Russian Federation has permitted MGTS to increase its tariffs several times.
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MGTS also provides a number of unregulated services. According to Russian legislation, DLD/ILD services provided by licensed non monopoly operators, data transmission services, value added services and a number of other services are not subject to tariff regulation. Among others, MGTS provides the following unregulated services:
● | various value-added services, including call forwarding, call waiting, call holding, caller ID, provision of second direct inward dialing (DID) number; |
● | Internet access for residential subscribers and |
● | IP TV for B2C and B2B subscribers; |
● | MVNO mobile telephony and Internet; |
● | alarm signaling; |
● | domestic maintenance services, including electric installation, sanitary engineering, cleaning, computer emergency, and consumer electronics installation; |
● | video-surveillance; and |
● | rent of space for telecommunications equipment of other operators connected to MGTS’ network. |
MGTS does not have license to provide DLD/ILD communications services directly to its subscribers but must route such traffic through a licensed DLD/ILD operator. As a result, DLD/ILD traffic originated by MGTS subscribers is carried either by us, with these services included in MGTS’ monthly bill, or by other providers of DLD/ILD services, who bill MGTS subscribers directly or pay MGTS an agency fee for processing their bills.
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The following table presents certain operating data for our Moscow fixed line operations as of and for the years ended December 31, 2022, 2021 2020 and 2019.2020.
| | | | | | | | | | | | |
| | December 31, |
| December 31, |
| December 31, | | December 31, |
| December 31, |
| December 31, |
Moscow fixed line operations |
| 2021 |
| 2020 |
| 2019 |
| 2022 |
| 2021 |
| 2020 |
Installed telephone lines on TDM (000s)(1) | | 0,367 | | 0,595 | | 0,683 | | 2,130 | | 2,780 | | 0,595 |
Installed telephone lines on IMS (000s)(1) |
| 5,180 |
| 5,180 |
| 5,180 |
| 7,989 |
| 9,214 |
| 5,180 |
Residential |
|
|
|
|
|
|
| |
| |
| |
Number of subscribers (000s) |
| 2,362 |
| 2,545 |
| 2,684 |
| 2,201 |
| 2,362 |
| 2,545 |
CPP traffic (millions of minutes) |
| 166 |
| 214 |
| 240 |
| 131 |
| 166 |
| 214 |
Corporate(2) |
|
|
|
|
|
|
| |
| |
| |
Number of active lines (000s) |
| 465 |
| 492 |
| 525 |
| 440 |
| 465 |
| 492 |
Number of subscribers (000s) |
| 39 |
| 43 |
| 46 |
| 37 |
| 39 |
| 43 |
CPP traffic (millions of minutes) |
| 164 |
| 185 |
| 205 |
| 140 |
| 164 |
| 185 |
(1) | Telephone lines on TDM and IMS can be installed at one household. We added B2B connections of switch capacity in 2021. |
(2) | Includes state-owned enterprises and government agencies. |
MGTS’ subscriber segments and the services provided to each subscriber segment are further described below.
Residential and corporate subscribers
MGTS provides basic regulated voice services to residential and corporate subscribers using its PSTN facilities and copper or optical “last mile” access.
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In addition to basic voice services, MGTS provides its residential and corporate subscribers with digital telecommunications services, Internet, IP TV, MVNO mobile telephony and Internet and VPN deployment services, rental of high-speed communication channels, intelligent voice and various other services.
The following table illustrates MGTS’ regulated tariff development:
| | | | | | |
| | March 24, |
| January 12, |
| March 1, |
MGTS Regulated Tariffs |
| 2022 |
| 2021 |
| 2020 |
Residential(1) | |
| |
| |
|
Line rental |
|
|
|
|
|
|
RUB per month |
| 214 |
| 214 |
| 214 |
Per minute tariff plan—local connection fee |
|
|
|
|
|
|
RUB per minute |
| 0.60 |
| 0.60 |
| 0.60 |
Unlimited tariff plan—connection fee (unlimited connection) |
|
|
|
|
|
|
RUB per month |
| 513 |
| 513 |
| 299 |
Combined tariff plan—fee for fixed amount of minutes(2) |
|
|
|
|
|
|
RUB per month |
| 438 |
| 438 |
| 224 |
Combined tariff plan—fee for each additional minute |
|
|
|
|
|
|
RUB per minute |
| 0.58 |
| 0.58 |
| 0.58 |
Combined tariff plan—fee for fixed amounts of minutes(3) |
|
|
|
|
|
|
RUB per month |
| 242 |
| 242 |
| 28 |
Combined tariff plan���fee for each additional minute |
|
|
|
|
|
|
RUB per minute |
| 0.59 |
| 0.59 |
| 0.59 |
Corporate (non‑governmental)(1) |
|
|
|
|
|
|
Line rental |
|
|
|
|
|
|
RUB per month |
| 225 |
| 225 |
| 225 |
Per minute tariff plan—local connection fee |
|
|
|
|
|
|
RUB per minute |
| 0.60 |
| 0.60 |
| 0.60 |
Unlimited tariff plan—connection fee (unlimited connection) |
|
|
|
|
|
|
RUB per month |
| 641 |
| 641 |
| 416 |
Combined tariff plan—fee for fixed amount of minutes(4) |
|
|
|
|
|
|
RUB per month |
| 804 |
| 804 |
| 224 |
Combined tariff plan—fee for each additional minute |
|
|
|
|
|
|
RUB per minute |
| 0.58 |
| 0.58 |
| 0.58 |
Corporate (governmental and state‑funded organizations)(1) |
|
|
|
|
|
|
Line rental |
|
|
|
|
|
|
RUB per month |
| 215 |
| 225 |
| 215 |
Per minute tariff plan—local connection fee |
|
|
|
|
|
|
RUB per minute |
| 0.60 |
| 0.60 |
| 0.60 |
Unlimited tariff plan—connection fee (unlimited connection) |
|
|
|
|
|
|
RUB per month |
| 641 |
| 641 |
| 416 |
Combined tariff plan—fee for fixed amount of minutes(4) |
|
|
|
|
|
|
RUB per month |
| 804 |
| 804 |
| 224 |
Combined tariff plan—fee for each additional minute |
|
|
|
|
|
|
RUB per minute |
| 0.58 |
| 0.58 |
| 0.58 |
|
|
|
|
|
|
|
|
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Operators
MGTS provides interconnect, traffic transmission and leased line services to other communications operators. Interconnect is carried out on the local and zonal levels in accordance with terms and conditions that are publicly disclosed. MGTS also provides additional services to operators interconnecting to MGTS’ network, including access to emergency service, information and customer care numbers.
MGTS has also established an active presence in the data transmission market. Through its PDTN, MGTS can establish VPNs for other operators as well as provide other data network services. Operators can also rent space and utility systems from MGTS to house their network equipment.
MGTS provides services for the design and construction of mobile and fixed-line networks for third-party Telecom operators.
Customers and Services Offered—Other Fixed Line Operations
We provide fixed-line communications services to corporate, operator and residential subscribers in 5660 regions throughout Russia. Specifically, we offer local voice, DLD/ILD voice, data and Internet and pay TV services to our subscribers. Some of the interconnect tariffs we charge other telecommunications operators for in Moscow and certain other cities are regulated by the Russian government. We believe our fixed-line subscribers typically evaluate our service and product offerings based on such factors as price, technology, security, reliability and customer service.
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The following table presents certain operating data for our other fixed line operations in Russia as of and for the years ended December 31, 20212022 and 2020.2021.
| | | | | | | | |
| | December 31, | | December 31, | | December 31, | | December 31, |
Other fixed line operations |
| 2021 |
| 2020 | | 2022 |
| 2021 |
Residential | |
| |
| |
| |
|
Number of subscribers (000s)(1) |
| 6,230 |
| 6,044 | ||||
Corporate(2),(3) |
|
|
|
| ||||
Number of subscribers (000 000s)(1) | | 6,303 |
| 6,230 | ||||
Corporate(2) | | |
|
| ||||
Number of subscribers (000s) |
| 170 |
| 119 | | 162 |
| 170 |
(1) | Subscribers to broadband Internet, pay-TV, Wi-Max, voice and other services. |
(2) | Includes state-owned enterprises and government agencies. |
|
|
Corporate subscribers
We target corporate subscribers covering a range of industries, such as business centers, hotels, financial institutions, professional services firms, consumer goods companies, manufacturers and companies involved in extractive industries, among others. These subscribers vary in size, ranging from large multinational and Russian corporations with thousands of employees to small and medium sized enterprises with up to several hundred employees.
As further described below, weWe offer voice, data transmission and Internet and various value added services to our corporate subscribers.
Voice Services. We provide a full range of other fixed line voice services to corporations in Moscow, the Moscow region and other selected regions of Russia, which include local, zonal, and DLD/ILD services using our transmission network and leased capacity between major Russian cities. We also provide integrated voice and data services, voice over frame relay and certain integrated services digital network (“ISDN”) services.
Data Transmission and Internet Services. We offer high quality data transmission services to corporations, which allow for data exchange between their various branches or offices located within Russia and abroad. For data transmission services, our network is capable of transferring data at speeds of up to 10 Gbps and utilizes various technologies, such as 10 GE, GE, ATM, TDM, VPN MPLS/VPLS, GPON, Microwave radio relay (“MRR”), xDSL, LTE and Wi-Fi to provide high quality solutions at a relatively low
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cost. We endeavor to ensure the reliability of network connections by utilizing a full reservation approach to back up all elements of the network.
In addition, we offer a wide range of Internet services to corporations, including broadband Internet access, VoIP, VPNs and data center services using the following technologies: (1) NGN (up to 10 Gbps), (2) GPON (up to 1 Gbps), (3) xDSL (up to 100 Mbps), (4) radio Ethernet (up to 300 Mbps), (5) MRR (up to 1 Gbps), (6) Wi-Fi (up to 600 Mbps), and (7) LTE (up to 100 Mbps). We also provide continuous flexibility to upgrade their network capacity to handle additional Internet services. For example, we often integrate data transmission and Internet services for our clients as they expand their operations and need to interconnect and exchange data with newly opened offices and/or branches.
We also provide security services, such as Anti DDoS protection and various AntiVirus solutions.
We offer a broad range of Internet packages that vary in terms of data transfer speeds and pricing, with higher tariffs for faster uploading and downloading capabilities. Corporates with GPON broadband Internet packages generally experience data transfer speeds between 1 Mbps and 1 Gbps. In addition, we offer a premium broadband Internet service over our NGN in which subscribers enjoy data transfer speeds between 1 Mbps and 10 Gbps. The NGN provides subscribers with the benefit of the same uploading and downloading data transfer speeds, whereas Internet subscribers using an xDSL/GPON connection upload at speeds that are much slower than the one at which they can download.
We also utilize MGTS’ PDTN to provide high speed reliable Internet services and create VPNs for our corporate clients.
Leased Channels. We provide corporate clients with the ability to rent high speed data channels. These “leased channels” are dedicated lines of data transmission.
Value Added Services. We provide corporate clients with several value added services, including Autosekretar and integrated solutions. The Autosekretar service is based on our proprietary IN and is designed to help our corporate customers manage the reception and servicing of a large volume of incoming calls. The unique multi channel telephone number assigned to customers will not change even if the customer moves to a different location in Moscow, and does not require the customer to install any equipment. In addition, this service allows all incoming calls to be transferred to other fixed or mobile telephone numbers in Russia or in other countries. The IN identifies a subscriber by phone number, phone card or password, which allows our customers to bill their subscribers for services and, if necessary, block access for subscribers who have a negative balance on their account.
In addition, we serve as general contractor for the provision of a full range of integrated solutions to subscribers wishing to establish a modern integrated communications infrastructure. Each solution is customized for subscriber specific needs. In developing these customized networks, we are able to offer the following range of services: site survey, cost analysis and optimum project planning, assistance with government related documentation, supply of equipment and operational, technical and maintenance support on an ongoing basis. Once the infrastructure is established or renovated, as the case may be, we typically provide digital voice communications, voice intelligent services, high speed Internet services, videoconferencing and other data transmission services. We intend to expand our service offerings to include customer premises management and network centric IT solutions.
Fixed mobile convergence. Based on our fixed and mobile networks, we offer fixed to mobile convergence services to corporate clients, enabling the use of their mobile phone as an extension of their private branch exchange (“PBX”). We also provide access to corporate IP networks from a mobile phone via GPRS/EDGE/3G/4G.
Operators
We operate fixed line local and zonal networks in Moscow and other cities for provision of telephony services to fixed line subscribers and additional local numbers to mobile subscribers. In order to lower the costs
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We had 214202 local fixed nodes in 6766 regions of Russia, including Moscow, and 5762 zonal fixed networks to provide telephony services to subscribers as of December 31, 2021.2022. Our integrated intercity/international network is interconnected to 52 international operators.
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In the corporate subscriber segment, we generally compete on the basis of network quality, individual and bundled service offerings, customer service, installation time, geographical presence and pricing.
Residential subscribers
We offer voice, Internet and pay TV services to residential subscribers.
Voice Services. We provide voice services to residential and corporate subscribers. Like corporate subscribers, residential subscribers in each of our operational regions seek a full range of high quality voice services equivalent to those provided in Western Europe. In addition to “basic” voice telephony services, we provide a number of additional services, such as call forwarding, call transferring, call waiting, conference, voicemail and Caller ID, among others.
Internet Services. We offer broadband Internet services to residential subscribers throughout Russia. As of December 31, 2021, we had 12% market share in the Russian Federation based on our subscriber data and reports of other national operators and TMT Consulting reports.
Pay TV. We operate a TV service based on IPTV service over ADSL and GPON technologies in Moscow. In addition, we offer pay TV services based on DVB C (digital television via cable connection), analog cable transmission and MMDS (wireless cable) technologies in most of the regions in which we are present. Since November 2013, we connect our subscribers only to the digital TV and since 2017 we broadcast in 4K ultra HD quality. Special auxiliary equipment (set top box) allows pay TV subscribers to access more than 170 channels of digital quality, including channels of HD quality from a home television and channels of 4K ultra HD quality. International and Russian channels are included as part of the base services package.
Our pricing structure is designed to appeal to large numbers of consumers with various interests and purchasing power, and varies significantly between regions. We charge a subscription fee between RUB 500 RUB 990 per month in Moscow and a subscription fee between RUB 300 RUB 2700 in other regions of Russia, depending on the number of channels included in the package. We also offer bundledIn 2022, we continued to develop converged packages that include Internet, pay TV and Internet, Mobile, pay TV services for RUB 780 RUB - 1,290 per month in Moscow and RUB 390 RUB 2,490 in certain other regions of Russia, depending on the speed of the Internet connection, the number of pay TV channels being provided and level of competition in a particular region. In 2021, convergent bundles, that included Internet, TVtelevision and mobile services, had been developed rapidly, including family subscriptions and special tariff plans forplans.
In 2022, we began to actively expand our presence in new regions through FVNO - using the 1 GB/sbroadband network of partner operators and the MTS mobile network. As a result we have achieved overall growth of convergent subscriber base up to more than 1.8 million subscribers in 57 regions (excluding Moscow), as of December 31, 2021.
Sales and Marketing
Moscow fixed line operations
In 2021,2022, MGTS continued monetization ofto modernize its own high tech fiber optichigh-tech fiber-optic GPON network GPON and developed combinations of differentvarious services in packages, including convergentconverged packages of mobile and fixfixed-line services, andas well as subscriptions to online cinemas subscriptions. Promotional packagescinemas. The clients were offered to clients andpromotional packages that included basic services, subscription to online cinemas subscriptions and high-speed Internet access. In order to expand and consolidate its market share, MGTS continued to enter the Moscow Region market through the construction of its own network, as well as through acquisition of local Internet service providers.
By the end of 2021, 1.8 million subscribers were transferred to GPON. In 2022, MGTS plans to developbegan actively developing and implementimplementing new services as partwithin the framework of the concept of Smart Home"Smart Home" and Smart City, participate"Smart City" concepts, actively participating in the cloud solutions market, more actively, developdeveloping partnerships with delivery services and becomebecoming a partner of iconic citylandmark urban projects.
Other fixed line operations
Our target customers include corporate, operator and residential subscribers.
To promote our product and service offerings, we use various communication channels for advertising and marketing, including direct marketing, printed mass media, television, Internet, radio, directories, outdoor advertising, advertising in the subway, special promotions and cross promotions. Through these various advertising and marketing channels, we intend to further develop our
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brand recognition. Our marketing strategy is designed to create a unified brand for each of our various product and service offerings with the aim of becoming a single source for all of our subscribers’ communications needs.
We also actively promote our services to existing subscribers with the help of special bundledcomprehensive product offeringsoffers aimed at servicingmeeting their communication requirementsneeds and enhancingincreasing subscriber loyalty. Our advertising and marketing materials are primarily aimed primarily at promoting the promotion of MTS brand. All fixed line products are offered and marketedsold under this brand. However, when we enter new markets, and acquire or cooperate with companies within the framework of FVNO, we have tocan use both brands in advertising MTS brand and the acquired brand.promotion. This is done to decreasereduce churn, as customers tend to expressshow strong loyalty towardsto local brands. We thenThen we gradually decreasereduce the presence of the acquired brand, and this allows us to make MTS athe market leader in a giventhis region in the future. Our advertising and marketing efforts are designed to convey a positive image of us to the market as a leading communications operator focused on customer satisfaction.
Competition
We compete with a number of fixed line telecommunications operators servicing Moscow, St. Petersburg and other major Russian cities. Moscow is the largest and most competitive of these markets. Our primary competitors include:
● | Rostelecom, Russia’s largest national fixed line telecommunications operator with presence in all Russian regions. We compete with Rostelecom in the corporate, operator and residential fixed line telecommunications markets in all regions where we operate in Russia. We also compete with Rostelecom in the mobile telecommunications market. |
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● | ER-Telecom, voice telephony, broadband and TV operator. We compete with ER-Telecom in the corporate and residential fixed line telecommunications market in St. Petersburg, Novosibirsk, Omsk, N.Novgorod, Ekaterinburg, Kazan, Novosibirsk, Chelyabinsk and other regions. |
● | VEON Ltd. (VimpelCom), which is also one of our primary competitors in the Russian mobile communications market, offers voice, data and Internet services to corporates, operators and residential |
● | MegaFon, which acquired operators Synterra and Net by Net, and offers services in the operator, corporate and residential fixed line telecommunications markets in Moscow, St. Petersburg, and other regions. |
● | Akado Group, which has been acquired by ER-Telecom and Rostech, provider of pay TV, broadband Internet and digital telephony in Moscow. We compete with the Akado Group primarily in the residential fixed line telecommunications market of Moscow. |
Corporate subscribers
The following table sets forth the corporate subscriber market shares of the primary fixed line operators in Moscow as of December 31, 2021:2022:
| | | |
MTS | |
| % |
VEON Ltd. (VimpelCom) | |
| % |
Akado | |
| % |
Rostelecom | | 16 | % |
Other | |
| % |
Total | | 100 | % |
Source: TMT Consulting.
In the corporate subscriber segment, we generally compete on the basis of network quality, individual and bundled service offerings, customer service, installation time, geographical presence and pricing.
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Residential subscribers
Voice services
The following table sets forth the market shares of the primary fixed line operators for voice services in Russia as of December 31, 2021:2022:
| | | |
Company |
| Russia |
|
MTS |
| 18 | % |
Rostelecom |
|
| % |
Other |
|
| % |
Total |
| 100 | % |
Source: TMT Consulting.
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Internet
According to TMT Consulting, as of December 31, 2021,2022, broadband Internet penetration of households was 61%62% in Russia. The following table sets forth the market shares of the primary operators in the residential broadband Internet market in Russia as of December 31, 2021:2022:
| | | |
Company | | Russia |
|
MTS | |
| % |
VEON Ltd. (VimpelCom) | | 8 | % |
| | 11 | % |
Rostelecom | |
| % |
Other | | 33 | % |
Total | | 100 | % |
Source: TMT Consulting.
Pay-TV
According to TMT Consulting, as of December 31, 2021,2022, pay TV penetration was 82%82.6% in Russia. The following table sets forth the market shares of the primary operators in the TV market in Russia as of December 31, 2021:2022:
| | | |
Company |
| Russia |
|
MTS |
| 10 | % |
Rostelecom |
|
| % |
Tricolor TV |
| 26 | % |
ER‑Telecom |
| 8 | % |
Orion |
|
| % |
Other |
| 26 | % |
Total |
| 100 | % |
Source: TMT Consulting.
In the TV market, we generally compete on the basis of pricing, channel selection and content, individual and bundled service offerings, customer service and installation time.
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Tariffs
We establish prices for our unregulated services and different subscriber segments based on certain common considerations, policies and goals. For example, we generally seek to establish competitive prices based on market rates for the services we offer and below market prices when our lower than average costs or economies of scale allow us to do so. We also offer subscribers bundled service packages with several services offered together at a discount to the cost of ordering each individual service separately and to promote additional services to our existing subscribers. In addition, we often offer promotions to our various subscriber segments waiving or discounting installation fees in order to attract new subscribers or promote new services.
With regard to corporate clients, we generally aim to derive the bulk of our operating revenues from monthly payments. Thus, depending on the scale and type of services ordered, we will often discount or waive installation fees.
For services offered to other communications service providers, we aim to generate most of our operating revenues from monthly payments and by offering an array of value added services.
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Network Infrastructure
Network Infrastructure—Transmission Networks
Backbone and Internet Networks
Mobile, fixed and inter‑carrierinter-carrier aggregated traffic increased in 2021:2022: downlink (towards users) data throughput reached 8.2710.07 Tbps (7.06(8.27 Tbps in 2020)2021), uplink (from users) data throughput reached 2.542.93 Tbps (2.27(2.54 Tbps in 2020)2021).
The size of MTS fiber‑opticfiber-optic networks increased by 10,05812,342 km in 20212022 and reached 259,770272,112 km in total.
The main factor impacting network infrastructure in 2021 was the integration of the Data Center Network (DC NET) and multiservice network divisions intocompany continued to reconstruction the backbone and multi service network and the network of data centers in the Internet department. Centralizationcontext of network infrastructure management competencies should have a positive effect on network infrastructure optimization.complex sanctions policy.
Development ofWe continued to develop the backbone network in 2021:2022.
Convergent network
In accordance withWe had to revise our deployment plans, we completed the following projects in 2021:
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The tender for the selection of equipment for the converged regional network has been completed. Three vendors were identified for different regions of the country. Three contracts for the supply of equipment and work are in the process of preparation. Detailedinitial plans for 2022. We completed various projects, including the modernizationdevelopment or acquisition of convergent networks ofregional fiber-optic for interconnect sites, the regions are being worked out.
We have successfully completed testing of automated provisioningdeployment of new network elements. RFP has been launched. We plan to implement network automation in 2022.
The test generationMBH transport nodes, micro-wave links and the launch of the configuration for the converged network element was successfully carried out.
Three private LTE commercial zones have been launched.zones.
SD-WAN solution was successfully deployed on MTS regional sitesWe were also forced to look for a replacement for all vendors MBH and prepared for on-boarding customers. Based on referencesRRN.
Satellite network
We launched and installed ground receiving station to receive and process data from customers and results of pilot projects, business owners (Telecom B2B Block) made a decision to relaunch this project with the new product strategy.low-orbit Earth observation satellites.
Public Switching Telephone networks (PSTN)
The network infrastructure we maintain in Moscow is substantially different to the infrastructures we use in theother regions. In Moscow, primarily we have organically grown, while our regional development has largely been through the acquisition of companies with different business models and a focus on different services. As a result, the network infrastructures in the regions outside Moscow and the technologies used to support such infrastructures are different from the network infrastructure established in Moscow and which we currently own. At present, the telephone network in Moscow and Moscow region has a capacity of more than 1,095,6381,112,781 telephone numbers.
All of our PSTN switching centers (TDM and Soft switch) are connected to a digital transport network, which uses SDH and IP technology. The network ensures connectivity with a digital equipment of PSTNs of other operators.
The SDH network will be operated to support existing clients, but we also provide the moving traffic and clients from SDH/TDM technology to IP.
The management of the transport network and digital PSTN is carried out remotely from network operation centers.
As of December 31, 2021,2022, in Moscow and the Moscow region we had a wireless broadband network including 405404 base and subscriber stations in the 5-6 GHz frequency band and also near 169197 radio relay lines in the 70-80 GHz frequency band.
For the provision of Internet access, IP‑telephony and other services, we have our own IP network, the core of which is constructed as IP MPLS rings with routers connected to each other by means of 10/100 GE channels. In addition, separate routers are used for inter‑carrier connections and are connected to the core routers by means of 10/100 GE interfaces.
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Russia
As of December 31, 20212022 we provided cable Internet access to about 10.811.4 million households and cable TV access to about 10.711.9 million households. The access equipment used are Ethernet switches, Optic Line Terminal, IP DSLAM and Optical Receivers. We mainly use FTTB technology for Internet ( 10.5 million households) and CATV access, which can provide speeds up to 1 Gb/s per building and up to 300 channels CATV (analog and digital). Since 2020, we have started building and upgrading networks using GPON technology. As of 31 December, 2021,2022, more than 15 thousand260,000 households have been built. In 2011, we started to roll‑out DVB‑C technology for a cable TV service.
Currently, we have digital TV service (DVB‑C&DVB‑S2) in approximately 200 cities and localities with 5,17 millionsubscribers. In 2014, we started to roll‑out an advanced hybrid TV service (DVBC/DVB‑S2/IPTV+IP/VOD, CatchUp).5,06 million subscribers. By December 2021,2022, we launched Hybrid TV platform with an IPTV commercial service in Moscow (including Moscow Region) and more than 8595 other regions, DVB‑C/IP Hybrid commercial service in more than 100 regional cities and DVB‑S2/IP Hybrid commercial service all over Russia including 6 56 HD/UHD channels using HEVC (H.265) format. Total number of connected hybrid TV users is about 1,23 million. During 2019We combined UHD and 2020 MTS was executing migration from existing Hybrid TV platform to new unified TV platform which is almost complete as of December 2021. Only B2B subscribers of IPTV segment remain to be migrated until mid-2022HD channels due to the need for an IT systems upgradechange in order to support the migration.content policy after foreign UHD and HD channels had left russian market in 2022. Since 2020, the target technology for providing television services is IPTV technology. As of 31 December, 2021,2022, the service was launched
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at a capacity of 6.38.2 million households.In September 2019 MTS has launched new unified TV platform and started sales in OTT (mobile) TV segment with TV applications for smartphones, pads, Smart TV, Android-based STBs and PC browsers. Now MTS TV service is expanding to more specific devices such as MTS.Auto appliances and . Migration process for fixed segments (Hybrid IPTV, DVB-C, DVB-S) started in the middle of 2020 with its active phase completed in December 2020.households. During first half of 2021 migration in DVB-S and B2B segments was fully completed and by November 2021 mobile (OTT) subscribers were also migrated to the new platform which allowed MTS to stop partnership with previous OTT TV platform provider (SPB TV). Number of subscribers activated in OTT segment as of December 31, 2021 was 10,05 million. In order to deliver video traffic to OTT users MTS launched 8 CDN points of presence including Far East with total bandwidth up to 430 Gbits/sec. In order to process traffic peaks MTS also implemented CDN offload setup which allows to MTS to transfer traffic excess to partner CDN network (G-Core). Maximum traffic at the end of 2021 was more than 305 Gbits/sec. During 20222023 according to MTS TVKION expansion forecast CDN bandwidth is planned to be increased by more than twice its current sizesize. We also plan to use in-house solution for new CDN PoPs and integrate backup CDN offload partner. In Moscow and regions as an Internet traffic supplier, we mainly use our own IP Backbone network.
The acquisition of Comstar provided us with an opportunity to use MTS fiber optic lines for fixed network development. Optical network construction in cities is carried out on the basis of fixed and mobile business needs. When we modernize and construct new networks, we deploy fixed and mobile equipment on the basis of “collocation” method
Principal suppliers
Our principal suppliers are: Huawei, Iskratel, Oracle‑PSTN switching equipment and SBC; Ericsson, Harmonic, Summavision, Teleste, Lifestream — equipment of Digital TV station; Irdeto, Verimatrix — CAS TV systems; Huawei — Hybrid TV platform; Cisco Systems, Huawei, Juniper‑FTTB core; Cisco Systems, Alcatel, Coreant, Huawei, FiberHome, D‑Link‑FTTB aggregation‑access. Please see “Item 3. Key Information—D. Risk Factors—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the risks connected with sanctions.
All of our equipment is supplied directly through authorized dealers.method.
Seasonality
Our results of operations are impacted by certain seasonal trends. Generally, revenue is higher during the second and third quarter due to increase in roaming revenues and guest roaming revenues during these quarters. Quarterly trends can also be influenced by a number of factors, including new marketing campaigns and promotions, and may not be consistent from year to year.
In 2020, the measures for combating COVID-19 which included restrictions on movement had a significant impact on the seasonality of our roaming revenues and resulted in the reduction in international roaming of our subscribers and income from guest subscribers.
The decreased riskIn 2022, after the lifting of mortality from COVID-19 in 2021, prompted the removal of some of the government restrictions on international tourism. As a result, we increasedmovement, the volume of roaming services providedincreased mainly due to subscribers, whiletravel within the country. The usual seasonality with a peak of roaming revenues shifted toin the thirdsummer months during the holidays and fourth quarters.during the school holidays has recovered.
The COVID-19 outbreak has had a significant impact on the development of the telecommunications industry and continues to contribute to the development of digital services. We recorded an increase in the consumption of internet traffic in mobile and fixed networks as well as, an increase in the number of users of online services, TV users and others OTT applications. This trend continued in 2021.2022. We expectbelieve that digitalization processes will gradually affect all spheres of social interaction. The greatest demand in 2022 will stem from both onlineOnline entertainment services and digital services of state federal and municipal services.services will continue to be in the greatest demand in 2023.
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Regulation of Telecommunications in the Russian Federation
Regulation in the Russian Federation
In the Russian Federation, the federal government regulates telecommunications services. Theservices and the principal law regulating telecommunications in the Russian Federation is the Federal Law on Communications, which came into force on January 1, 2004 and provides, among other elements, for the following:
● | licensing of telecommunications services; |
● | requirements for obtaining a radio frequency allocation; |
● | equipment certification; |
● | equal rights for individuals and legal entities, including foreign individuals and legal entities, to offer telecommunications services; |
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● | fair competition; |
● | freedom of pricing other than pricing by companies with a substantial position in public telecommunication networks; and |
● | liability for violations of Russian legislation on telecommunications. |
The Federal Law on Communications came into force on January 1, 2004. The Federal Law on Communications creates a framework in which government authorities may enact specific regulations. Regulations enacted under the legislative framework in place prior to the enactment of the Federal Law on Communications continue to be applied to the extent they do not conflict with the Federal Law on Communications.
The Federal Law on Communications which confers broad powers toon the state to regulate the communications industry, including the allocation of frequencies, the establishment of fees for frequency use and the allocation and revocation of numbering capacity, significantly modifies the system of government regulation of the provision of communications services in Russia. In particular, licenses to provide communications services in territories where frequency and numbering capacity are limited may be issued only on the basis of a tender, whereas according to the Government Decree No. 480 dated May 24, 2014, licenses to provide communication services with frequency spectrum—only on auction basis.capacity. In addition, the Federal Law on Communications provides for the establishment of a “universal services reserve fund” which is funded by a levy imposed on all operators of public networks, including us.
Regulatory Authorities
The Russian telecommunications industry is regulated by several governmental agencies. These agencies, form a complex, multi-tier system of regulation that resulted, in part, from the implementation of the Federal Law on Communications, as well as from the large-scale restructuring of the Russian government in March 2004 and subsequent restructuring in May 2008. See also “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Countries of Operation—Political and Social Risks—Political and governmental instability in Russia and other countries of our operations could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs.”including:
The Ministry of Digital Development, Communications and Mass Media of the Russian Federation is the federal executive body that develops and supervises the implementation of governmental policy in the area of communications and coordinates and controls the activities of its subordinate agencies. The Ministry has the authority to issue certain regulations implementing the Federal Law on Communications and other federal laws.
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The Federal Service for Supervision of Communications, Information Technology and Mass Media (Roskomnadzor) is a federal executive body that supervises and controls certain areas of communications and information technologies, including:including, among other matters, licensing, registration, certification, technical supervision of networks and equipment as well as compliance monitoring and enforcement.
|
|
The State Commission For Radio Frequencies is an inter-agency coordination body acting under the Ministry of Digital Development, Communications and Mass Media of the Russian Federation which is responsible for the regulation of the radio frequency spectrum, developsdevelopment of long-term policy for frequency allocation in the Russian Federation and decides ondetermination of the allocation of frequency bands.
The Federal Antimonopoly Service (FAS) is a federal executive body that supervises competition regulations and enforces the Federal Law on Protection of Competition and the Federal Law on Natural Monopolies and the regulations enacted thereunder. The FAS controls certain activities of natural monopolies, including monitoring their execution of certain obligatory contracts, and can issue certain mandatory orders as provided for in the Federal Law on Natural Monopolies.orders. In addition, the FAS regulates certain tariffs in the sphere of telecommunications, including the tariffs on the local, intra-zone and DLD calls by subscribers of public switched telephone networks and installation and subscription fees.
Other regulatory authorities. The Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor) is responsible for the enforcement of sanitary regulations including somecertain authority over the location of telecommunications equipment, and supervises the compliance of companies with the regulations relating to the protection of consumer rights.rights regulations. The Federal Service for State Registration, Cadastre and Cartography (Rosreestr) is responsible for registering certain telecommunications infrastructure that is considered real property. The Federal Financial Monitoring Service (Rosfinmonitoring) is a federal executive body responsible for countering money laundering and terrorism financing. Mobile operators are tomust comply with Federal Law No. 115-FZ dated August 7, 2001 “On Combating Money Laundering and Terrorist Financing.”
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Licensing of Telecommunications Services and Radio Frequency Allocation
Telecommunications licenses are issued based on the Federal Law on Communications and Government Decree No. 480 dated May 24, 2014 on Bidding Process (Auctions, Tenders) for Receipt of Telecommunications License. Under these regulations, licenses may be issued and renewed for periods ranging from three to twenty-five years. Several different licenses to conduct different communication services may be issued to one entity. Provided the licensee has conducted its activities in accordance with the applicable law and terms of the license, renewals may be obtained upon application to the Federal Service for Supervision of
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Communications, Information Technology and Mass Media. Officials of the Federal Service for Supervision of Communications, Information Technology and Mass Media have broad discretion with respect to both issuance and renewal procedures.
ATo operate a communications network, a company must complete a multi-stage process before the commercial launch of its communications network. A company must:obtain:
● |
● |
● |
If the terms of a license are not fulfilled or the service provider violates applicable legislation, the licenseLicenses may be suspended or terminated. Licenses may be suspended for various reasons, including:
In addition, licenses may be terminated for various reasons, by a court, including:
including failure |
The license may also be terminated by the Federal Servicelicensee to comply with the terms of its license, information requests or applicable law, for Supervisionexample, detection of Communications, Information Technology and Mass Media in a numberviolations which may cause damage to rights, interests, life or health of cases, including liquidation of a license holder. A suspension or termination of a license may be appealed in court.individuals.
Frequencies are allocated for a maximum term of ten years, which may be extended upon the application of a frequency user. Under the Federal Law on Communications, frequency allocations may be changed for purposes of state management, defense, security and protection of legal order in the Russian Federation with the license holder to be compensated for related losses. Further, frequency allocations may be suspended or terminated for a number of reasons, including failure to comply with the conditions on which the frequency was allocated.
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The following one-time license fee is payable irrespective of the number of regions covered by the license: RUB 7,500 for services involving, among other things, the use of a frequency spectrum and the lease of communication channels. The license fee for a license received through a tender or auction is determined by the terms of such tender or auction. The official fee of RUB 750 is to be paid for renewing (re-issuing) the license.
Furthermore, the Federal Law on Communications provides for the establishment of a “universal services reserve fund” for the purpose of supporting communications companies operating in less developed regions of Russia through the financing, construction and maintenance of telecommunications networks in low-profit and unprofitable sectors. This reserve fund is aimed at eliminating the practice of cross-subsidies by compensating operators for certain mandatory, loss-making local services in rural and sparsely populated areas. It is funded by a levy imposed on all operators of public networks, including us, in the amount of 1.2% of revenues from telecommunications services less the amount of taxes paid by subscribers. The universal service fund concept has been used in some developed countries and in Eastern Europe.
The Federal Law on Communications empowers the Russian government to determine and annually review the list of licensing requirements applicable to various communication services being licensed. TheThis list of licensing requirements was enacted by Government Decree No. 2385 dated December 30, 2020. Licenses also generally contain a number of other detailed conditions, including a date by which service must begin, technical standards and certain other terms and conditions. We have either commenced service
The Federal Law No. 356-FZ dated July 14, 2022, implemented in the The Federal Law on Communications the obligation of telecommunications operators to submit an annual report on their activities to Roskomnadzor from December 1, 2022 (if the license was obtained earlier than December 1, 2022, the first report was sent by the applicable deadline or received an extension of the applicable deadline for all of our licenses.March 1, 2023 inclusive).
Equipment Certification
Government Decree No. 532113 adopted on June 25, 2009,February 4, 2022, sets forth the types of communications equipment that isare subject to mandatory certification. Communications equipment must be certified, or its compliance with the established requirements must be declared and proven in the interconnected communications network of the Russian Federation,certification, which includes all fixed line and wireless networks open to the public. All our networks must be certified. The Federal AgencyMinistry of Digital Development, Communications and Mass Media of the Russian Federation issues certificates of compliance with technical requirements to equipment suppliers based on the Agency’s internal review.suppliers. In addition, a Presidential decree No. 960 adopted on August 11, 2003 requires that licenses and equipment certifications shouldto be obtained from the Federal Security Service to design, produce, sell, use or import encryption devices. Some commonly used digital cellular telephones are designed with encryption capabilities and must be certified by the Federal Security Service.
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Further, certain high-frequency equipment, a list of which was approved by Government Decree No. 5391800 dated October 12, 2004 (as amended),20, 2021 manufactured or used in the Russian Federation, requires special permission from the Federal Service for Supervision of Communications, Information Technology and Mass Media. Failure to receive such certification could result in the mandatory cessation of the use of such equipment. In accordance to Government Decree No. 1252 dated November 27, 2014, the equipment can be shared by operators according to their agreement and certificate of the Federal Service for Supervision of Communications, Information Technology and Mass Media. In accordance with theMoreover, Federal Law No. 204 dated June 23, 2016 therequires each operator sharing a radio frequency spectrum can be shared by operators according to their agreement. In the case of shared-use of the radio frequency spectrum for the provision of telecommunications services each operator should have propera telecommunications services license.
Competition, Interconnect and Pricing
The Federal Law on Communications requires federal regulatory agencies to encourage competition in the provision of communication services and prohibits the abuse of a dominant position to limit competition. The Federal Law on Communications provides that telecommunications tariffs may be regulated in cases provided for by legislation. The Federal Law on Communications and Presidential Decree No. 221, enacted on February 28, 1995, as amended, on Measures for Streamlining State Regulation of Prices (Tariffs) allowprovides for regulation of tariffs and other commercial activities of telecommunications companies that are “natural monopolies.” Government Decree No. 637, dated October 24, 2005 (as amended) authorized the FAS to set the following tariffs for the natural monopolies in the communications market, including:
● | provision of access to a local telephone network; |
● | permanent use of a subscriber’s line; and |
● | local and intra-zone calls. |
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In addition, the Federal Law on Natural Monopolies No. 147 dated August 17, 1995 establishes the legal basis for federal regulation of natural monopolies, including those in the communications market, and provides for governmental control over tariffs andoutlines certain activities of the natural monopolies. The Federal Law on Natural Monopolies outlines the types of transactions for which a regulated entity must obtain prior FAS approval and establishes the general principle that regulated entities may not refuse to provide regulated services to certain types of consumers. Regulated entities are also subject to continuous reporting requirements, including submitting plans for capital investments.
The FAS maintains a Register of Natural Monopolies whose tariffs are controlled and regulated by the state. A telecommunications operator may be included in this register upon a decision by the FAS based on analysis of the operator’s activities and the market conditions.
Our subsidiary, MGTS, was added to the Register of Natural Monopolies in 2000 and, therefore, is subject to the requirements of the Federal Law on Natural Monopolies including, inter alia, the following:
● | the FAS regulates and controls tariffs for services provided by MGTS, including installation fees, monthly subscription fees (for subscribers to the unlimited tariff plan) and local call charges (for subscribers who do not use the unlimited tariff plan); |
● | MGTS must obtain prior FAS approval for any transaction involving the acquisition, disposal or lease of assets not related to the regulated activity, if the value of such assets exceeds 10% of MGTS’ share capital, additional capital, retained profits and reserves; |
● | MGTS is required to maintain separate accounting records for each type of activity; |
● | MGTS is required to publicly disclose information on tariffs, products, material conditions of contracts with customers, capital expenditure programs and certain other information; and |
● | MGTS is required to comply with Federal law No. 223-FZ dated July 18, 2011 “On Procurement of Goods, Works, Services by Certain Types of Legal Entities” while active in the procurement of goods and services. |
It should also be noted that our subsidiary Comstar-Regions was added to the Register83
In addition, companies which are found to have a dominant position onin relevant markets may be subject to certain FAS restrictions in conducting their business, including in relation to pricing, acquisitions, geographical expansion, and associations and agreements with competitors. OnSince January 5, 2016, the new version ofunder the Federal law No. 135-FZ “On Protection of the Competition” came into force and the regulations in relation to the register of companies holding market share exceeding 35% were repealed. Nowadays,, dominant position is established on case-by-case basis. See also “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we are found to have a dominant position in the markets where we operate and are determined to have abused this position and/or concluded anti-competitive agreements, or found to have committed concerted actions, the FAS may be entitled to impose fines as well as regulate our subscriber tariffs and impose certain restrictions on our operations.”
The Federal Law on Communications also provides for the special regulation of telecommunications operators occupying a “substantial position,” i.e., operators which together with their affiliates have, in the Russian Federation generally or in a geographically defined specific numerical zone, 25% or more of installed capacity or capacity to carry out transmission of not less than 25% of traffic. MGTS was added to the register of telecommunications operators occupying a substantial position and, therefore, is subject to the requirements of the Federal Law on Communications relating to operators occupying a substantial position in the public switched telephone networks and, therefore, is subject to certain requirements including, inter alia, the following:
● | MGTS must develop interconnect rules and procedures in accordance with |
● | MGTS must ensure that interconnect agreements with operators who intend to interconnect to our networks are entered into on the same terms and conditions as the agreements between MGTS, us and our affiliates; MGTS also cannot refuse to provide interconnect or discriminate against one operator over another; |
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● | MGTS must comply with the mandatory orders of the Federal Service for Supervision of Communications, Information Technology and Mass Media issued if non-compliance |
● | MGTS must comply with the tariffs for interconnect and traffic transit where determined by the |
● | MGTS must develop standard interconnect contracts and publish them as a public offer for all operators who intend to use such interconnect services. |
The Federal Law on Communications and implementation rules adopted by Government Decrees No. 16129 dated March 28, 2005,January 21, 2022, and No. 627 dated October 19, 2005, also provides for government regulation of interconnect tariffs established by operators occupying a substantial position. In addition, such operators, including MGTS, are required to develop standard interconnect contracts and publish them as a public offer for all operators who intend to use such interconnect services.
Notwithstanding the above, fixed line operators not considered to occupy a substantial position and not included in the Register of Natural Monopolies, as well as mobile operators, are free to set their own tariffs. Also see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.”
Calling Party Pays
In March 2006, the Federal Law on Communications was amended to incorporate a “calling party pays” scheme effective as of July 1, 2006. Prior to the implementation of the “calling party pays” principle, subscribers of fixed line operators could initiate calls to mobile phone users free of charge. Under the current system, fixed line operators charge their subscribers for such calls and transfer a percentage of the charge to mobile operators terminating such calls. The percentage transferred to mobile operators is regulated by the Federal Service for Supervision of Communications, Information Technology and Mass Media and is known as the settlement rate.
Communications Services rules and Mobile Number Portability
On December 15, 2014, Government Decree No. 1342 concerning fixed and mobile services rules was adopted. This act, inter alia, has changed rules and conditions of MNP process (retaining telephone number after switching from one mobile operator to another) of certain types of legal entities and state customers. The period of switching numbers for mentioned subscribers was decreased and the procedure was simplified.
Introduction of renewed procedure on MNP in respect of particular legal entities and state customers affects the mobile services market in Russia and leads to intensification of competition.
Anti-terror law
The Federal Law No. 374 dated July 6, 2016, amended some legislative acts and established additional measures to counter terrorism and to maintain public safety.
In accordance with the abovementioned amendments to the Federal Law on Communications (came(which came into force in July, 2018) the telecommunications operators have to store and to provide to the authorities upon request the information on the facts of receiving, transmitting, delivering and (or)and/or processing of voice information, text messages, images, sounds, video, or other communications by their subscribers, as well as relevant messages themselves. The authorities may request this information.
The implementation of these amendments has a material effect on telecommunications operators’ financials and performance, see also “Item 3. Key Information—D. Risk Factors.”
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Subscribers identification
The Federal Law No 245 dated July 29, 2017, amended the Federal Law on Communications to prevent the conclusion of the contract oncontracts for the provision of services of mobile communications without proper identification of the subscriber (user) of communication services.
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These amendments (came into force in June, 2018) have material effect on telecommunication operators since they are required to implement measures to organize the interaction with state resources for verification of information on subscribers.
SovereignFixed Line Services
We offer fixed-line communications services in 60 regions across Russia, covering about 30 million households.
Our other fixed line operations include the following communication services: voice, data and broadband Internet and pay TV services for corporate and residential subscribers, as well as the provision of interconnect services to other communications operators and numbering capacity to their subscribers. We also operate in Armenia, where we provide digital telephony communications services, data transmission, Internet access and the renting of channels.
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Customers and Services Offered—Moscow Fixed Line Operations
We provide fixed line communications services through our subsidiary, MGTS, which is the incumbent fixed line PSTN operator in Moscow. MGTS owns Moscow’s PSTN infrastructure, including switches, a transmission network, underground ducts, and owns or holds leases to properties housing its offices and equipment.
As of December 31, 2022, MGTS had approximately 3.63 million active lines in service, a cable network of over 45,121 km, a fiber optic network of over 47,717 km and 1 116 payphones. Currently, MGTS has focused its efforts on the deployment of GPON, IP/MPLS technologies and an IMS core. The old SDH equipment is being removed which results in the decreased number of E1 streams, a reduction in the copper network and the respective extension of the fiber optic network. MGTS also develops new services for IP TV, and MVNO as the convergent service for mobile and fixed telephony.
The Federal Law No. 90 dated May 1, 2019, establishes the obligation of telecommunications operators to install equipment to counter threats to the stability, security and integritytotal installed capacity of the Internettelephone network reached 2.130 million numbers on the territoryTDM area (Time Division Multiplexing) and 7.989 million numbers on the IMS area (IP Multimedia Subsystem) as of December 31, 2022.
Moscow fixed line operations customers consist of the following subscribers:
| | | | | | | |
| | December 31, |
| December 31, |
| December 31, |
|
Moscow fixed line operations | | 2022 |
| 2021 |
| 2020 | |
Residential subscribers | | 8,334 | % | 8,355 | % | 836 | % |
Corporate subscribers | | 714 | % | 725 | % | 78 | % |
Public sector subscribers | | 952 | % | 920 | % | 85 | % |
MGTS holds licenses and regulatory approvals to provide, among others, the following services:
● | local telephony; |
● | DLD/ILD voice telephony through licensed DLD/ILD operators, including us; |
● | interconnect to other operators; |
● | Internet and data transmission, including leased DLD/ILD services; |
● | IP TV for B2C and B2B subscribers; |
● | MVNO mobile telephony and Internet; |
● | inquiry and information, including telephone directories; |
● | local telephony with use of payphones; |
● | telematic communications services; |
● | telecommunications services associated with providing of communication channel; |
● | telecommunications services associated with voice data transmission; |
● | telecommunications services associated with cablecasting; |
● | movable radiotelephony services; |
● | measures and (or) services for the protection of State secrets; |
● | capital construction projects engineering. |
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As the only licensed PSTN operator in Moscow, MGTS is considered a natural monopoly under Russian antimonopoly regulations. Consequently, substantial parts of services provided by MGTS are subject to governmental regulation. The Federal Antimonopoly Service of the Russian Federation. Federation regulates MGTS’ tariffs for voice telephony services provided to its PSTN subscribers, including monthly subscription fees, installation fees and local call charges. Revenues from regulated services are accounted for approximately 24.5% of service operating revenues of our Moscow fixed line operations in 2022, 28% in 2021 and 32% in 2020.
The provisionspercentage decline is connected with gradual growth of thisoperating revenues from non regulated services as a proportion of the overall operating revenues in 2022, 2021 and 2020. The Federal Law regarding the national domain-name system and national crypto security standards came into force in January 2021. In February 2021,Antimonopoly Service of the Russian President signed Federal Law No. 19-FZ that introduced penaltiesFederation sets the tariffs MGTS can charge taking into account cost of up to 6 million rubles for violatingservices, network investment and a certain profit margin, and the applicable rules governing sovereign Internet. Consequently, operators are likely to face additional costscurrent tariffs fully compensate MGTS for the maintenancecost of services provided to residential and operationgovernment subscribers. According to Russian legislation, MGTS is allowed to petition the Federal Antimonopoly Service of this equipment. For more informationthe Russian Federation for tariff increases upon certain conditions, such as inflation or increases in the cost of services. Historically, MGTS has petitioned the relevant Russian government agency for tariff increases once per year. The Federal Antimonopoly Service of the Russian Federation has permitted MGTS to increase its tariffs several times.
MGTS also provides a number of unregulated services. According to Russian legislation, DLD/ILD services provided by licensed non monopoly operators, data transmission services, value added services and a number of other services are not subject to tariff regulation. Among others, MGTS provides the following unregulated services:
● | various value-added services, including call forwarding, call waiting, call holding, caller ID, provision of second direct inward dialing (DID) number; |
● | Internet access for residential subscribers and corporates; |
● | IP TV for B2C and B2B subscribers; |
● | MVNO mobile telephony and Internet; |
● | alarm signaling; |
● | domestic maintenance services, including electric installation, sanitary engineering, cleaning, computer emergency, and consumer electronics installation; |
● | video-surveillance; and |
● | rent of space for telecommunications equipment of other operators connected to MGTS’ network. |
MGTS does not have license to provide DLD/ILD communications services directly to its subscribers but must route such traffic through a licensed DLD/ILD operator. As a result, DLD/ILD traffic originated by MGTS subscribers is carried either by us, with these services included in MGTS’ monthly bill, or by other providers of DLD/ILD services, who bill MGTS subscribers directly or pay MGTS an agency fee for processing their bills.
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The following table presents certain operating data for our Moscow fixed line operations as of and for the years ended December 31, 2022, 2021 and 2020.
| | | | | | |
| | December 31, |
| December 31, |
| December 31, |
Moscow fixed line operations |
| 2022 |
| 2021 |
| 2020 |
Installed telephone lines on TDM (000s)(1) | | 2,130 | | 2,780 | | 0,595 |
Installed telephone lines on IMS (000s)(1) |
| 7,989 |
| 9,214 |
| 5,180 |
Residential |
| |
| |
| |
Number of subscribers (000s) |
| 2,201 |
| 2,362 |
| 2,545 |
CPP traffic (millions of minutes) |
| 131 |
| 166 |
| 214 |
Corporate(2) |
| |
| |
| |
Number of active lines (000s) |
| 440 |
| 465 |
| 492 |
Number of subscribers (000s) |
| 37 |
| 39 |
| 43 |
CPP traffic (millions of minutes) |
| 140 |
| 164 |
| 185 |
(1) | Telephone lines on TDM and IMS can be installed at one household. We added B2B connections of switch capacity in 2021. |
(2) | Includes state-owned enterprises and government agencies. |
MGTS’ subscriber segments and the services provided to each subscriber segment are further described below.
Residential and corporate subscribers
MGTS provides basic regulated voice services to residential and corporate subscribers using its PSTN facilities and copper or optical “last mile” access.
In addition to basic voice services, MGTS provides its residential and corporate subscribers with digital telecommunications services, Internet, IP TV, MVNO mobile telephony and Internet and VPN deployment services, rental of high-speed communication channels, intelligent voice and various other services.
Operators
MGTS provides interconnect, traffic transmission and leased line services to other communications operators. Interconnect is carried out on the law, see “Item 3. Key Information—Legal Riskslocal and Uncertainties—Regulatory changeszonal levels in accordance with terms and conditions that are publicly disclosed. MGTS also provides additional services to operators interconnecting to MGTS’ network, including access to emergency service, information and customer care numbers.
MGTS has also established an active presence in the data transmission market. Through its PDTN, MGTS can establish VPNs for other operators as well as provide other data network services. Operators can also rent space and utility systems from MGTS to house their network equipment.
MGTS provides services for the design and construction of mobile and fixed-line networks for third-party Telecom operators.
Customers and Services Offered—Other Fixed Line Operations
We provide fixed-line communications services to corporate, operator and residential subscribers in 60 regions throughout Russia. Specifically, we offer local voice, DLD/ILD voice, data and Internet and pay TV services to our subscribers. Some of the interconnect tariffs we charge other telecommunications operators for in Moscow and certain other cities are regulated by the Russian government. We believe our fixed-line subscribers typically evaluate our service and product offerings based on such factors as price, technology, security, reliability and customer service.
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The following table presents certain operating data for our other fixed line operations in Russia as of and for the years ended December 31, 2022 and 2021.
| | | | |
| | December 31, | | December 31, |
Other fixed line operations | | 2022 |
| 2021 |
Residential | |
| |
|
Number of subscribers (000 000s)(1) | | 6,303 |
| 6,230 |
Corporate(2) | | |
|
|
Number of subscribers (000s) | | 162 |
| 170 |
(1) | Subscribers to broadband Internet, pay-TV, Wi-Max, voice and other services. |
(2) | Includes state-owned enterprises and government agencies. |
Corporate subscribers
We target corporate subscribers covering a range of industries, such as business centers, hotels, financial institutions, professional services firms, consumer goods companies, manufacturers and companies involved in extractive industries, among others. These subscribers vary in size, ranging from large multinational and Russian corporations with thousands of employees to small and medium sized enterprises with up to several hundred employees.
We offer voice, data transmission and Internet and various value added services to our corporate subscribers.
We also provide security services, such as Anti DDoS protection and various AntiVirus solutions.
We offer a broad range of Internet packages that vary in terms of data transfer speeds and pricing, with higher tariffs for faster uploading and downloading capabilities.
We also utilize MGTS’ PDTN to provide high speed reliable Internet services and create VPNs for our corporate clients.
Leased Channels. We provide corporate clients with the ability to rent high speed data channels. These “leased channels” are dedicated lines of data transmission.
Value Added Services. We provide corporate clients with several value added services, including Autosekretar and integrated solutions. The Autosekretar service is based on our proprietary IN and is designed to help our corporate customers manage the reception and servicing of a large volume of incoming calls.
In addition, we serve as general contractor for the provision of a full range of integrated solutions to subscribers wishing to establish a modern integrated communications infrastructure. In developing these customized networks, we are able to offer the following range of services: site survey, cost analysis and optimum project planning, assistance with government related documentation, supply of equipment and operational, technical and maintenance support on an ongoing basis. Once the infrastructure is established or renovated, as the case may be, we typically provide digital voice communications, voice intelligent services, high speed Internet services, videoconferencing and other data transmission services. We intend to expand our service offerings to include customer premises management and network centric IT solutions.
Fixed mobile convergence. Based on our fixed and mobile networks, we offer fixed to mobile convergence services to corporate clients, enabling the use of their mobile phone as an extension of their private branch exchange (“PBX”). We also provide access to corporate IP networks from a mobile phone via GPRS/EDGE/3G/4G.
Operators
We operate fixed line local and zonal networks in Moscow and other cities for provision of telephony services to fixed line subscribers and additional local numbers to mobile subscribers.
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We had 202 local fixed nodes in 66 regions of Russia, including Moscow, and 62 zonal fixed networks to provide telephony services to subscribers as of December 31, 2022. Our integrated intercity/international network is interconnected to 52 international operators.
In the corporate subscriber segment, we generally compete on the basis of network quality, individual and bundled service offerings, customer service, installation time, geographical presence and pricing.
Residential subscribers
We offer voice, Internet and pay TV services to residential subscribers.
Our pricing structure is designed to appeal to large numbers of consumers with various interests and purchasing power, and varies significantly between regions. In 2022, we continued to develop converged packages that include Internet, television and mobile services, including family subscriptions and special tariff plans.
In 2022, we began to actively expand our presence in new regions through FVNO - using the broadband network of partner operators and the MTS mobile network.
Sales and Marketing
Moscow fixed line operations
In 2022, MGTS continued to modernize its own high-tech fiber-optic GPON network and developed combinations of various services in packages, including converged packages of mobile and fixed-line services, as well as regulatory changes atsubscriptions to online cinemas. The clients were offered promotional packages that included basic services, subscription to online cinemas and high-speed Internet access. In 2022, MGTS began actively developing and implementing new services within the international level may haveframework of the "Smart Home" and "Smart City" concepts, actively participating in the cloud solutions market, developing partnerships with delivery services and becoming a material adverse effect onpartner of landmark urban projects.
Other fixed line operations
Our target customers include corporate, operator and residential subscribers.
To promote our financial conditionproduct and resultsservice offerings, we use various communication channels for advertising and marketing, including direct marketing, printed mass media, television, Internet, radio, directories, outdoor advertising, advertising in the subway, special promotions and cross promotions. Through these various advertising and marketing channels, we intend to further develop our brand recognition. Our marketing strategy is designed to create a unified brand for each of operations.”
Personal dataour various product and service offerings with the aim of becoming a single source for all of our subscribers’ communications needs.
We also actively promote our services to existing subscribers with the help of special comprehensive product offers aimed at meeting their communication needs and increasing subscriber loyalty. Our advertising and marketing materials are subjectprimarily aimed at promoting the MTS brand. All fixed line products are offered and sold under this brand. However, when we enter new markets, acquire or cooperate with companies within the framework of FVNO, we can use both brands in promotion. This is done to laws and regulations regarding privacy and protectionreduce churn, as customers tend to show strong loyalty to local brands. Then we gradually reduce the presence of the user data, includingacquired brand, and this allows us to make MTS the Federal Law No. 152-FZ “On Personal Data” dated July 27, 2006 (the “Personal Data Law”). The notionmarket leader in this region in the future. Our advertising and marketing efforts are designed to convey a positive image of “personal data” under Russian law includes any data which relates (directly or indirectly) to an identified or identifiable individual. There is no closed list of information which denotes personal data and any data (or set of data) which identifies a specific individual is treated as personal data. Typically name and contact details are considered to be personal data. The amendmentsus to the Personal Data Law implemented by the Federal Law No. 519 dated December 30, 2020 (which entered into forcemarket as a leading communications operator focused on March 1, 2021) set forth new rules on processing of a specific type of personal data, specifically personal data which are made available to the general public (the “Relevant Data”).customer satisfaction.
Russian law uses the term “data operator” to denote a person who determines the scope and purposes of the processing (this notion is equivalent to the notion of the “data controller” under the European Union General Data Protection Regulation). Russia also has a notion of “person involved into the data processing by the data operator” which is equivalent to the notion of “data processor” under the European Union General Data Protection Regulation.Competition
The Personal Data Law, among other things, requires, subject to a limited number of exceptions, that an individual provide specific, informed and conscious consent to any processing (i.e. any action or combination of actions performed on personal data, including the collection, recording, systematization, accumulation, storage, use, transfer (distributing, providing or authorizing access to), blocking, deleting and destroying) of his/her personal data. In respect of most types of data, the Personal Data Law does not require the consent to be in writing (under the Personal Data Law, “in writing” means hand-written or subject to qualified electronic signature) but requires that the consent be in a form that, from an evidential perspective, sufficiently attests tothe data subject.
The consent must be in writing in certain cases, including: (i) where the processing relates to special categories of personal data (regarding the data subject’s race, nationality, political views, religion, philosophical beliefs, health conditions or intimate information); (ii) where the processing of personal data relates to any biometrics; (iii) cross-border transfers to a state that does not provide adequate protection of rights of subjects (e.g. under Russian law, the United States is one of such states); and (iv) the certain types processing of an employee’s personal data, etc. The written consent of subjects must meetWe compete with a number of formal requirementsfixed line telecommunications operators servicing Moscow, St. Petersburg and must be signed by holographic or electronic signature.
Big Data
In 2021,other major Russian cities. Moscow is the National Centre for Digital Economics announced the developmentlargest and most competitive of the Russian national standard corresponding with ISO/IEC TR 20547-1:2020 Information technology – Big data reference architecture – Part 1: Framework and applicable process.these markets. Our primary competitors include:
Procedure for concluding subscription contracts
The Federal Law No 533-FZ dated December 30, 2020 (has come into force on June 1, 2021), amended the Federal Law on Communications to tighten the procedure for concluding subscription contracts, including:
● | Rostelecom, Russia’s largest national fixed line telecommunications operator with presence in all Russian regions. We compete with Rostelecom in the corporate, operator and residential fixed line telecommunications markets in all regions where we operate in Russia. We also compete with Rostelecom in the mobile telecommunications market. |
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● |
● |
● |
● |
Roskomnadzor will create an information system for monitoring to check the work of telecommunications operators. Telecommunications operators will need to refine their business processes and IT-systems to connect to the information system for monitoring.
Providing free access to social resources
The Federal Law No 319-FZ dated July 02, 2021, establishes the obligation of telecommunications operators that provide communication services for data transmission and providing access to the Internet toCorporate subscribers to provide such subscribers with free access to the websites of state bodies, extra-budgetary funds, portals of state and municipal services (came into force in December 1, 2021), as well as to other sites that are determined by the Government Commission. The Government of the Russian Federation will have to determine the criteria for selecting socially significant resources, the requirements for their owners and the conditions under which operators will have to provide free access. Such criteria are not defined at the moment.
Monitoring compliance with the requirements for the provision of communication services, traffic transmission services, connection of communication networks
The Federal Law No 319-FZ dated July 02, 2021, amended the Federal Law on Communications to expand the list of requirements for the procedure for passing traffic and for telecommunications operators, including:
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Regulation of Banking Activities in the Russian Federation
General
MTS Bank, our subsidiary, operates as a credit organization in Russia and is therefore subject to a number of laws and regulations applicable to banks. Federal Law No. 395-1 “On Banks and Banking Activity” dated December 2, 1990, as amended (the “Banking Law”), is the principal law regulating the Russian banking sector, among other things, defining credit organizations, setting forth the list of banking operations and other transactions that credit organizations may perform and establishing the framework for the registration, licensing of credit organizations and the regulation of banking activities by the CBR. Pursuant to the Banking Law, a banking group is described as an association of legal entities under control of a credit organization, and a banking holding is defined as an association of legal entities, at least one of which is a credit organization, under control of a parent legal entity that is not a credit organization, provided that a share of banking activities in the banking holding is at least 40% of the overall activities of such group.
Licensing
A license must be obtained from the CBR in order for any institution to engage in banking activities as defined in the Banking Law. Applicants must be incorporated within Russia and registered with the CBR as a credit organization, and submit, among other things, a feasibility report and detailed information on the suitability of the applicant’s management team. A banking license may be denied for a number of reasons, including if the financial standing of the founders of the bank is deemed by the CBR to be unsatisfactory or if the proposed candidates for the senior management of the bank, including members of the management board and the chief executive officer, are deemed to be unsuitable or do not meet the qualification requirements.
Charter Capital Requirements
The Banking Law sets out the minimum charter capital for newly-established banks in Russia the amount of RUB 1 billion for a bank with a general license and RUB 300 million for a bank with a basic license. As of the date of this document, charter capital of MTS Bank that holds a general license amounts to RUB 15,015,046,500. Further, under the Banking Law, the minimum regulatory capital amounts to RUB 1 billion for banks applying for the status of a bank with a general license and to RUB 300 million for banks applying for the status of a bank with a basic license. As of the date of this document, regulatory capital of MTS Bank amounted to RUB 52,968 million.
Reporting Requirements
Russian banks must regularly submit balance sheets to the CBR, together with financial statements showing their actual respective financial positions. They must also inform the CBR in respect of providing large loans (exceeding 5% of a bank's capital). Banking groups and banking holdings must regularly submit consolidated accounts to the CBR. The CBR may at any time carry out full or selective checks of a bank’s submissions, and may inspect all books and records of the bank. In addition, annual audits must be carried out by an audit company that is a member of a self-regulatory organization of auditors. Starting from 2004, all credit organizations in Russia have been required to prepare financial statements according to both RAS and IFRS. Banks must file IFRS standalone and audited consolidated annual financial statements with the CBR on an annual basis.
Mandatory Reserve Deposit Requirements
To cover loan losses and currency, interest and financial risks, the CBR requires banks to form mandatory reserve deposits and keep them in designated non-interest bearing accounts with the CBR. Particular reserve requirements are set by the Board of
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Directors of the CBR from time to time. As of the date of this document, mandatory reserves of MTS Bank amounted to RUB 1,790 million.
Licenses
Mobile Services
The following table shows,sets forth the corporate subscriber market shares of the primary fixed line operators in Moscow as of April 5, 2022, information with respect to the license areas in which we and our subsidiaries and affiliates provide or expect to provide GSM, LTE and UMTS services:
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Mobile Virtual NetworkDecember 31, 2022:
| | | |
MTS | | 24 | % |
VEON Ltd. (VimpelCom) | | 19 | % |
Akado | | 8 | % |
Rostelecom | | 16 | % |
Other | | 33 | % |
Total | | 100 | % |
Source: TMT Consulting.
In the corporate subscriber segment, we generally compete on the basis of network quality, individual and bundled service offerings, customer service, installation time, geographical presence and pricing.
Residential subscribers
Voice services
The following table sets forth the market shares of the primary fixed line operators for voice services in Russia as of December 31, 2022:
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MTS | 18 | % | ||
Rostelecom | 71 | % | ||
Other | 11 | % | ||
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Each of our licenses requires service to be started by a specific date. We have met this target or received extensions to these dates in those regional license areas in which we have not commenced operations. Neither the government nor other parties have taken or attempted to take legal actions to suspend, terminate or challenge the legality of any of our licenses (except for Uzbekistan, see Note 34 to our audited consolidated financial statements). We have not received any notice of violation of any of our licenses, and we believe that we are in compliance with all material terms of our licenses.Source: TMT Consulting.
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Internet
According to TMT Consulting, as of December 31, 2022, broadband Internet penetration of households was 62% in Russia. The following table sets forth the market shares of the primary operators in the residential broadband Internet market in Russia as of December 31, 2022:
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Company | | Russia | |
MTS | | 13 | % |
VEON Ltd. (VimpelCom) | | 8 | % |
ER-Telecom | | 11 | % |
Rostelecom | | 35 | % |
Other | | 33 | % |
Total | | 100 | % |
Source: TMT Consulting.
Pay-TV
According to TMT Consulting, as of December 31, 2022, pay TV penetration was 82.6% in Russia. The following table sets forth the market shares of the primary operators in the TV market in Russia as of December 31, 2022:
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Company | Russia | ||
MTS | 10 | % | |
Rostelecom | 24 | % | |
Tricolor TV | 26 | % | |
ER‑Telecom | 8 | % | |
Orion | 6 | % | |
Other | 26 | % | |
Total | 100 | % |
Source: TMT Consulting.
In the TV market, we generally compete on the basis of pricing, channel selection and content, individual and bundled service offerings, customer service and installation time.
Tariffs
We establish prices for our unregulated services and different subscriber segments based on certain common considerations, policies and goals. For example, we generally seek to establish competitive prices based on market rates for the services we offer and below market prices when our lower than average costs or economies of scale allow us to do so. We also offer subscribers bundled service packages with several services offered together at a discount to the cost of ordering each individual service separately and to promote additional services to our existing subscribers. In addition, we often offer promotions to our various subscriber segments waiving or discounting installation fees in order to attract new subscribers or promote new services.
With regard to corporate clients, we generally aim to derive the bulk of our operating revenues from monthly payments. Thus, depending on the scale and type of services ordered, we will often discount or waive installation fees.
For services offered to other communications service providers, we aim to generate most of our operating revenues from monthly payments and by offering an array of value added services.
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Network Infrastructure
Network Infrastructure—Transmission Networks
Backbone and Internet Networks
Mobile, fixed and inter-carrier aggregated traffic increased in 2022: downlink (towards users) data throughput reached 10.07 Tbps (8.27 Tbps in 2021), uplink (from users) data throughput reached 2.93 Tbps (2.54 Tbps in 2021).
The size of MTS fiber-optic networks increased by 12,342 km in 2022 and reached 272,112 km in total.
The company continued to reconstruction the backbone and multi service network and the network of data centers in the context of a complex sanctions policy.
We continued to develop the backbone network in 2022.
Convergent network
We had to revise our initial plans for 2022. We completed various projects, including the development or acquisition of regional fiber-optic for interconnect sites, the deployment of new MBH transport nodes, micro-wave links and the launch of private LTE commercial zones.
We were also forced to look for a replacement for all vendors MBH and RRN.
Satellite network
We launched and installed ground receiving station to receive and process data from low-orbit Earth observation satellites.
Public Switching Telephone networks (PSTN)
The network infrastructure we maintain in Moscow is substantially different to the infrastructures we use in other regions. In Moscow, primarily we have organically grown, while our regional development has largely been through the acquisition of companies with different business models and a focus on different services. As a result, the network infrastructures in the regions outside Moscow and the technologies used to support such infrastructures are different from the network infrastructure established in Moscow and which we currently own. At present, the telephone network in Moscow and Moscow region has a capacity of more than 1,112,781 telephone numbers.
All of our PSTN switching centers (TDM and Soft switch) are connected to a digital transport network, which uses SDH and IP technology. The network ensures connectivity with a digital equipment of PSTNs of other operators.
The SDH network will be operated to support existing clients, but we also provide the moving traffic and clients from SDH/TDM technology to IP.
The management of the transport network and digital PSTN is carried out remotely from network operation centers.
As of December 31, 2022, in Moscow and the Moscow region we had a wireless broadband network including 404 base and subscriber stations in the 5-6 GHz frequency band and also near 197 radio relay lines in the 70-80 GHz frequency band.
For the provision of Internet access, IP‑telephony and other services, we have our own IP network, the core of which is constructed as IP MPLS rings with routers connected to each other by means of 10/100 GE channels. In addition, separate routers are used for inter‑carrier connections and are connected to the core routers by means of 10/100 GE interfaces.
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Russia
As of December 31, 2022 we provided cable Internet access to about 11.4 million households and cable TV access to about 11.9 million households. Since 2020, we have started building and upgrading networks using GPON technology. As of 31 December, 2022, more than 260,000 households have been built.
Currently, we have digital TV service (DVB‑C&DVB‑S2) in approximately 200 cities and localities with 5,06 million subscribers. By December 2022, we launched Hybrid TV platform with an IPTV commercial service in Moscow (including Moscow Region) and more than 95 other regions, DVB‑C/IP Hybrid commercial service in more than 100 regional cities and DVB‑S2/IP Hybrid commercial service all over Russia including 56 HD/UHD channels using HEVC (H.265) format. We combined UHD and HD channels due to change in content policy after foreign UHD and HD channels had left russian market in 2022. Since 2020, the target technology for providing television services is IPTV technology. As of 31 December, 2022, the service was launched at a capacity of 8.2 million households. During 2023 according to KION expansion forecast CDN bandwidth is planned to be increased by more than twice its current size. We also plan to use in-house solution for new CDN PoPs and integrate backup CDN offload partner. In Moscow and regions as an Internet traffic supplier, we mainly use our own IP Backbone network.
The acquisition of Comstar provided us with an opportunity to use MTS fiber optic lines for fixed network development. Optical network construction in cities is carried out on the basis of fixed and mobile business needs. When we modernize and construct new networks, we deploy fixed and mobile equipment on the basis of “collocation” method.
Seasonality
Our results of operations are impacted by certain seasonal trends. Generally, revenue is higher during the second and third quarter due to increase in roaming revenues and guest roaming revenues during these quarters. Quarterly trends can also be influenced by a number of factors, including new marketing campaigns and promotions, and may not be consistent from year to year.
In 2020, the measures for combating COVID-19 which included restrictions on movement had a significant impact on the seasonality of our roaming revenues and resulted in the reduction in international roaming of our subscribers and income from guest subscribers.
In 2022, after the lifting of government restrictions on movement, the volume of roaming services increased mainly due to travel within the country. The usual seasonality with a peak in the summer months during the holidays and during the school holidays has recovered.
The COVID-19 outbreak has had a significant impact on the development of the telecommunications industry and continues to contribute to the development of digital services. We recorded an increase in the consumption of internet traffic in mobile and fixed networks as well as, an increase in the number of users of online services, TV users and others OTT applications. This trend continued in 2022. We believe that digitalization processes will gradually affect all spheres of social interaction. Online entertainment services and digital services of state federal and municipal services will continue to be in the greatest demand in 2023.
Regulation of Telecommunications in the Russian Federation
In the Russian Federation, the federal government regulates telecommunications services and the principal law is the Federal Law on Communications, which came into force on January 1, 2004 and provides, among other elements, for the following:
● | licensing of telecommunications services; |
● | requirements for obtaining a radio frequency allocation; |
● | equipment certification; |
● | equal rights for individuals and legal entities, including foreign individuals and legal entities, to offer telecommunications services; |
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● | fair competition; |
● | freedom of pricing other than pricing by companies with a substantial position in public telecommunication networks; and |
● | liability for violations of Russian legislation on telecommunications. |
The Federal Law on Communications creates a framework in which government authorities may enact specific regulations. Regulations enacted under the legislative framework in place prior to the enactment of the Federal Law on Communications continue to be applied to the extent they do not conflict with the Federal Law on Communications.
The Federal Law on Communications confers broad powers on the state to regulate the communications industry, including the allocation of frequencies, the establishment of fees for frequency use and the allocation and revocation of numbering capacity. In addition, the Federal Law on Communications provides for the establishment of a “universal services reserve fund” which is funded by a levy imposed on all operators of public networks, including us.
Regulatory Authorities
The Russian telecommunications industry is regulated by several governmental agencies, including:
The Ministry of Digital Development, Communications and Mass Media of the Russian Federation is the federal executive body that develops and supervises the implementation of governmental policy in the area of communications and coordinates and controls the activities of its subordinate agencies. The Ministry has the authority to issue certain regulations implementing the Federal Law on Communications and other federal laws.
The Federal Service for Supervision of Communications, Information Technology and Mass Media (Roskomnadzor) is a federal executive body that supervises and controls certain areas of communications and information technologies, including, among other matters, licensing, registration, certification, technical supervision of networks and equipment as well as compliance monitoring and enforcement.
The State Commission For Radio Frequencies is an inter-agency coordination body acting under the Ministry of Digital Development, Communications and Mass Media of the Russian Federation which is responsible for the regulation of the radio frequency spectrum, development of long-term policy for frequency allocation in the Russian Federation and determination of the allocation of frequency bands.
The Federal Antimonopoly Service (FAS) is a federal executive body that supervises competition regulations and enforces the Federal Law on Protection of Competition and the Federal Law on Natural Monopolies and the regulations enacted thereunder. The FAS controls certain activities of natural monopolies, including monitoring their execution of certain obligatory contracts, and can issue certain mandatory orders. In addition, the FAS regulates certain tariffs in the sphere of telecommunications, including the tariffs on the local, intra-zone and DLD calls by subscribers of public switched telephone networks and installation and subscription fees.
Other regulatory authorities. The Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor) is responsible for the enforcement of sanitary regulations including certain authority over the location of telecommunications equipment, and supervises compliance with consumer rights regulations. The Federal Service for State Registration, Cadastre and Cartography (Rosreestr) is responsible for registering certain telecommunications infrastructure that is considered real property. The Federal Financial Monitoring Service (Rosfinmonitoring) is a federal executive body responsible for countering money laundering and terrorism financing. Mobile operators must comply with Federal Law No. 115-FZ dated August 7, 2001 “On Combating Money Laundering and Terrorist Financing.”
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Licensing of Telecommunications Services and Radio Frequency Allocation
Telecommunications licenses are issued based on the Federal Law on Communications and Government Decree No. 480 dated May 24, 2014 on Bidding Process (Auctions, Tenders) for Receipt of Telecommunications License. Under these regulations, licenses may be issued and renewed for periods ranging from three to twenty-five years. Several different licenses to conduct different communication services may be issued to one entity. Officials have broad discretion with respect to both issuance and renewal procedures.
To operate a communications network, a company must obtain:
● | a license from the Federal Service for Supervision of Communications, Information Technology and Mass Media to provide communications services; |
● | approval to use specific frequencies within the specified band from the State Commission For Radio Frequencies if providing wireless telecommunications services; and |
● | permission from the Federal Service for Supervision of Communications, Information Technology and Mass Media for network operations (including certification of the company’s frequency assignment and site plan in relation to electromagnetic compatibility of the proposed cellular network with other radio equipment operating in the licensed area). As of January 1, 2004, licenses may be transferred in case of mergers or other reorganizations of the licensee upon application by a transferee as a new license holder. |
Licenses may be suspended or terminated for various reasons, including failure by the licensee to comply with the terms of its license, information requests or applicable law, for example, detection of violations which may cause damage to rights, interests, life or health of individuals.
Frequencies are allocated for a maximum term of ten years, which may be extended upon the application of a frequency user. Under the Federal Law on Communications, frequency allocations may be changed for purposes of state management, defense, security and protection of legal order in the Russian Federation with the license holder to be compensated for related losses. Further, frequency allocations may be suspended or terminated for a number of reasons, including failure to comply with the conditions on which the frequency was allocated.
Furthermore, the Federal Law on Communications provides for the establishment of a “universal services reserve fund” for the purpose of supporting communications companies operating in less developed regions of Russia through the financing, construction and maintenance of telecommunications networks in low-profit and unprofitable sectors. This reserve fund is aimed at eliminating the practice of cross-subsidies by compensating operators for certain mandatory, loss-making local services in rural and sparsely populated areas. It is funded by a levy imposed on all operators of public networks, including us, in the amount of 1.2% of revenues from telecommunications services less the amount of taxes paid by subscribers.
The Federal Law on Communications empowers the Russian government to determine and annually review the list of licensing requirements applicable to various communication services being licensed. This list was enacted by Government Decree No. 2385 dated December 30, 2020. Licenses also generally contain a number of other detailed conditions, including a date by which service must begin, technical standards and certain other terms and conditions.
The Federal Law No. 356-FZ dated July 14, 2022, implemented in the The Federal Law on Communications the obligation of telecommunications operators to submit an annual report on their activities to Roskomnadzor from December 1, 2022 (if the license was obtained earlier than December 1, 2022, the first report was sent by March 1, 2023 inclusive).
Equipment Certification
Government Decree No. 113 adopted on February 4, 2022, sets forth the types of communications equipment that are subject to mandatory certification, which includes all fixed line and wireless networks open to the public. The Ministry of Digital Development, Communications and Mass Media of the Russian Federation issues certificates of compliance with technical requirements to equipment suppliers. In addition, Presidential decree No. 960 adopted on August 11, 2003 requires licenses and equipment certifications to be obtained from the Federal Security Service to design, produce, sell, use or import encryption devices.
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Further, certain high-frequency equipment, a list of which was approved by Government Decree No. 1800 dated October 20, 2021 manufactured or used in the Russian Federation, requires special permission from the Federal Service for Supervision of Communications, Information Technology and Mass Media. Failure to receive such certification could result in the mandatory cessation of the use of such equipment. Moreover, Federal Law No. 204 dated June 23, 2016 requires each operator sharing a radio frequency spectrum to have a telecommunications services license.
Competition, Interconnect and Pricing
The Federal Law on Communications requires federal regulatory agencies to encourage competition in the provision of communication services and prohibits the abuse of a dominant position to limit competition. The Federal Law on Communications and Presidential Decree No. 221, enacted on February 28, 1995, as amended, on Measures for Streamlining State Regulation of Prices (Tariffs) provides for regulation of tariffs and other commercial activities of telecommunications companies that are “natural monopolies.” Government Decree No. 637, dated October 24, 2005 (as amended) authorized the FAS to set the following tariffs for the natural monopolies in the communications market, including:
● | provision of access to a local telephone network; |
● | permanent use of a subscriber’s line; and |
● | local and intra-zone calls. |
In addition, the Federal Law on Natural Monopolies No. 147 dated August 17, 1995 outlines certain types of transactions for which a regulated entity must obtain prior FAS approval and establishes the general principle that regulated entities may not refuse to provide regulated services to certain types of consumers. Regulated entities are also subject to continuous reporting requirements, including submitting plans for capital investments.
The FAS maintains a Register of Natural Monopolies whose tariffs are controlled and regulated by the state. A telecommunications operator may be included in this register upon a decision by the FAS based on analysis of the operator’s activities and the market conditions.
Our subsidiary, MGTS, was added to the Register of Natural Monopolies in 2000 and, therefore, is subject to the requirements of the Federal Law on Natural Monopolies including, inter alia, the following:
● | the FAS regulates and controls tariffs for services provided by MGTS, including installation fees, monthly subscription fees (for subscribers to the unlimited tariff plan) and local call charges (for subscribers who do not use the unlimited tariff plan); |
● | MGTS must obtain prior FAS approval for any transaction involving the acquisition, disposal or lease of assets not related to the regulated activity, if the value of such assets exceeds 10% of MGTS’ share capital, additional capital, retained profits and reserves; |
● | MGTS is required to maintain separate accounting records for each type of activity; |
● | MGTS is required to publicly disclose information on tariffs, products, material conditions of contracts with customers, capital expenditure programs and certain other information; and |
● | MGTS is required to comply with Federal law No. 223-FZ dated July 18, 2011 “On Procurement of Goods, Works, Services by Certain Types of Legal Entities” while active in the procurement of goods and services. |
83
In addition, companies which are found to have a dominant position in relevant markets may be subject to certain FAS restrictions in conducting their business, including in relation to pricing, acquisitions, geographical expansion, and associations and agreements with competitors. Since January 5, 2016, under the Federal law No. 135-FZ “On Protection of the Competition”, dominant position is established on case-by-case basis. See also “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business— If we are found to have a dominant position in the markets where we operate and are determined to have abused this position and/or concluded anti-competitive agreements, or found to have committed concerted actions, the FAS may be entitled to impose fines as well as regulate our subscriber tariffs and impose certain restrictions on our operations.”
The Federal Law on Communications also provides for the special regulation of telecommunications operators occupying a “substantial position,” i.e., operators which together with their affiliates have, in the Russian Federation generally or in a geographically defined specific numerical zone, 25% or more of installed capacity or capacity to carry out transmission of not less than 25% of traffic. MGTS was added to the register of telecommunications operators occupying a substantial position in the public switched telephone networks and, therefore, is subject to certain requirements including, inter alia, the following:
● | MGTS must develop interconnect rules and procedures in accordance with federal requirements; |
● | MGTS must ensure that interconnect agreements with operators who intend to interconnect to our networks are entered into on the same terms and conditions as the agreements between MGTS, us and our affiliates; MGTS also cannot refuse to provide interconnect or discriminate against one operator over another; |
● | MGTS must comply with the mandatory orders of the Federal Service for Supervision of Communications, Information Technology and Mass Media issued if non-compliance was identified as a result of monitoring of MGTS’ interconnect terms; and |
● | MGTS must comply with the tariffs for interconnect and traffic transit where determined by the Ministry of Digital Development, Communications and Mass Media of the Russian Federation; |
● | MGTS must develop standard interconnect contracts and publish them as a public offer for all operators who intend to use such interconnect services. |
The Federal Law on Communications and implementation rules adopted by Government Decrees No. 29 dated January 21, 2022, and No. 627 dated October 19, 2005, also provides for government regulation of interconnect tariffs established by operators occupying a substantial position.
Notwithstanding the above, fixed line operators not considered to occupy a substantial position and not included in the Register of Natural Monopolies, as well as mobile operators, are free to set their own tariffs. Also see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.”
Anti-terror law
The Federal Law No. 374 dated July 6, 2016, amended some legislative acts and established additional measures to counter terrorism and to maintain public safety.
In accordance with the abovementioned amendments to the Federal Law on Communications (which came into force in July, 2018) telecommunications operators have to store information on the receiving, transmitting, delivering and/or processing of voice information, text messages, images, sounds, video, or other communications by their subscribers, as well as relevant messages themselves. The authorities may request this information.
The implementation of these amendments has a material effect on telecommunications operators’ financials and performance, see also “Item 3. Key Information—D. Risk Factors.”
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Subscribers identification
The Federal Law No 245 dated July 29, 2017, amended the Federal Law on Communications to prevent the conclusion of contracts for the provision of services of mobile communications without proper identification of the subscriber (user) of communication services.
Fixed Line Services
We offer fixed-line communications services in 60 regions across Russia, covering about 30 million households.
Our other fixed line operations include the following communication services: voice, data and broadband Internet and pay TV services for corporate and residential subscribers, as well as the provision of interconnect services to other communications operators and numbering capacity to their subscribers. We also operate in Armenia, where we provide digital telephony communications services, data transmission, Internet access and the renting of channels.
71
Customers and Services Offered—Moscow Fixed Line Operations
We provide fixed line communications services through our subsidiary, MGTS, which is the incumbent fixed line PSTN operator in Moscow. MGTS owns Moscow’s PSTN infrastructure, including switches, a transmission network, underground ducts, and owns or holds leases to properties housing its offices and equipment.
As of December 31, 2022, MGTS had approximately 3.63 million active lines in service, a cable network of over 45,121 km, a fiber optic network of over 47,717 km and 1 116 payphones. Currently, MGTS has focused its efforts on the deployment of GPON, IP/MPLS technologies and an IMS core. The old SDH equipment is being removed which results in the decreased number of E1 streams, a reduction in the copper network and the respective extension of the fiber optic network. MGTS also develops new services for IP TV, and MVNO as the convergent service for mobile and fixed telephony.
The total installed capacity of the telephone network reached 2.130 million numbers on the TDM area (Time Division Multiplexing) and 7.989 million numbers on the IMS area (IP Multimedia Subsystem) as of December 31, 2022.
Moscow fixed line operations customers consist of the following subscribers:
| | | | | | | |
| | December 31, |
| December 31, |
| December 31, |
|
Moscow fixed line operations | | 2022 |
| 2021 |
| 2020 | |
Residential subscribers | | 8,334 | % | 8,355 | % | 836 | % |
Corporate subscribers | | 714 | % | 725 | % | 78 | % |
Public sector subscribers | | 952 | % | 920 | % | 85 | % |
MGTS holds licenses and regulatory approvals to provide, among others, the following services:
● | local telephony; |
● | DLD/ILD voice telephony through licensed DLD/ILD operators, including us; |
● | interconnect to other operators; |
● | Internet and data transmission, including leased DLD/ILD services; |
● | IP TV for B2C and B2B subscribers; |
● | MVNO mobile telephony and Internet; |
● | inquiry and information, including telephone directories; |
● | local telephony with use of payphones; |
● | telematic communications services; |
● | telecommunications services associated with providing of communication channel; |
● | telecommunications services associated with voice data transmission; |
● | telecommunications services associated with cablecasting; |
● | movable radiotelephony services; |
● | measures and (or) services for the protection of State secrets; |
● | capital construction projects engineering. |
72
As the only licensed PSTN operator in Moscow, MGTS is considered a natural monopoly under Russian antimonopoly regulations. Consequently, substantial parts of services provided by MGTS are subject to governmental regulation. The Federal Antimonopoly Service of the Russian Federation regulates MGTS’ tariffs for voice telephony services provided to its PSTN subscribers, including monthly subscription fees, installation fees and local call charges. Revenues from regulated services are accounted for approximately 24.5% of service operating revenues of our Moscow fixed line operations in 2022, 28% in 2021 and 32% in 2020.
The percentage decline is connected with gradual growth of operating revenues from non regulated services as a proportion of the overall operating revenues in 2022, 2021 and 2020. The Federal Antimonopoly Service of the Russian Federation sets the tariffs MGTS can charge taking into account cost of services, network investment and a certain profit margin, and the current tariffs fully compensate MGTS for the cost of services provided to residential and government subscribers. According to Russian legislation, MGTS is allowed to petition the Federal Antimonopoly Service of the Russian Federation for tariff increases upon certain conditions, such as inflation or increases in the cost of services. Historically, MGTS has petitioned the relevant Russian government agency for tariff increases once per year. The Federal Antimonopoly Service of the Russian Federation has permitted MGTS to increase its tariffs several times.
MGTS also provides a number of unregulated services. According to Russian legislation, DLD/ILD services provided by licensed non monopoly operators, data transmission services, value added services and a number of other services are not subject to tariff regulation. Among others, MGTS provides the following unregulated services:
● | various value-added services, including call forwarding, call waiting, call holding, caller ID, provision of second direct inward dialing (DID) number; |
● | Internet access for residential subscribers and corporates; |
● | IP TV for B2C and B2B subscribers; |
● | MVNO mobile telephony and Internet; |
● | alarm signaling; |
● | domestic maintenance services, including electric installation, sanitary engineering, cleaning, computer emergency, and consumer electronics installation; |
● | video-surveillance; and |
● | rent of space for telecommunications equipment of other operators connected to MGTS’ network. |
MGTS does not have license to provide DLD/ILD communications services directly to its subscribers but must route such traffic through a licensed DLD/ILD operator. As a result, DLD/ILD traffic originated by MGTS subscribers is carried either by us, with these services included in MGTS’ monthly bill, or by other providers of DLD/ILD services, who bill MGTS subscribers directly or pay MGTS an agency fee for processing their bills.
73
The following table shows,presents certain operating data for our Moscow fixed line operations as of April 5,and for the years ended December 31, 2022, 2021 and 2020.
| | | | | | |
| | December 31, |
| December 31, |
| December 31, |
Moscow fixed line operations |
| 2022 |
| 2021 |
| 2020 |
Installed telephone lines on TDM (000s)(1) | | 2,130 | | 2,780 | | 0,595 |
Installed telephone lines on IMS (000s)(1) |
| 7,989 |
| 9,214 |
| 5,180 |
Residential |
| |
| |
| |
Number of subscribers (000s) |
| 2,201 |
| 2,362 |
| 2,545 |
CPP traffic (millions of minutes) |
| 131 |
| 166 |
| 214 |
Corporate(2) |
| |
| |
| |
Number of active lines (000s) |
| 440 |
| 465 |
| 492 |
Number of subscribers (000s) |
| 37 |
| 39 |
| 43 |
CPP traffic (millions of minutes) |
| 140 |
| 164 |
| 185 |
(1) | Telephone lines on TDM and IMS can be installed at one household. We added B2B connections of switch capacity in 2021. |
(2) | Includes state-owned enterprises and government agencies. |
MGTS’ subscriber segments and the services provided to each subscriber segment are further described below.
Residential and corporate subscribers
MGTS provides basic regulated voice services to residential and corporate subscribers using its PSTN facilities and copper or optical “last mile” access.
In addition to basic voice services, MGTS provides its residential and corporate subscribers with digital telecommunications services, Internet, IP TV, MVNO mobile telephony and Internet and VPN deployment services, rental of high-speed communication channels, intelligent voice and various other services.
Operators
MGTS provides interconnect, traffic transmission and leased line services to other communications operators. Interconnect is carried out on the local and zonal levels in accordance with terms and conditions that are publicly disclosed. MGTS also provides additional services to operators interconnecting to MGTS’ network, including access to emergency service, information with respectand customer care numbers.
MGTS has also established an active presence in the data transmission market. Through its PDTN, MGTS can establish VPNs for other operators as well as provide other data network services. Operators can also rent space and utility systems from MGTS to house their network equipment.
MGTS provides services for the design and construction of mobile and fixed-line networks for third-party Telecom operators.
Customers and Services Offered—Other Fixed Line Operations
We provide fixed-line communications services to corporate, operator and residential subscribers in 60 regions throughout Russia. Specifically, we offer local voice, DLD/ILD voice, data and Internet and pay TV services to our subscribers. Some of the interconnect tariffs we charge other telecommunications operators for in Moscow and certain other cities are regulated by the Russian government. We believe our fixed-line subscribers typically evaluate our service and product offerings based on such factors as price, technology, security, reliability and customer service.
74
The following table presents certain operating data for our other fixed line licenses:operations in Russia as of and for the years ended December 31, 2022 and 2021.
| | | | |
| | December 31, | | December 31, |
Other fixed line operations | | 2022 |
| 2021 |
Residential | |
| |
|
Number of subscribers (000 000s)(1) | | 6,303 |
| 6,230 |
Corporate(2) | | |
|
|
Number of subscribers (000s) | | 162 |
| 170 |
(1) | Subscribers to broadband Internet, pay-TV, Wi-Max, voice and other services. |
(2) | Includes state-owned enterprises and government agencies. |
Corporate subscribers
We target corporate subscribers covering a range of industries, such as business centers, hotels, financial institutions, professional services firms, consumer goods companies, manufacturers and companies involved in extractive industries, among others. These subscribers vary in size, ranging from large multinational and Russian corporations with thousands of employees to small and medium sized enterprises with up to several hundred employees.
We offer voice, data transmission and Internet and various value added services to our corporate subscribers.
We also provide security services, such as Anti DDoS protection and various AntiVirus solutions.
We offer a broad range of Internet packages that vary in terms of data transfer speeds and pricing, with higher tariffs for faster uploading and downloading capabilities.
We also utilize MGTS’ PDTN to provide high speed reliable Internet services and create VPNs for our corporate clients.
Leased Channels. We provide corporate clients with the ability to rent high speed data channels. These “leased channels” are dedicated lines of data transmission.
Value Added Services. We provide corporate clients with several value added services, including Autosekretar and integrated solutions. The Autosekretar service is based on our proprietary IN and is designed to help our corporate customers manage the reception and servicing of a large volume of incoming calls.
In addition, we serve as general contractor for the provision of a full range of integrated solutions to subscribers wishing to establish a modern integrated communications infrastructure. In developing these customized networks, we are able to offer the following range of services: site survey, cost analysis and optimum project planning, assistance with government related documentation, supply of equipment and operational, technical and maintenance support on an ongoing basis. Once the infrastructure is established or renovated, as the case may be, we typically provide digital voice communications, voice intelligent services, high speed Internet services, videoconferencing and other data transmission services. We intend to expand our service offerings to include customer premises management and network centric IT solutions.
Fixed mobile convergence. Based on our fixed and mobile networks, we offer fixed to mobile convergence services to corporate clients, enabling the use of their mobile phone as an extension of their private branch exchange (“PBX”). We also provide access to corporate IP networks from a mobile phone via GPRS/EDGE/3G/4G.
Operators
We operate fixed line local and zonal networks in Moscow and other cities for provision of telephony services to fixed line subscribers and additional local numbers to mobile subscribers.
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We had 202 local fixed nodes in 66 regions of Russia, including Moscow, and 62 zonal fixed networks to provide telephony services to subscribers as of December 31, 2022. Our integrated intercity/international network is interconnected to 52 international operators.
In the corporate subscriber segment, we generally compete on the basis of network quality, individual and bundled service offerings, customer service, installation time, geographical presence and pricing.
Residential subscribers
We offer voice, Internet and pay TV services to residential subscribers.
Our pricing structure is designed to appeal to large numbers of consumers with various interests and purchasing power, and varies significantly between regions. In 2022, we continued to develop converged packages that include Internet, television and mobile services, including family subscriptions and special tariff plans.
In 2022, we began to actively expand our presence in new regions through FVNO - using the broadband network of partner operators and the MTS mobile network.
Sales and Marketing
Moscow fixed line operations
In 2022, MGTS continued to modernize its own high-tech fiber-optic GPON network and developed combinations of various services in packages, including converged packages of mobile and fixed-line services, as well as subscriptions to online cinemas. The clients were offered promotional packages that included basic services, subscription to online cinemas and high-speed Internet access. In 2022, MGTS began actively developing and implementing new services within the framework of the "Smart Home" and "Smart City" concepts, actively participating in the cloud solutions market, developing partnerships with delivery services and becoming a partner of landmark urban projects.
Other fixed line operations
Our target customers include corporate, operator and residential subscribers.
To promote our product and service offerings, we use various communication channels for advertising and marketing, including direct marketing, printed mass media, television, Internet, radio, directories, outdoor advertising, advertising in the subway, special promotions and cross promotions. Through these various advertising and marketing channels, we intend to further develop our brand recognition. Our marketing strategy is designed to create a unified brand for each of our various product and service offerings with the aim of becoming a single source for all of our subscribers’ communications needs.
We also actively promote our services to existing subscribers with the help of special comprehensive product offers aimed at meeting their communication needs and increasing subscriber loyalty. Our advertising and marketing materials are primarily aimed at promoting the MTS brand. All fixed line products are offered and sold under this brand. However, when we enter new markets, acquire or cooperate with companies within the framework of FVNO, we can use both brands in promotion. This is done to reduce churn, as customers tend to show strong loyalty to local brands. Then we gradually reduce the presence of the acquired brand, and this allows us to make MTS the market leader in this region in the future. Our advertising and marketing efforts are designed to convey a positive image of us to the market as a leading communications operator focused on customer satisfaction.
Competition
We compete with a number of fixed line telecommunications operators servicing Moscow, St. Petersburg and other major Russian cities. Moscow is the largest and most competitive of these markets. Our primary competitors include:
● | Rostelecom, Russia’s largest national fixed line telecommunications operator with presence in all Russian regions. We compete with Rostelecom in the corporate, operator and residential fixed line telecommunications markets in all regions where we operate in Russia. We also compete with Rostelecom in the mobile telecommunications market. |
76
● | ER-Telecom, voice telephony, broadband and TV operator. We compete with ER-Telecom in the corporate and residential fixed line telecommunications market in St. Petersburg, Novosibirsk, Omsk, N.Novgorod, Ekaterinburg, Kazan, Novosibirsk, Chelyabinsk and other regions. |
● | VEON Ltd. (VimpelCom), which is also one of our primary competitors in the Russian mobile communications market, offers voice, data and Internet services to corporates, operators and residential subscribers. We compete with VEON Ltd. (VimpelCom) in the corporate, operator and residential fixed line telecommunications markets in Moscow and in certain other regions of Russia where we are present, including, among others, St. Petersburg, Rostov, Nizhny Novgorod, Ekaterinburg and Krasnodar. In 2022, VEON Ltd., based in the Netherlands, announced the start of the sale of the Russian business — VimpelCom (operating under the «Beeline» brand) to local top management. |
● | MegaFon, which acquired operators Synterra and Net by Net, and offers services in the operator, corporate and residential fixed line telecommunications markets in Moscow, St. Petersburg, and other regions. |
● | Akado Group, which has been acquired by ER-Telecom and Rostech, provider of pay TV, broadband Internet and digital telephony in Moscow. We compete with the Akado Group primarily in the residential fixed line telecommunications market of Moscow. |
Corporate subscribers
The following table sets forth the corporate subscriber market shares of the primary fixed line operators in Moscow as of December 31, 2022:
| | | |
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|
|
| | 24 | % | |||
VEON Ltd. (VimpelCom) | | 19 | % | |||
Akado | | 8 | % | |||
Rostelecom | | 16 | % | |||
Other | | 33 | % | |||
Total | |
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115
In the corporate subscriber segment, we generally compete on the basis of Contentsnetwork quality, individual and bundled service offerings, customer service, installation time, geographical presence and pricing.
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Residential subscribers
116Voice services
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126
| | | | |||
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| ||||
MTS |
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| ||||
Rostelecom | 71 |
| ||||
Other | 11 |
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Source: TMT Consulting.
12777
Internet
According to TMT Consulting, as of December 31, 2022, broadband Internet penetration of households was 62% in Russia. The following table sets forth the market shares of the primary operators in the residential broadband Internet market in Russia as of December 31, 2022:
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VEON Ltd. (VimpelCom) | | 8 | % | |||
ER-Telecom | | 11 | % | |||
Rostelecom | | 35 | % | |||
Other | | 33 | % | |||
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128
Pay-TV
According to TMT Consulting, as of ContentsDecember 31, 2022, pay TV penetration was 82.6% in Russia. The following table sets forth the market shares of the primary operators in the TV market in Russia as of December 31, 2022:
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Rostelecom | 24 |
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Tricolor TV | 26 |
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Orion | 6 | % | ||||
Other | 26 | % | ||||
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Source: TMT Consulting.
In the TV market, we generally compete on the basis of pricing, channel selection and content, individual and bundled service offerings, customer service and installation time.
Tariffs
We establish prices for our unregulated services and different subscriber segments based on certain common considerations, policies and goals. For example, we generally seek to establish competitive prices based on market rates for the services we offer and below market prices when our lower than average costs or economies of scale allow us to do so. We also offer subscribers bundled service packages with several services offered together at a discount to the cost of ordering each individual service separately and to promote additional services to our existing subscribers. In addition, we often offer promotions to our various subscriber segments waiving or discounting installation fees in order to attract new subscribers or promote new services.
With regard to corporate clients, we generally aim to derive the bulk of our operating revenues from monthly payments. Thus, depending on the scale and type of services ordered, we will often discount or waive installation fees.
For services offered to other communications service providers, we aim to generate most of our operating revenues from monthly payments and by offering an array of value added services.
12978
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Network Infrastructure
Banking ServicesNetwork Infrastructure—Transmission Networks
Backbone and Internet Networks
Mobile, fixed and inter-carrier aggregated traffic increased in 2022: downlink (towards users) data throughput reached 10.07 Tbps (8.27 Tbps in 2021), uplink (from users) data throughput reached 2.93 Tbps (2.54 Tbps in 2021).
The following table shows information with respectsize of MTS fiber-optic networks increased by 12,342 km in 2022 and reached 272,112 km in total.
The company continued to reconstruction the backbone and multi service network and the network of data centers in the context of a complex sanctions policy.
We continued to develop the backbone network in 2022.
Convergent network
We had to revise our initial plans for 2022. We completed various projects, including the development or acquisition of regional fiber-optic for interconnect sites, the deployment of new MBH transport nodes, micro-wave links and the launch of private LTE commercial zones.
We were also forced to look for a replacement for all vendors MBH and RRN.
Satellite network
We launched and installed ground receiving station to receive and process data from low-orbit Earth observation satellites.
Public Switching Telephone networks (PSTN)
The network infrastructure we maintain in Moscow is substantially different to the license areasinfrastructures we use in other regions. In Moscow, primarily we have organically grown, while our regional development has largely been through the acquisition of companies with different business models and a focus on different services. As a result, the network infrastructures in the regions outside Moscow and the technologies used to support such infrastructures are different from the network infrastructure established in Moscow and which MTS Bank provides financial services:
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we currently own. At present, the telephone network in Moscow and Moscow region has a capacity of more than 1,112,781 telephone numbers.
All licensesof our PSTN switching centers (TDM and Soft switch) are connected to a digital transport network, which uses SDH and IP technology. The network ensures connectivity with expiry date beforea digital equipment of PSTNs of other operators.
The SDH network will be operated to support existing clients, but we also provide the datemoving traffic and clients from SDH/TDM technology to IP.
The management of this Annual Report on Form 20-F for the year endedtransport network and digital PSTN is carried out remotely from network operation centers.
As of December 31, 2021 were renewed.2022, in Moscow and the Moscow region we had a wireless broadband network including 404 base and subscriber stations in the 5-6 GHz frequency band and also near 197 radio relay lines in the 70-80 GHz frequency band.
For the provision of Internet access, IP‑telephony and other services, we have our own IP network, the core of which is constructed as IP MPLS rings with routers connected to each other by means of 10/100 GE channels. In addition, separate routers are used for inter‑carrier connections and are connected to the core routers by means of 10/100 GE interfaces.
13079
Russia
As of December 31, 2022 we provided cable Internet access to about 11.4 million households and cable TV access to about 11.9 million households. Since 2020, we have started building and upgrading networks using GPON technology. As of 31 December, 2022, more than 260,000 households have been built.
Currently, we have digital TV service (DVB‑C&DVB‑S2) in approximately 200 cities and localities with 5,06 million subscribers. By December 2022, we launched Hybrid TV platform with an IPTV commercial service in Moscow (including Moscow Region) and more than 95 other regions, DVB‑C/IP Hybrid commercial service in more than 100 regional cities and DVB‑S2/IP Hybrid commercial service all over Russia including 56 HD/UHD channels using HEVC (H.265) format. We combined UHD and HD channels due to change in content policy after foreign UHD and HD channels had left russian market in 2022. Since 2020, the target technology for providing television services is IPTV technology. As of 31 December, 2022, the service was launched at a capacity of 8.2 million households. During 2023 according to KION expansion forecast CDN bandwidth is planned to be increased by more than twice its current size. We also plan to use in-house solution for new CDN PoPs and integrate backup CDN offload partner. In Moscow and regions as an Internet traffic supplier, we mainly use our own IP Backbone network.
The acquisition of Comstar provided us with an opportunity to use MTS fiber optic lines for fixed network development. Optical network construction in cities is carried out on the basis of fixed and mobile business needs. When we modernize and construct new networks, we deploy fixed and mobile equipment on the basis of “collocation” method.
Seasonality
Our results of operations are impacted by certain seasonal trends. Generally, revenue is higher during the second and third quarter due to increase in roaming revenues and guest roaming revenues during these quarters. Quarterly trends can also be influenced by a number of factors, including new marketing campaigns and promotions, and may not be consistent from year to year.
In 2020, the measures for combating COVID-19 which included restrictions on movement had a significant impact on the seasonality of our roaming revenues and resulted in the reduction in international roaming of our subscribers and income from guest subscribers.
In 2022, after the lifting of government restrictions on movement, the volume of roaming services increased mainly due to travel within the country. The usual seasonality with a peak in the summer months during the holidays and during the school holidays has recovered.
The COVID-19 outbreak has had a significant impact on the development of the telecommunications industry and continues to contribute to the development of digital services. We recorded an increase in the consumption of internet traffic in mobile and fixed networks as well as, an increase in the number of users of online services, TV users and others OTT applications. This trend continued in 2022. We believe that digitalization processes will gradually affect all spheres of social interaction. Online entertainment services and digital services of state federal and municipal services will continue to be in the greatest demand in 2023.
Regulation of Telecommunications in the Russian Federation
In the Russian Federation, the federal government regulates telecommunications services and the principal law is the Federal Law on Communications, which came into force on January 1, 2004 and provides, among other elements, for the following:
● | licensing of telecommunications services; |
● | requirements for obtaining a radio frequency allocation; |
● | equipment certification; |
● | equal rights for individuals and legal entities, including foreign individuals and legal entities, to offer telecommunications services; |
80
● | fair competition; |
● | freedom of pricing other than pricing by companies with a substantial position in public telecommunication networks; and |
● | liability for violations of Russian legislation on telecommunications. |
The Federal Law on Communications creates a framework in which government authorities may enact specific regulations. Regulations enacted under the legislative framework in place prior to the enactment of the Federal Law on Communications continue to be applied to the extent they do not conflict with the Federal Law on Communications.
The Federal Law on Communications confers broad powers on the state to regulate the communications industry, including the allocation of frequencies, the establishment of fees for frequency use and the allocation and revocation of numbering capacity. In addition, the Federal Law on Communications provides for the establishment of a “universal services reserve fund” which is funded by a levy imposed on all operators of public networks, including us.
Regulatory Authorities
The Russian telecommunications industry is regulated by several governmental agencies, including:
The Ministry of Digital Development, Communications and Mass Media of the Russian Federation is the federal executive body that develops and supervises the implementation of governmental policy in the area of communications and coordinates and controls the activities of its subordinate agencies. The Ministry has the authority to issue certain regulations implementing the Federal Law on Communications and other federal laws.
The Federal Service for Supervision of Communications, Information Technology and Mass Media (Roskomnadzor) is a federal executive body that supervises and controls certain areas of communications and information technologies, including, among other matters, licensing, registration, certification, technical supervision of networks and equipment as well as compliance monitoring and enforcement.
The State Commission For Radio Frequencies is an inter-agency coordination body acting under the Ministry of Digital Development, Communications and Mass Media of the Russian Federation which is responsible for the regulation of the radio frequency spectrum, development of long-term policy for frequency allocation in the Russian Federation and determination of the allocation of frequency bands.
The Federal Antimonopoly Service (FAS) is a federal executive body that supervises competition regulations and enforces the Federal Law on Protection of Competition and the Federal Law on Natural Monopolies and the regulations enacted thereunder. The FAS controls certain activities of natural monopolies, including monitoring their execution of certain obligatory contracts, and can issue certain mandatory orders. In addition, the FAS regulates certain tariffs in the sphere of telecommunications, including the tariffs on the local, intra-zone and DLD calls by subscribers of public switched telephone networks and installation and subscription fees.
Other regulatory authorities. The Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor) is responsible for the enforcement of sanitary regulations including certain authority over the location of telecommunications equipment, and supervises compliance with consumer rights regulations. The Federal Service for State Registration, Cadastre and Cartography (Rosreestr) is responsible for registering certain telecommunications infrastructure that is considered real property. The Federal Financial Monitoring Service (Rosfinmonitoring) is a federal executive body responsible for countering money laundering and terrorism financing. Mobile operators must comply with Federal Law No. 115-FZ dated August 7, 2001 “On Combating Money Laundering and Terrorist Financing.”
81
Licensing of Telecommunications Services and Radio Frequency Allocation
Telecommunications licenses are issued based on the Federal Law on Communications and Government Decree No. 480 dated May 24, 2014 on Bidding Process (Auctions, Tenders) for Receipt of Telecommunications License. Under these regulations, licenses may be issued and renewed for periods ranging from three to twenty-five years. Several different licenses to conduct different communication services may be issued to one entity. Officials have broad discretion with respect to both issuance and renewal procedures.
To operate a communications network, a company must obtain:
● | a license from the Federal Service for Supervision of Communications, Information Technology and Mass Media to provide communications services; |
● | approval to use specific frequencies within the specified band from the State Commission For Radio Frequencies if providing wireless telecommunications services; and |
● | permission from the Federal Service for Supervision of Communications, Information Technology and Mass Media for network operations (including certification of the company’s frequency assignment and site plan in relation to electromagnetic compatibility of the proposed cellular network with other radio equipment operating in the licensed area). As of January 1, 2004, licenses may be transferred in case of mergers or other reorganizations of the licensee upon application by a transferee as a new license holder. |
Licenses may be suspended or terminated for various reasons, including failure by the licensee to comply with the terms of its license, information requests or applicable law, for example, detection of violations which may cause damage to rights, interests, life or health of individuals.
Frequencies are allocated for a maximum term of ten years, which may be extended upon the application of a frequency user. Under the Federal Law on Communications, frequency allocations may be changed for purposes of state management, defense, security and protection of legal order in the Russian Federation with the license holder to be compensated for related losses. Further, frequency allocations may be suspended or terminated for a number of reasons, including failure to comply with the conditions on which the frequency was allocated.
Furthermore, the Federal Law on Communications provides for the establishment of a “universal services reserve fund” for the purpose of supporting communications companies operating in less developed regions of Russia through the financing, construction and maintenance of telecommunications networks in low-profit and unprofitable sectors. This reserve fund is aimed at eliminating the practice of cross-subsidies by compensating operators for certain mandatory, loss-making local services in rural and sparsely populated areas. It is funded by a levy imposed on all operators of public networks, including us, in the amount of 1.2% of revenues from telecommunications services less the amount of taxes paid by subscribers.
The Federal Law on Communications empowers the Russian government to determine and annually review the list of licensing requirements applicable to various communication services being licensed. This list was enacted by Government Decree No. 2385 dated December 30, 2020. Licenses also generally contain a number of other detailed conditions, including a date by which service must begin, technical standards and certain other terms and conditions.
The Federal Law No. 356-FZ dated July 14, 2022, implemented in the The Federal Law on Communications the obligation of telecommunications operators to submit an annual report on their activities to Roskomnadzor from December 1, 2022 (if the license was obtained earlier than December 1, 2022, the first report was sent by March 1, 2023 inclusive).
Equipment Certification
Government Decree No. 113 adopted on February 4, 2022, sets forth the types of communications equipment that are subject to mandatory certification, which includes all fixed line and wireless networks open to the public. The Ministry of Digital Development, Communications and Mass Media of the Russian Federation issues certificates of compliance with technical requirements to equipment suppliers. In addition, Presidential decree No. 960 adopted on August 11, 2003 requires licenses and equipment certifications to be obtained from the Federal Security Service to design, produce, sell, use or import encryption devices.
82
Further, certain high-frequency equipment, a list of which was approved by Government Decree No. 1800 dated October 20, 2021 manufactured or used in the Russian Federation, requires special permission from the Federal Service for Supervision of Communications, Information Technology and Mass Media. Failure to receive such certification could result in the mandatory cessation of the use of such equipment. Moreover, Federal Law No. 204 dated June 23, 2016 requires each operator sharing a radio frequency spectrum to have a telecommunications services license.
Competition, Interconnect and Pricing
The Federal Law on Communications requires federal regulatory agencies to encourage competition in the provision of communication services and prohibits the abuse of a dominant position to limit competition. The Federal Law on Communications and Presidential Decree No. 221, enacted on February 28, 1995, as amended, on Measures for Streamlining State Regulation of Prices (Tariffs) provides for regulation of tariffs and other commercial activities of telecommunications companies that are “natural monopolies.” Government Decree No. 637, dated October 24, 2005 (as amended) authorized the FAS to set the following tariffs for the natural monopolies in the communications market, including:
● | provision of access to a local telephone network; |
● | permanent use of a subscriber’s line; and |
● | local and intra-zone calls. |
In addition, the Federal Law on Natural Monopolies No. 147 dated August 17, 1995 outlines certain types of transactions for which a regulated entity must obtain prior FAS approval and establishes the general principle that regulated entities may not refuse to provide regulated services to certain types of consumers. Regulated entities are also subject to continuous reporting requirements, including submitting plans for capital investments.
The FAS maintains a Register of Natural Monopolies whose tariffs are controlled and regulated by the state. A telecommunications operator may be included in this register upon a decision by the FAS based on analysis of the operator’s activities and the market conditions.
Our subsidiary, MGTS, was added to the Register of Natural Monopolies in 2000 and, therefore, is subject to the requirements of the Federal Law on Natural Monopolies including, inter alia, the following:
● | the FAS regulates and controls tariffs for services provided by MGTS, including installation fees, monthly subscription fees (for subscribers to the unlimited tariff plan) and local call charges (for subscribers who do not use the unlimited tariff plan); |
● | MGTS must obtain prior FAS approval for any transaction involving the acquisition, disposal or lease of assets not related to the regulated activity, if the value of such assets exceeds 10% of MGTS’ share capital, additional capital, retained profits and reserves; |
● | MGTS is required to maintain separate accounting records for each type of activity; |
● | MGTS is required to publicly disclose information on tariffs, products, material conditions of contracts with customers, capital expenditure programs and certain other information; and |
● | MGTS is required to comply with Federal law No. 223-FZ dated July 18, 2011 “On Procurement of Goods, Works, Services by Certain Types of Legal Entities” while active in the procurement of goods and services. |
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In addition, companies which are found to have a dominant position in relevant markets may be subject to certain FAS restrictions in conducting their business, including in relation to pricing, acquisitions, geographical expansion, and associations and agreements with competitors. Since January 5, 2016, under the Federal law No. 135-FZ “On Protection of the Competition”, dominant position is established on case-by-case basis. See also “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business— If we are found to have a dominant position in the markets where we operate and are determined to have abused this position and/or concluded anti-competitive agreements, or found to have committed concerted actions, the FAS may be entitled to impose fines as well as regulate our subscriber tariffs and impose certain restrictions on our operations.”
The Federal Law on Communications also provides for the special regulation of telecommunications operators occupying a “substantial position,” i.e., operators which together with their affiliates have, in the Russian Federation generally or in a geographically defined specific numerical zone, 25% or more of installed capacity or capacity to carry out transmission of not less than 25% of traffic. MGTS was added to the register of telecommunications operators occupying a substantial position in the public switched telephone networks and, therefore, is subject to certain requirements including, inter alia, the following:
● | MGTS must develop interconnect rules and procedures in accordance with federal requirements; |
● | MGTS must ensure that interconnect agreements with operators who intend to interconnect to our networks are entered into on the same terms and conditions as the agreements between MGTS, us and our affiliates; MGTS also cannot refuse to provide interconnect or discriminate against one operator over another; |
● | MGTS must comply with the mandatory orders of the Federal Service for Supervision of Communications, Information Technology and Mass Media issued if non-compliance was identified as a result of monitoring of MGTS’ interconnect terms; and |
● | MGTS must comply with the tariffs for interconnect and traffic transit where determined by the Ministry of Digital Development, Communications and Mass Media of the Russian Federation; |
● | MGTS must develop standard interconnect contracts and publish them as a public offer for all operators who intend to use such interconnect services. |
The Federal Law on Communications and implementation rules adopted by Government Decrees No. 29 dated January 21, 2022, and No. 627 dated October 19, 2005, also provides for government regulation of interconnect tariffs established by operators occupying a substantial position.
Notwithstanding the above, fixed line operators not considered to occupy a substantial position and not included in the Register of Natural Monopolies, as well as mobile operators, are free to set their own tariffs. Also see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.”
Anti-terror law
The Federal Law No. 374 dated July 6, 2016, amended some legislative acts and established additional measures to counter terrorism and to maintain public safety.
In accordance with the abovementioned amendments to the Federal Law on Communications (which came into force in July, 2018) telecommunications operators have to store information on the receiving, transmitting, delivering and/or processing of voice information, text messages, images, sounds, video, or other communications by their subscribers, as well as relevant messages themselves. The authorities may request this information.
The implementation of these amendments has a material effect on telecommunications operators’ financials and performance, see also “Item 3. Key Information—D. Risk Factors.”
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Subscribers identification
The Federal Law No 245 dated July 29, 2017, amended the Federal Law on Communications to prevent the conclusion of contracts for the provision of services of mobile communications without proper identification of the subscriber (user) of communication services.
Sovereign Internet
The Federal Law No. 90 dated May 1, 2019, establishes obligations on telecommunications operators to install equipment to counter threats to the stability, security and integrity of the Internet on the territory of the Russian Federation. The provisions of this Federal Law regarding the national domain-name system and national crypto security standards came into force in January 2021. In February 2021, Federal Law No. 19-FZ introduced penalties of up to 6 million rubles for violating the applicable rules governing sovereign Internet. Criminal liability may also apply. For more information on the law, see “Item 3. Key Information—Legal Risks and Uncertainties—Regulatory changes in Russia as well as regulatory changes at the international level may have a material adverse effect on our financial condition and results of operations.”
Since January 1, 2023, the administrative and criminal liability for telecommunications operators has been established for violating the requirements for traffic transit through technical means to counter threats to the stability, security and integrity of the functioning of the Internet on the territory of the Russian Federation and public communication network (The Federal Law No. 259-FZ dated July 14, 2022, The Federal Law No. 260-FZ dated July 14, 2022).
Personal data
We are subject to laws and regulations regarding privacy and protection of user data, including the Federal Law No. 152-FZ “On Personal Data” dated July 27, 2006 (the “Personal Data Law”), as amended by the Federal Law No. 519 dated December 30, 2020.
The Personal Data Law, among other things, requires, subject to a limited number of exceptions, that an individual provide specific, informed and conscious consent to any processing (i.e. any action or combination of actions performed on personal data, including the collection, recording, systematization, accumulation, storage, use, transfer (distributing, providing or authorizing access to), blocking, deleting and destroying) of his/her personal data.
The consent must be in writing in certain cases, including: (i) where the processing relates to special categories of personal data (regarding the data subject’s race, nationality, political views, religion, philosophical beliefs, health conditions or intimate information); (ii) where the processing of personal data relates to any biometrics; (iii) cross-border transfers to a state that does not provide adequate protection of rights of subjects (e.g. under Russian law, the United States is one of such states); and (iv) the certain types processing of an employee’s personal data, etc. The written consent of subjects must meet a number of formal requirements and must be signed by holographic or electronic signature.
The Federal Law No. 572-FZ dated December 29, 2022, regulates the identification or authentication of individuals using biometric personal data as well as the processing of biometric personal data.
Big Data
In 2021, the National Centre for Digital Economics announced the development of the Russian national standard corresponding with ISO/IEC TR 20547-1:2020 Information technology – Big data reference architecture – Part 1: Framework and applicable process.
Procedure for concluding subscription contracts
The Federal Law No 533-FZ dated December 30, 2020 (which came into force on June 1, 2021), amended the Federal Law on Communications to tighten various procedures for concluding subscription contracts, including how the Unified Biometric System, Simple Electronic Signature and the Enhanced Qualified Signature may be used.
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In addition, under the Federal Law, subscribers now have the right to enter in the Integrated Identification and Authentication System (IIAS) information about their subscriber number and/or IMEI. If the subscriber’s device is lost, he/she may report this to the operator through the IIAS. Subject to the confirmation of an IMEI number, telecommunications operators must stop providing telecommunications services for the lost device.
Moreover, the Federal Law No. 319-FZ dated July 2, 2021, and Government Decree No. 1313 dated July 22, 2022, have defined the information that telecom operators are obliged to submit to Roskomnadzor, including subscribers’ information, the volume and period of provision of communication services, etc.
Providing free access to social resources
The Federal Law No 319-FZ dated July 2, 2021, establishes obligations on telecommunications operators that provide communication services for data transmission and access to the Internet to subscribers to provide such subscribers with free access to the websites of state bodies, extra-budgetary funds, portals of state and municipal services (which came into force on December 1, 2021), as well as to other sites that are determined by the Government Commission. Government Decree No. 2531 dated December 29, 2021 and Government Decree No. 2469 dated December 25, 2021, have set up a list of domestic socially significant information resources (“VKontakte” social network and “Unified Portal of Public Services”) and formed a Government Commission. Telecommunications operators must provide free access to these resources.
New regulation in the interaction of telecommunications operators with the State customer and the IIAS
The Federal Law No. 465-FZ dated December 30, 2021, amended the Federal Law on Communications to establish obligations on telecommunications operators to transmit free SMS messages with a confirmation code when individual and legal entities pass authentication procedures in the IIAS and when they perform significant actions in the IIAS. It is prohibited for telecommunications operators to suspend and/or terminate the provision of communication services to the State customer after the expiration of the relevant contract without the written consent of this customer.
Monitoring compliance with the requirements for the provision of communication services, traffic transmission services, connection of communication networks
The Federal Law No 319-FZ dated July 2, 2021, amended the Federal Law on Communications to expand the list of requirements for the procedure for passing traffic and telecommunications operators, including:
● | Compliance with procedures for identifying subscribers initiating a connection for the purpose of transmitting voice information in the data transmission network (came into force on May 1, 2022). |
● | The formation of a register of communication lines crossing the state border of the Russian Federation and the means of communication to which these communication lines are connected (the Register). Telecommunications operators are obliged to comply with the requirements established by Roskomnadzor for such lines and means of communication (came into force on January 1, 2023). |
● | Telecommunications operators are obliged to connect and send/receive information through a special prescribed system to ensure compliance (came into force on January 1, 2023). |
● | Telecommunications operators must cease providing communication services and/or traffic services in cases of identified risky traffic as set out in the Federal Law No 319-FZ (came into force on January 1, 2023). |
The Federal Law No. 480-FZ dated December 30, 2021, imposes administrative liability on telecommunications operators for non-fulfillment of obligations related to the transmission of a subscriber number and/or a unique identification code, termination of the provision of communication services and/or traffic transit services (which came into force on December 30, 2021) and connection to the system to ensure compliance by telecommunications operators with the requirements for provision of communication services and traffic transit services in the public communication network (which came into force on January 1, 2023).
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From March 1, 2023, Federal Law No. 625 of December 29, 2022 will introduce in the Code of Administrative Offences new types of offenses and tighten responsibility in the field of communications. New types of offenses are related to a subscriber’s contract conclusion via Internet, beginning of the services provision, failure to submit information to Roskomnadzor to monitor the reliability of information about subscribers and users.
Regulation of Banking Activities in the Russian Federation
General
MTS Bank, our subsidiary, operates as a credit organization in Russia and is therefore subject to a number of laws and regulations applicable to banks. Federal Law No. 395-1 “On Banks and Banking Activity” dated December 2, 1990, as amended (the “Banking Law”), is the principal law regulating the Russian banking sector, among other things, defining credit organizations, setting forth the list of banking operations and other transactions that credit organizations may perform and establishing the framework for the registration, licensing of credit organizations and the regulation of banking activities by the CBR. Pursuant to the Banking Law, a banking group is described as an association of legal entities under control of a credit organization, and a banking holding is defined as an association of legal entities, at least one of which is a credit organization, under control of a parent legal entity that is not a credit organization, provided that a share of banking activities in the banking holding is at least 40% of the overall activities of such group.
Licensing
A license must be obtained from the CBR in order for any institution to engage in banking activities as defined in the Banking Law. Applicants must be incorporated within Russia and registered with the CBR as a credit organization, and submit, among other things, a feasibility report and detailed information on the suitability of the applicant’s management team. A banking license may be denied for a number of reasons, including if the financial standing of the founders of the bank is deemed by the CBR to be unsatisfactory or if the proposed candidates for the senior management of the bank, including members of the management board and the chief executive officer, are deemed to be unsuitable or do not meet the qualification requirements.
Charter Capital Requirements
The Banking Law sets out the minimum charter capital for newly-established banks in Russia the amount of RUB 1 billion for a bank with a general license and RUB 300 million for a bank with a basic license. As of the date of this document, charter capital of MTS Bank that holds a general license amounts to RUB 15,015,046,500. Further, under the Banking Law, the minimum regulatory capital amounts to RUB 1 billion for banks applying for the status of a bank with a general license and to RUB 300 million for banks applying for the status of a bank with a basic license. As of February 1, 2023, regulatory capital of MTS Bank amounted to RUB 65,862 million.
Reporting Requirements
Russian banks must regularly submit balance sheets to the CBR, together with financial statements showing their actual respective financial positions. They must also inform the CBR in respect of providing large loans (exceeding 5% of a bank’s capital). Banking groups and banking holdings must regularly submit consolidated accounts to the CBR. The CBR may at any time carry out full or selective checks of a bank’s submissions, and may inspect all books and records of the bank. In addition, annual audits must be carried out by an audit company that is a member of a self-regulatory organization of auditors. Starting from 2004, all credit organizations in Russia have been required to prepare financial statements according to both RAS and IFRS. Banks must file IFRS standalone and audited consolidated annual financial statements with the CBR on an annual basis.
Mandatory Reserve Deposit Requirements
To cover loan losses and currency, interest and financial risks, the CBR requires banks to form mandatory reserve deposits and keep them in designated non-interest bearing accounts with the CBR. Particular reserve requirements are set by the Board of Directors of the CBR from time to time. As of March 1, 2023, mandatory reserves of MTS Bank amounted to RUB 723 million.
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Licenses
The Group owns the licenses on mobile services, mobile virtual network, fixed line services, data transmission services, telecommunications services for broadcasting, cable radio (communication services for the purpose of wire broadcasting) and banking services. All our licenses are valid with average completion date of 3 years in areas in which we and our subsidiaries and affiliates provide or expect to provide GSM, LTE and UMTS services.
Each of our licenses requires service to be started by a specific date. We have met this target or received extensions to these dates in those regional license areas in which we have not commenced operations. Neither the government nor other parties have taken or attempted to take legal actions to suspend, terminate or challenge the legality of any of our licenses (except for Uzbekistan, see Note 34 to our audited consolidated financial statements). We have not received any notice of violation of any of our licenses, and we believe that we are in compliance with all material terms of our licenses.
C. | Organizational Structure |
The table below presents our significant subsidiaries and investees, the places of incorporation and our effective ownership interests therein as of December 31, 2021.2022.
| | | | | | |
| | | | | | Place of |
| | Accounting | | Ownership | | Incorporation/ |
Subsidiary |
| Method |
| Interest |
| Organization |
RTC | | Consolidated | | 100.0 | % | Russia |
MTS Bank | | Consolidated | | 99.9 | % | Russia |
MGTS Group | | Consolidated |
| 94.7 | % | Russia |
Multiregional TransitTelecom | | Consolidated |
| 100.0 | % | Russia |
MTS Armenia | | Consolidated |
| 100.0 | % | Armenia |
NVision Czech Republic(1) | | Consolidated |
| 100.0 | % | Czech Republic |
| | Consolidated | 100.0 | % | Russia | |
Gulfstream | | Consolidated | 58.4 | % | Russia | |
Bronevik | | Consolidated | 100.0 | % | Russia | |
Webinar | | Consolidated | 84.3 | % | Russia | |
TIC (Tower Infrastructure Company) | | Consolidated | 100.0 | % | Russia | |
MDTZK (Ticketland) | | Consolidated |
| 100.0 | % | Russia |
Kulturnaya Sluzhba (Ponominalu) | | Consolidated |
| 100.0 | % | Russia |
|
| IT-Grad 1 Cloud |
|
|
| |
| Consolidated |
| 100.0 | % | Russia | |
MTS | | Consolidated |
| 100.0 | % | Russia |
Zelenaya Tochka Group – (Achemar Holdings) |
|
|
|
| ||
| Consolidated |
| 100.0 | % | Russia | |
MTS Media | | Consolidated |
| 100.0 | % | Russia |
|
|
|
|
| ||
MTS Didgital (former MTS IT) | | Consolidated |
| 100.0 | % | Russia |
| | Consolidated |
| 100.0 | % | Russia |
Sistema Capital | | Consolidated |
| 100.0 | % | Russia |
Stream | | Consolidated |
| 100.0 | % | Russia |
MTS |
|
|
|
| ||
| | Consolidated |
| 100.0 | % | Russia |
MWS | | Consolidated |
| 100.0 | % | Russia |
Energy Group | | Consolidated |
| 100.0 | % | Russia |
|
| Stream Digital(2) |
|
|
| |
| Consolidated |
| 100.0 | % | Russia | |
Bastion | | Consolidated |
| 100.0 | % | Russia |
MTS International Funding Limited | | Consolidated |
| SE | | Ireland |
MTS Belarus | | Equity |
| 49.0 | % | Belarus |
(1) |
(2) | Wholly-owned subsidiary, through which the Group |
88
A company organized and existing as a private limited company under the laws of Ireland. The Group does not have any equity in MTS International. It was established for the purpose of raising capital through the issuance of debt securities on the Irish Stock Exchange followed by transferring the proceeds through a loan facility to the Group. In 2010 and 2013, MTS International issued $750 million 8.625% notes due in 2020 and $500 million 5.0% notes due in 2023, respectively. The notes are guaranteed by MTS in the event of default. MTS International does not perform any other activities except those required for notes servicing. The Group bears all costs incurred by MTS International in connection with the notes’ maintenance activities. Accordingly, the Group concluded that it exercises control over the entity. |
See also Note 2 to our audited consolidated financial statements.
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D. | Property, Plant and Equipment |
Property, Plant and Equipment
We own and occupy premises in Moscow at 4 Marksistskaya Street Bldgs. 1-4 (1 – 3156.6 sq.m.; 2 – 168.6 sq.m; 3 - 227.7 sq.m; 4 – 89.5 sq.m), 34 Marksistskaya Street Bldg. 10 (902), 1/3 Vorontsovskaya Street Bldgs. 2 (3970.2 sq.m) and 2a (1584.1 sq.m), 5 Vorontsovskaya Street Bldgs. 1 (873.6 sq.m) and 2 (3408.6 sq.m), 13/14 Vorontsovskaya Street Bldg. 4 (879.3 sq.m), 8 Vorontsovskaya Street Bldg. 4À (1379.6 sq.m), 12/12 Pankratievsky Pereulok (2940.1 sq.m), 2/10 Perviy Golutvinskiy Pereulok Bldg. 1 (658.9 sq.m) and 2 (2234.2 sq.m), 4 Perviy Golutvinskiy Pereulok Bldg. 1 (450.5 sq.m), 9 Magnitogorskaya Street (6273.4 sq.m), 6 Vtoroy Vyazovskiy Proezd Building 1-3 (1 – 8962.6 sq.m; 2 – 328.5 sq.m; 3 – 16.9 sq.m), 2A Konstantina Simonova Street (807), 19 Dmitrovskoye shosse Bldg. 2 (417.9 sq.m), 103 Prospect Mira (676.5 sq.m), 42 Profsoyuznaya Street Bldg. 1 (817.1 sq.m), Panfilovskiy prospect Zelenograd Bldg 1101À (542.5 sq.m), 24/2 Malaya Dmitrovka Street (551 sq.m), 5/9 Malaya Dmitrovka Street (455.7 sq.m), 58/1 Ryazanskiy prospect (190 sq.m), 60 Varshavskoe shosse (159.4 sq.m), 27 Smolenskaya-Sennaya square Bldg 2 (7727.1 sq.m), 27 Smolenskaya-Sennaya square Bldg 3 (20.2 sq.m), 6 Ostrovitjanova Street (12.1 sq.m), 2 Mozhayskoe shosse (17.2 sq.m), 51 Second Line of Khoroshevsky Serebryany Bor Bldg.1-3 (1 – 712.9 sq.m; 2 – 266.4 sq.m; 3 – 51 sq.m), 24 Central prospect of Khoroshevsky Serebryany Bor (318 sq.m), 24 Central prospect (574 sq.m), 18 Andropov prospect Bldg. 8-9 (8 – 2588 sq.m; 9 – 30894.6 sq.m), 18 Andropov prospect Bldg.1 (2374.4 sq.m), 18 Andropov prospect Bldg.4 (168.1 sq.m), premises in Moscow region in village Valishevo, 5 Bldg 2 (13104.1 sq.m), in Podolsk, 1 Komsomolskaya street (550,6), in Pushkino, 22 Gorky street 207,6), Pushkin district, village Pushkino, 7A, Yaroslavl shosse (499.7 sq.m), Mytishchi district, Pirogovo village, 8, Timiryazev street (19 sq.m), Lytkarino, Children's town “ZIL”, bldg. 60 (27704 sq.m), which we use for administration, sales and other service centers as well as the operations of mobile switching centers. The size of premises is indicated in square meters.
Wemeters.We also lease buildings in Moscow for similar purposes, including marketing and sales and other service centers.
In addition, through our subsidiary MGTS, we own 118156 properties and rent buildings and premises at approximately 122115 addresses located throughout Moscow, which serve as sales and customer service offices, house MGTS’ telecommunication equipment. We also own office buildings in some of our regional license areas, and we lease office space on an as- needed basis. We believe that our properties are adequate for our current needs and additional space is available to us if and when it is needed.
The primary elements of our network are base stations, base station controllers, transcoders and mobile switching centers. Base stations occupy sites leased at selected locations in all the areas in which we provide network coverage. GSM, 3G and 4G technologies are based on an “open architecture,” which means that equipment of radio access network from one supplier can be combined with core network equipment of another supplier to expand the network. Thus, there are no technical limitations to using equipment from different suppliers.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is intended to help the reader understand us, our operations and our present business environment and should be read in conjunction with our consolidated financial statements, related notes and other information included elsewhere in this document. In particular, we refer you to the risks discussed in “Item 3. Key Information—D. Risk Factors” Factors” for information regarding governmental, economic, fiscal, monetary or political policies or factors that could materially adversely affect our operations or your investment in our shares and ADSs.. In addition, this section contains forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements as a result of various factors, including those described under “Item 3. Key Information—D. Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” Our reporting currency is the Russian ruble and our consolidated financial statements have been prepared in accordance with IFRS.
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A. | Operating Results |
Overview
We are a leading telecommunications group in Russia, providingRussia’s digital ecosystem and largest mobile operator that provides a wide range of mobiledigital-first services to help enrich the modern 21st-century lifestyle. We offer a full range of solutions for consumers and fixed line voice, data telecommunicationsbusiness customers across wireless and digital services, including transmission, broadband, pay-TV, various value-added serviceswireline connectivity; over-the-top, linear, and satellite television; digital-first banking and financial services; as well as financialunified communications, cloud computing and integrationIoT. There are more than 88 million mobile subscribers using our services and selling equipment and accessories. According to AC&M-Consulting, we areacross the largest mobile operatorour operations in Russia, Armenia, and Belarus, including around 80 million subscribers in termsRussia alone. The number of mobile subscribers. We are also the largest operator in Armenia in termsecosystem clients exceeds 12 million and MTS Bank client base is over 3 million.
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Our revenues for the year ended December 31, 2021 increased2022 grew 2.6% to RUB 541,749 million with positive impacts coming from core connectivity services as well as Fintech and Media segments, which were almost offset by 8.0% compareda drop in sales of handsets & accessories due to 2020 to reach RUB 534,403 million on the back of growth in all business verticals: telecom, fintech, media and retail.imposed import restrictions. Our operating income for the year ended December 31, 2021 totaled2022 decreased by 7.3% to RUB 118,279 million, an increase of 4.8% in comparison with prior year. The growth was primarily driven by core connectivity and financial services. In addition, in 2020 our109,437 million. Our operating income was negatively impacted by increased loan impairment of our e-ticketing companies.provisions at MTS bank as well as growing personnel costs. Our profit for the year ended December 31, 2021 grew2022 dropped by 3.5%48.0% to RUB 64,269 million. Profit growth was supported by core operating performance as well as operating performance of MTS Bank, partially offset by greater financing costs amid an increasing interest rate environment, as well as forex operations or operations with derivatives and other factors.
Our revenues for the year ended December 31, 2020 totaled to RUB 494,926 million, an increase of 5.2% year-over-year. The Group’s performance was largely driven by both core telecom services as well as new segments beyond connectivity, with Fintech, Media, and B2B Digital & Cloud services. Our operating income for the year ended December 31, 2020 decreased by 2.3% to RUB 112,893 million. Our operating income was negatively impacted by the COVID-19 outbreak, including loan impairment provisions at MTS bank, impairment of our e-ticketing business as well as a steep decline in international roaming. Our profit for the year ended December 31, 2020 increased by 12.7% to RUB 62,07333,435 million mainly due to lowerhigh finance costs as well compensating effect of our operations with derivatives.as lower operating income.
Our cash outlays for capital expenditures for the years ended December 31, 2022, 2021 and 2020 and 2019 were RUB 112,581 million, RUB 111,683 million RUB 97,838 million and RUB 91,73697,838 million, respectively.
We have financed our cash requirements through our operating cash flows and borrowings. Net cash provided by operating activities for the years ended December 31, 2022, 2021 and 2020 and 2019 was RUB 190,592 million, RUB 142,846 million RUB 155,507 million and RUB 106,652155,507 million, respectively.
Our borrowings consist of notes and bank loans. Our notes comprise of U.S. dollar and ruble denominated notes. As of December 31, 20212022 and December 31, 20202021 U.S. dollar denominated notes totaled to RUB 33.323.4 billion and RUB 33.133.3 billion, and ruble denominated notes amounted to RUB 158.7172.6 billion and RUB 175.1158.7 billion, respectively. Our bank loans consist of ruble-denominated borrowings totaling approximately RUB 290.2 billion as of December 31, 2022 and RUB 270.1 billion as of December 31, 2021 and RUB 221.1 billion as of December 31, 2020.2021.
We repaid approximately RUB 36.4119.2 billion and RUB 162.736.4 billion of indebtedness in 20212022 and 2020,2021, respectively. As of December 31, 2021,2022, the total amount available to us under our credit facilities amounted to RUB 207.3206.1 billion. We had total indebtedness of 486.1 billion as of December 31, 2022, excluding lease obligations, compared to RUB 462.1 billion as of December 31, 2021, excluding lease obligations, compared to RUB 429.3 billion as of December 31, 2020.2021. See Note 2423 to our audited consolidated financial statements for a description of our indebtedness.
Our total finance costs for the years ended December 31, 2022, 2021 2020 and 20192020 were RUB 41,35258,378 million, RUB 42,08441,342 million and RUB 47,36642,078 million, net of amounts of interest capitalized, respectively. See Note 98 to our audited consolidated financial statements for a description of our finance costs.
Our reporting currency is Russian rubles. Our and our subsidiaries’ functional currencies are the ruble in Russia, the hryvnia in Ukraine (before it was disposed of on December 3, 2019), the manat in Turkmenistan,and the dram in Armenia and the som in Uzbekistan (before UMS was deconsolidated).Armenia. See “—Certain Factors Affecting our Financial Position and Results of Operations—Currency fluctuations” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk.”
We report under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”). None of our financial statements were prepared in accordance with generally accepted accounting principles in the United States.
On October 24, 2022, MTS disposed of a plant that produced and supplied Tier 2 electronic components for the automotive industry as well as microelectronic components. NVision Czech Republic a.s. was part of “Czech Republic” operating segment included in “Other” reportable segment. The consolidated statements of profit or loss for the years ended December 31, 2021 and 2020 were retrospectively restated to present operations with NVision Czech Republic a.s. as discontinued operations.
13390
The selected financial data presented below as of December 31, 2022, 2021, 2020 2019 and for the years ended December 31, 2022, 2021 2020 and 20192020 was derived from the audited consolidated financial statements of the Company, included in this document. The amounts are presented in millions of Russian rubles, except share and per share amounts, industry and operating data and ratios.
| | | | | | | |
| | 2021 | | 2020 | | 2019 |
|
Consolidated statements of profit or loss data: |
|
|
|
|
|
| |
Services revenue |
| 457,677 |
| 425,448 |
| 406,478 | |
Sales of goods |
| 76,726 |
| 69,478 |
| 64,127 | |
Total operating revenues |
| 534,403 |
| 494,926 |
| 470,605 | |
Operating expenses: |
|
|
|
|
|
| |
Cost of services |
| 133,512 |
| 121,943 |
| 114,057 | |
Cost of goods |
| 72,244 |
| 63,482 |
| 58,872 | |
Selling, general and administrative expenses |
| 96,239 |
| 87,983 |
| 89,933 | |
Depreciation and amortization |
| 111,088 |
| 100,234 |
| 96,195 | |
Operating share of the profit of associates and joint ventures |
| (5,565) |
| (5,048) |
| (4,583) | |
Impairment of non‑current assets |
| (10) |
| 2,023 |
| (148) | |
Impairment of financial assets |
| 13,010 |
| 11,912 |
| 7,723 | |
Other operating income(1) |
| (4,394) |
| (496) |
| (7,021) | |
Operating profit |
| 118,279 |
| 112,893 |
| 115,577 | |
Finance income |
| (2,518) |
| (3,437) |
| (4,352) | |
Finance costs |
| 41,352 |
| 42,084 |
| 47,366 | |
Non‑operating share of the loss of associates and joint ventures |
| (181) |
| (273) |
| (3,496) | |
Other non‑operating expenses/(income), net(2) |
| 424 |
| (3,064) |
| 7,821 | |
Profit before tax |
| 79,202 |
| 77,583 |
| 68,238 | |
Income tax expense |
| 15,403 |
| 16,126 |
| 15,667 | |
Profit for the period from continuing operations |
| 63,799 |
| 61,457 |
| 52,571 | |
(Profit)/Loss from discontinued operations, net of tax |
| (470) |
| (616) |
| (2,528) | |
Profit for the period |
| 64,269 |
| 62,073 |
| 55,099 | |
Attributable to: |
|
|
|
|
|
| |
Owners of the company |
| 63,473 |
| 61,412 |
| 54,241 | |
Non‑controlling interests |
| 796 |
| 661 |
| 858 | |
Dividends declared(2) |
| 74,049 |
| 58,948 |
| 83,751 | |
Earnings per share, basic, RUB |
| 37.49 |
| 34.88 |
| 30.46 | |
Earnings per share, diluted, RUB |
| 37.30 |
| 34.86 |
| 30.41 | |
Earnings per share from continuing operations, basic, RUB |
| 37.21 |
| 34.53 |
| 29.04 | |
Earnings per share from continuing operations, diluted, RUB |
| 37.02 |
| 34.51 |
| 28.99 | |
Earnings per share from discontinued operations, basic, RUB |
| 0.28 |
| 0.35 |
| 1.42 | |
Earnings per share from discontinued operations, diluted, RUB |
| 0.28 |
| 0.35 |
| 1.42 | |
Annual Dividends declared per share, RUB |
| 26.51 |
| 20.57 |
| 41.91 | |
Semi‑annual Dividends declared per share, RUB |
| 10.55 |
| 8.93 |
| 8.68 | |
Special Dividends declared per share, RUB |
| — |
| 13.25 |
| — | |
Number of common shares outstanding |
| 1,662,624,118 |
| 1,726,902,169 |
| 1,772,834,153 | |
Weighted average number of common shares outstanding—basic |
| 1,693,244,209 |
| 1,760,467,519 |
| 1,780,935,238 | |
Weighted average number of common shares outstanding—diluted |
| 1,701,786,673 |
| 1,761,777,635 |
| 1,783,617,103 | |
Consolidated statement of cash flows data: |
|
|
|
|
|
| |
Cash provided by operating activities |
| 142,846 |
| 155,507 |
| 106,652 | |
Cash used in investing activities |
| (116,432) |
| (81,133) |
| (29,554) | |
(of which capital expenditures)(3) |
| |
| (97,838) |
| (91,736) | |
Cash used in financing activities |
| (71,214) |
| (27,360) |
| (120,448) | |
Consolidated statement of financial position (end of period): |
|
|
|
|
|
| |
Cash, cash equivalents and short‑term investments |
| 69,562 |
| 108,839 |
| 63,688 | |
Property, plant and equipment and investment property, net |
| 313,748 |
| 286,693 |
| 268,465 | |
Right‑of‑use assets |
| 132,343 |
| 130,503 |
| 138,817 | |
Total assets |
| 1,015,818 |
| 919,203 |
| 823,910 | |
Total debt (long‑term and short‑term)(4) |
| 462,139 |
| 429,268 |
| 343,319 | |
Total shareholders’ equity |
| 14,604 |
| 32,690 |
| 36,394 | |
Common stock less treasury stock |
| (95,995) |
| (74,790) |
| (59,548) | |
Financial ratios (end of period): |
|
|
|
|
|
| |
Total debt/total capitalization(5) |
| 96.9 | % | 92.9 | % | 90.4 | % |
Mobile industry and operating data:(6) |
|
|
|
|
|
| |
Mobile penetration in Russia (end of period) |
| 178 | % | 172 | % | 178 | % |
Mobile subscribers in Russia (end of period, thousands)(7) |
| 80,436 |
| 78,467 |
| 79,072 | |
Overall market share in Russia (end of period) |
| 31 | % | 31 | % | 30 | % |
| | | | | | | |
|
| 2022 | | 2021 | | 2020 |
|
Consolidated statements of profit or loss data: | |
|
|
|
|
| |
Services revenue | | 496,669 |
| 457,668 |
| 425,433 | |
Sales of goods | | 45,080 |
| 70,253 |
| 64,398 | |
Total operating revenues | | 541,749 |
| 527,921 |
| 489,831 | |
Operating expenses: | | |
| |
| | |
Cost of services | | 151,780 |
| 132,613 |
| 121,317 | |
Cost of goods | | 41,153 |
| 67,274 |
| 59,572 | |
Selling, general and administrative expenses | | 109,401 |
| 96,035 |
| 87,802 | |
Depreciation and amortization | | 114,393 |
| 110,962 |
| 100,143 | |
Share of the profit of operating associates and joint ventures | | (4,596) |
| (5,565) |
| (5,048) | |
Impairment of non-current assets | | 489 |
| (10) |
| 2,023 | |
Expected credit losses | | 26,366 |
| 13,001 |
| 11,912 | |
Other operating income | | (6,674) |
| (4,394) |
| (493) | |
Operating profit | | 109,437 |
| 118,005 |
| 112,603 | |
Finance income | | (1,774) |
| (2,518) |
| (3,437) | |
Finance costs | | 58,378 |
| 41,342 |
| 42,078 | |
Share of the loss of non-operating associates and joint ventures | | (209) |
| (181) |
| (273) | |
Other non-operating expenses/(income), net(1) | | 3,041 |
| 525 |
| (3,097) | |
Profit before tax | | 50,001 |
| 78,837 |
| 77,332 | |
Income tax expense | | 13,648 |
| 15,360 |
| 16,055 | |
Profit for the period from continuing operations | | 36,353 |
| 63,477 |
| 61,277 | |
(Profit)/Loss from discontinued operations, net of tax | | 2,918 |
| (792) |
| (796) | |
Profit for the period | | 33,435 |
| 64,269 |
| 62,073 | |
Attributable to: | | |
| |
| | |
Owners of the company | | 32,574 |
| 63,473 |
| 61,412 | |
Non-controlling interests | | 861 |
| 796 |
| 661 | |
Dividends declared(2) | | 66,335 |
| 74,049 |
| 58,948 | |
Earnings per share, total, basic, RUB | | 19.39 |
| 37.49 |
| 34.88 | |
Earnings per share, total, diluted, RUB | | 19.10 |
| 37.30 |
| 34.86 | |
Earnings per share from continuing operations, basic, RUB | | 21.13 |
| 37.02 |
| 34.43 | |
Earnings per share from continuing operations, diluted, RUB | | 20.81 |
| 36.83 |
| 34.41 | |
Earnings per share from discontinued operations, basic, RUB | | (1.74) |
| 0.47 |
| 0.45 | |
Earnings per share from discontinued operations, diluted, RUB | | (1.71) |
| 0.47 |
| 0.45 | |
Annual Dividends declared per share, RUB | | 33.85 |
| 26.51 |
| 20.57 | |
Semi-annual Dividends declared per share, RUB | | — |
| 10.55 |
| 8.93 | |
Special Dividends declared per share, RUB | | — |
| — |
| 13.25 | |
Number of common shares outstanding | | 1,682,953,850 |
| 1,662,624,118 |
| 1,726,902,169 | |
Weighted average number of common shares outstanding—basic | | 1,679,533,129 |
| 1,693,244,209 |
| 1,760,467,519 | |
Weighted average number of common shares outstanding—diluted | | 1,705,415,965 |
| 1,701,786,673 |
| 1,761,777,635 | |
Consolidated statement of cash flows data: | | |
| |
| | |
Cash provided by operating activities | | 190,592 |
| 142,846 |
| 155,507 | |
Cash used in investing activities | | (118,238) |
| (116,432) |
| (81,133) | |
(of which capital expenditures)(3) | | (112,581) |
| (111,683) |
| (97,838) | |
Cash used in financing activities | | (34,622) |
| (71,214) |
| (27,360) | |
Consolidated statement of financial position (end of period): | | |
| |
| | |
Cash, cash equivalents and short-term investments | | 102,714 |
| 69,562 |
| 108,839 | |
Property, plant and equipment and investment property, net | | 317,434 |
| 313,748 |
| 286,693 | |
Right-of-use assets | | 120,192 |
| 132,343 |
| 130,503 | |
Total assets | | 1,082,930 |
| 1,015,818 |
| 919,203 | |
Total debt (long-term and short-term)(4) | | 486,140 |
| 462,139 |
| 429,268 | |
Total shareholders’ equity | | (3,617) |
| 14,604 |
| 32,690 | |
Common stock less treasury stock | | (92,107) |
| (95,995) |
| (74,790) | |
Financial ratios (end of period): | | |
| |
| | |
Total debt/total capitalization(5) | | 100.7 | % | 96.9 | % | 92.9 | % |
Mobile industry and operating data:(6) | | |
| |
| |
|
Mobile penetration in Russia (end of period) | | 175 | % | 178 | % | 172 | % |
Mobile subscribers in Russia (end of period, thousands)(7) | | 79,997 |
| 80,436 |
| 78,467 |
|
Overall market share in Russia (end of period) | | 31 | % | 31 | % | 31 | % |
(1) | “Other non-operating expenses/(income), net” consist mainly of net forex exchange (gains)/losses and net (gains)/losses arising on financial instruments. |
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(2) | Dividends declared in each of the years ended December 31, 2022, 2021, 2020 |
(3) | Capital expenditures are the amounts of property, plant and equipment and intangible assets acquired during respective year. |
(4) | Includes notes, bank loans and other debt. |
(5) | Calculated as book value of total debt divided by the sum of the book values of total shareholders’ equity and total debt at the end of the relevant period. See footnote 5 above for the definition of “total debt.” |
(6) | Source: AC&M-Consulting and GSMA Intelligence. Operating data is presented for mobile operations only. None of this data is derived from our audited consolidated financial statements. |
(7) | We define a subscriber as an organization or individual, whose SIM-card shows traffic-generating activity or accrues a balance for services rendered or is replenished of topped off over the course of any |
Segments
Management (chief operating decision maker) analyzes and reviews results of the Company’s operating segments separately based on the nature of products and services, regulatory environments and geographic areas. The Group’s management evaluates the segments’ performance based on revenue and operating profit, excluding depreciation and amortization. Management does not analyze assets or liabilities by reportable segments.
Our current reportable segments are the following:
Telecom: represents the results of mobile and fixed line operations, which encompasses services rendered to customers across regions of Russia, including voice and data services, transmission, broadband, pay-TV and various value-added services and retail operations.
Fintech: represents the results of banking services, investment management and services of credit broker, rendered to customers across multiple regions of Russia.
Our reportable segments previously included the “Ukraine” reportable segment, which has been excluded from operational segments presentation as a result of the disposal of VF Ukraine in December 2019.
In 2021, our management changed the composition of operating segments, by dividing operations of the Group’s subsidiary MGTS (which previously constituted the “Moscow Fixed Line” reportable segment) into two operating segments. Operations of the established “MGTS service” operating segment comprised primarily maintenance and development of fixed-line network infrastructure. The segment generates revenues mainly from renting MGTS’ own network infrastructure. Operations of the established component “MGTS commercial” include client relationships and related fixed-line services, generating revenue from existing subscribers. The operating and financial results of “MGTS commercial” are reviewed jointly with the “Russia convergent” segment (representing results of both mobile and fixed-line services), in line with focus on convergent products development, while the results of “MGTS service” are monitored separately. Consequently, “MGTS service“ represents a separate operating segment. “MGTS commercial” and “Russia convergent” are presented as one reportable segment – “Telecom”.
Financial results of operating segment “MTS-Bank” were supplemented with operations of investment management and credit broker services in connection with the acquisition of LLC Sistema Capital and the acquisition of Credit Consulting. This new reportable segment was called “Fintech”.
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At the end of 2020, our management changed the approach for reviewing the Group’s operational results which led to the separation of two new segments—Cloud and WASD. Cloud represents operational results of the Group’s business focused on cloud services. WASD is the MTS streaming platform. Cloud and WASD were moved from “Telecom” operating segment to the “Other” category.
On October 30, 2020,24, 2022, MTS disposed of a plant that produced and supplied Tier 2 electronic components for the Group entered into a sale agreement with Sistema to disposeautomotive industry as well as microelectronic components. NVision a.s. was part of its 100% stake in JSC “Nvision Group”, which provided integration services and software sales and constituted the “System Integrator”“Czech Republic” operating segment included in the “Other” category.reportable segment.
In 2019, management changed the assessment of expenses allocated to HQ in relation with sale of MTS Ukraine.
All figures in the tables below for 2020 and 2019 have been retrospectively restatedorder to reflect the above changes.changes in segments’ composition, segment disclosures for 2022, 2021 and 2020 were retrospectively restated.
The “Other” category does not constitute a reportable segment. It includes the results of a number of other operating segments that do not meet the quantitative thresholds for separate reporting, such as Travel, Gulfstream, Artificial intelligence, Armenia, MGTS Service, Turkmenistan, Armenia, Cloud Media, Artificial Intelligence and others.
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Total revenues of our segments for the years ended December 31, 2022, 2021, 2020 2019 were as follows:
| | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, | ||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2022 |
| 2021 |
| 2020 |
| | (in millions of Russian rubles) | | (in millions of Russian rubles) | ||||||||
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Telecom |
| 448,313 |
| 429,319 |
| 391,104 |
| 438,362 |
| 448,339 |
| 429,319 |
Fintech |
| 49,607 |
| 36,222 |
| 31,185 |
| 68,439 |
| 50,315 |
| 36,771 |
Other |
| 62,824 |
| 49,132 |
| 71,573 |
| 65,779 |
| 55,702 |
| 43,451 |
HQ and eliminations(1) |
| (26,340) |
| (19,746) |
| (23,256) |
| (30,831) |
| (26,435) |
| (19,710) |
Total revenues as reported |
| 534,403 |
| 494,926 |
| 470,605 |
| 541,749 |
| 527,921 |
| 489,831 |
(1) | Represents the elimination of inter-company transaction results, primarily interconnect, roaming, rent of channels and telecommunications infrastructure. |
Certain Operating Data
Below we provide certain operating data not included in our financial statements that we believe is useful for evaluating our business and results. The data focuses primarily on our mobile operations, particularly in Russia, which comprise the most significant share of our revenue in the periods presented, and is among the information routinely reviewed by our management as part of their regular evaluation of our performance.
Mobile Subscriber Data
The following table shows our mobile subscribers by country as of the dates indicated:
| | | | | | | | | | | | |
| | At December 31, | | At December 31, | ||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2022 |
| 2021 |
| 2020 |
| | (in millions) | | (in millions) | ||||||||
Subscribers(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Russia |
| 80.4 |
| 78.5 |
| 79.1 |
| 80.0 |
| 80.4 |
| 78.5 |
Armenia |
| 2.2 |
| 2.1 |
| 2.2 |
| 2.3 |
| 2.2 |
| 2.1 |
Total consolidated |
| 82.6 |
| 80.6 |
| 81.3 |
| 82.3 |
| 82.7 |
| 80.6 |
MTS Belarus (unconsolidated) |
| 5.7 |
| 5.7 |
| 5.6 |
| 5.7 |
| 5.7 |
| 5.7 |
(1) | We define a subscriber as an organization or individual, whose SIM-card shows traffic-generating activity or accrues a balance for services rendered or is replenished of topped off over the course of any three-month period, inclusive within the reporting period, and was not blocked at the end of the period. |
We had approximately 80.480.0 million subscribers in Russia as of December 31, 2021,2022, and a leading 31% market share of total mobile cellular subscribers in Russia, according to AC&M-Consulting. Overall penetration in Russia was at approximately 178%175%. In
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addition, as of December 31, 2021,2022, we had approximately 2.22.3 million subscribers in Armenia, representing 59.8%58.4% market share, according to our estimates.
For a description of our fixed line subscriber base, see “Item 4. Information on Our Company—B. Business Overview—Fixed Line Services.”
Revenues
During the last few years our company has evolved from a leading provider of telecommunication services into an eco-system of telecommunication, financial, media and digital services.
Our principal sources of revenue are:
● | revenue from telecommunication or “сonnectivity” services, which include mobile and fixed service revenue; |
● | revenue from sales of handsets, accessories and other goods; and |
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● | revenue from financial services. |
Our mobile tariffs in Russia are not regulated by any organization or governmental authority. The interconnect fees we charge to other operators for terminating calls interconnecting to our mobile network are not regulated in Russia. See also “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we are found to have a dominant position in the markets where we operate and are determined to have abused this position and/or concluded anti-competitive agreements, or found to have committed concerted actions, the FAS may be entitled to impose fines as well as regulate our subscriber tariffs and impose certain restrictions on our operations”operations.” and “—If we or any of our mobile network operator subsidiaries operating in Russia are identified as an operator occupying a “substantial position,” the regulator may reduce our interconnect tariffs which, in turn, may have a material adverse effect on our financial condition and results of operations.”
Certain of our fixed service tariffs are regulated, including tariffs charged by Moscow incumbent operator MGTS for installation fees, monthly subscription fees and local call charges, as well as interconnect and traffic transit tariffs. The interconnect tariffs charged by us are also regulated by the Federal Agency on Communications.
Service revenues
Revenue from telecommunication services primarily include monthly fees paid by our users of tariff plans which contain fixed volume of services such as minutes of usage, sms, mobile internet traffic, pay-TV and broadband internet in case of convergent tariff plans. Telecommunication services also include interconnect fees, roaming fees and other services. Telecommunication services as a percentage of revenues gradually declinedremained stable and were 77.2%was 80.4% in 2022, 78.9% in 2021 79.2%and 80.9% in 2020 and 80.5% in 2019.2020. We expect revenue from telecommunication services to remain stableflat as a percentage of total revenue in 2022.2023.
Revenue from financial services which consist primarily of lending services, business funding options, deposit products, cash settlement services, trade finance, foreign currency control, bank cards, payroll projects, merchant acquiring and investment services provided by MTS Bank, comprised 8.8%12.6%, 6.8%9.2% and 6.2%7.2% of our total revenues in 2022, 2021 2020 and 2019,2020, respectively. We expect banking service revenues to remain stable as a percentage of our total operating revenue.revenue in 2023.
Sales of Goods
Sales of goods primary consist of the sale of handsets and accessories and sales of software products and as a percentage of total revenue comprised 14.4%decreased to 8.3% in 2022 from relatively stable amounts of 13.3% in 2021 14.0%and 13.1% in 2020, 13.3%2020. The significant decline in 2019.2022 both in absolute terms and as a percentage of revenue is attributable to the compression of devices market due to supply chain problems. The increase both in both absolute terms and as a percentage of revenue in 2021 as compared to 2020 is attributable to an increase of handsets retail market in monetary terms and low base of 2020 impacted by store closure due to public health guidelines amid the pandemic. We expect that sales of goods will remain stable or decline as a percentage of total revenue, depending on the continuity of smartphones and devices supplies. We do not subsidize handset sales in Russia.
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Cost of Services
Cost of telecommunication services mainly consist of interconnect and line rental charges payable to other operators for access to, and use of their networks, which are necessary in the course of providing service to our subscribers. Roaming expense which consist of amounts charged by other cellular operators under agreements for roaming services provided to our subscribers while outside our service area, is also a significant part of our cost of telecommunication services.
Cost of telecommunication services as a percentage of our total revenues represented 22.3%23.8% in 2022, 22.5% in 2021 22.3%and 22.6% in 2020 and 22.0% in 2019.2020.
Cost of financial services consists primarily of interests on loans received from banks and other financial institutions and commission fees. Cost of financial services as a percentage of our total revenues represented 2.6%4.3% in 2022 and 2.7% in 2021 and 2.3% in 2020 and 2019.2020.
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Cost of goods
This type of expense includes primarily the cost of handsets and accessories sold to subscribers, the cost of SIM cards provided to our customers, the cost of software products sold and inventory obsolescence provision. Cost of handsets, accessories and software sold and SIM cards provided to customers as a percentage of our total revenues represented 13.5%7.6% in 2022, 12.7% in 2021 12.8%and 12.2% in 2020 and 12.5% in 2019.2020.
Selling, general and administrative expenses
Our selling expenses comprise of all costs relating to the activities that do not directly increase the value of our products and services, but serve to secure sales. These costs consist primarily of:
● | expenses for advertising and promotion; |
● | dealer commissions for the acquisition of new subscribers and cash collection; and |
● | personnel, utilities and maintenance costs incurred in the area of sales. |
In 2022, 2021 2020 and 2019,2020, selling expenses comprised 8.7%9.5%, 9.0%8.8% and 9.8%9.0% of our total revenue, respectively. Selling expenses remained relatively stable as a percentageThe increase of our revenue in 2021 in comparison with 2020. The decrease of 0.8%0.7% of selling expenses in 2022 compared to 2021 was mainly attributable to increase of personnel costs, advertising and marketing expenses and dealers commissions. The decrease of 0.2% of selling expenses in 2021 compared to 2020 in comparison with 2019 related to cost optimizationwas mainly due to the COVID‑19 outbreak.cash collection comission optimization. The increase of 2,271 mln.rub of selling expenses in 2021 compared to 2020 was due to increase of advertising and marketing expenses.
We retain some degree of flexibility to increase or decrease these expenses in any given period based on our requirements, strategy and the general economic environment.
For the structure of our dealer commissions please see “Item 4. Information on Our Company—B. Business Overview—Mobile Operations—Sales and Marketing—Sales and Distribution.”
Our general and administrative expenses comprise of expenses attributable to the core administrative functions that cannot be allocated directly to the production or selling process. These consist primarily of:
● | personnel costs; |
● | office maintenance expenses and rental of administrative premises; |
● | consulting expenses; |
● | taxes other than income taxes, e.g. property taxes; |
● | billing and data processing expenses; and |
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● | other expenses of administrative nature. |
General and administrative expenses as a percentage of our total revenues represented 9,3%10.6%, 8.8%9.5% and 9.3%8.9% in 2022, 2021 2020 and 2019,2020, respectively. The increase of 0.5%1.2% in general and administrative expenses in 2022 compared to 2021 related to an increase in personnel costs related to acquisition of new companies and a number of employees growth and related to an increase in tax costs. The increase of 0.6% in general and administrative expenses in 2021 compared to 2020 is related to the changesan increase in personnel costs. The decreasecosts related to acquisition of 0.5% in the financial year 2020 compared to 2019, as well as the decreasenew companies and a number of selling expenses, was mainly attributable to cost optimization due to the global pandemic situation.employees growth. General and administrative expenses as a percentage of revenue are expected to increase over time as a result of inflation.
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Sundry Operating Income/Expenses
Our sundry operating income/expenses include:
● | operating share of associates’ profit; |
● | impairment of financial assets; |
● | impairment for goodwill and long-lived assets; and |
● | other operating |
Sundry operating income/expenses as a percentage of our total revenues represented 0.6%2.9%, 1.3%0.6% and (0.9)%1.7% as of December 31, 2022, 2021 and 2020, and 2019, respectively. The decrease of sundry operating expenses in 2021 compared to 2020 was mainly attributable to the absence of the impairment charges for goodwill and long-lived assets in the financial year 2021. The increase of sundry operating expenses in 20202022 compared to 20192021 was mainly attributable to an increase in the allowance of expected credit losses (ECL) for bank deposits and loans to customers becausedue to increased macroeconomic risks. The decrease of sundry operating income in the financial year 2021 compared to 2020 was mainly attributable to a higherdecrease in the allowance of expected credit risk duelosses (ECL) and to an increase in the COVID-19 outbreak.gain recognized as a result of transaction with the sale of fixed assets and leaseback.
Depreciation of Property, Network Equipment and Amortization of Intangible Assets
Our expense for depreciation of property, network equipment and amortization of intangible assets as a percentage of our total revenues was equal to 20.8%21.1% for the year ended December 31, 20212022 as compared to 20.3% of our total revenues for the year ended December 31, 2020. Our expense for depreciation of property, network equipment21.0% and amortization of intangible assets comprised 20.4% of our total revenues for the years ended December 31, 2021 and 2020 respectively. We expect this expense to remain relatively stable in 2023.
Finance costs
Our finance costs for 2022 increased by RUB 17,036 million, or 41.21%, to RUB 58,378 million from RUB 41,342 million for the year ended December 31, 2019.
We expect our expense for depreciation2021. The increase was primarily attributable to the increase in total debt and an increase in interest rates due to the growth of property, network equipment and amortizationCentral Bank of intangible assets to remain relatively stable or decline slightly inRussia key rate since February 2022 till July 2022.
Finance costs
Our finance costs for 2021 decreased by RUB 732736 million, or 1.74%1.75%, to RUB 41,35241,342 million from RUB 42,08442,078 million for the year ended December 31, 2020. The decrease was primarily attributable to the effect of the derecognition and modification of debt agreements (RUB 1,151 million), decrease in interest on lease obligations (RUB 457 million) and the effect of our operations with derivatives. The decrease was partly compensated by an increase in total debt and an increase in interest rates due to the growth of Central Bank of Russia key rate (RUB 1,258 million). Our finance costs for 2020 decreased by RUB 5,282 million, or 11.2%, to RUB 42,084 million from RUB 47,366 million for the year ended December 31, 2019. The decrease was primarily attributable to effect arisen on the derecognition of debt agreements (RUB 2,220 million), improved loan terms and decreased Central Bank of Russia key rate (RUB 1,930 million).
We expect our finance costs to increasedecrease slightly as a percentage of our revenue in 2022 mainly2023 due to the growthdecline and steadying of Central Bank of Russia key rate.
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Provision for Income Taxes
Taxation on income of Russian companies is regulated by a number of laws, government decrees and implementation instructions.
The income tax base for Russian companies is defined as income received from sales of goods and services reduced by the amount of expenses incurred in such operations with certain exceptions.
The statutory income tax rate in Russia is 20%. The effective tax rate applicable to our consolidated group in the year ended December 31, 2022, 2021 and 2020 was 27.3%, 19.5% and 2019 was 19.4%, 20.8% and 23.0%, respectively. The effective tax rate differs from the statutory rate mainly as a result of prior period tax effects, changechanges in recognized deferred tax assets, and a decrease inremoval of the items not deductabledeductible for tax purposes.
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Certain Factors Affecting our Financial Position and Results of Operations
COVID-19 impact
The COVID-19 outbreak has limited impact on our results of operations. Our operating income was negatively impacted by COVID-19 outbreak, mainly due to the loan impairment provisions at MTS bank and impairment of our e-ticketing business in 2020. In addition, our revenue growth was partly offset by decrease in revenue from roaming services due to a steep decline in international roaming in 2020, which partly recovered in 2021.
For more information, see “Item 3. Key Information—Risk Factors—The outbreak of COVID-19 may have a material adverse effect on our business, financial condition, results of operations and prospects.”
Potential adverse effects of economic instabilityvolatility and sanctions in Russia
In February and March 2022, following the recent geopolitical events,developments, the EU, US, UK and certain other countries have imposedbegan to impose significant new sanctions and export controls on Russian and Belarusian persons and entities. These include, among others,sanctions resulted in reduced access of the Russian businesses to international capital and some export markets, volatility of the Russian ruble, rise of inflation, decline in capitals markets, restrictions targeting several major Russian financial institutions and the CBR,Central Bank of Russia (“CBR”), a number of companies and individuals, as well as technology export controls.controls and other negative economic consequences.
Developments relating to these matters are highly unpredictable, occur swiftly and often with little notice and are mostly outside of our control.control, and the risk that any Group member, or individuals holding positions within the Group as well as its counterparties, may be affected by future sanctions designations cannot be excluded. Current and future risks to our financial position and results of operations include, among others, the risk of reduced or blocked access to capital markets and ability to obtain financing on commercially reasonable terms (or at all), the risk of restrictions on the import of certain equipment and software, as well as the risk of further depreciationdeviations of the conversion rate of Russian ruble against other currencies (which has already occurred to a significant extent), which may adversely impact our investment process as a significant portion of our capital expenditures are denominated in or linked to foreign currencies. In addition, rate hikes by the CBR, which has increasedCentral Bank’s of Russia increase of its key rate to 20%, will increase on February 28, 2022, impacted floating-rate credit facilities and consequently increased the Group’s finance costs. Further in 2022, the Central Bank of Russia has gradually decreased its key rate to 7.5% as of December 31, 2022.
Furthermore, the CBR has prohibited Russian companies from making any payments, including dividends, on securities of Russian companies to non-Russian residents, with the result that any non-Russian resident holders of our financing costsADSs were ineligible to receive such dividends. In May 2022, the Decree of the President of Russian Federation No. 254 set temporary procedures for making dividend payments on securities of Russian companies to non-Russian residents, which includes making payments in Russian rubles through special accounts.
In April 2022, Russian Federal Law No. 114-FZ, requiring Russian companies to terminate their depositary receipt programs, came into force. In May, the Russian Government Commission on Monitoring Foreign Investment (“the Commission”) approved the Company’s request to maintain its American Depositary Receipts (ADR) program. The Commission’s decision provided for the continuation of circulation of MTS ADRs until July 12, 2022 (inclusive). Following the Commission’s decision and requirements of the law the Group initiated the termination process of its depository receipt program, starting from July 13th, 2022. MTS’ ADSs were delisted from the NYSE effective August 8, 2022. The existing ADSs could have been converted into MTS’ ordinary shares at the ratio of 1:2. The guaranteed conversion period expired on January 12, 2023 (inclusive). In August 2022, the Group initiated ADSs automatic conversion into ordinary shares. If holders of depositary receipts held with foreign brokers and/or custodians were restricted by foreign brokers and/or custodians from the conversion of receipts and allotment of shares due to sanctions, holders of receipts could have their shares converted through a forced conversion mechanism. The deadline for submitting forced conversion applications expired on November 11, 2022.
In February 2023, the impact on floating-rate credit facilities.
OperationsUS Office of Foreign Assets Control (OFAC) and the UK Office of Financial Sanctions Implementation (OFSI) designated MTS Bank are susceptibleas a sanctioned person pursuant to the risks affecting the borrowers’ ability to repay amounts due to us, which may be impactedapplicable sanctions regulations adopted by the overall macroeconomic environmentUS and business climate. Adverse changes in economic conditions may result in deterioration in the valueUK, respectively. Accordingly, MTS Bank became subject to so-called “blocking” (asset-freeze) sanctions maintained by the US and the UK. Among other matters, these sanctions require US and UK third parties, including banks, to block or freeze assets which MTS Bank holds with such parties or otherwise block the settlement of collateral held against loanspayments to or from MTS Bank and other obligations.its counterparties. The full impact and potential implications of the imposed sanctions on MTS Bank on the Group’s operations, assets and liabilities cannot be reliably estimated at this time. Management believes it is taking the appropriate measures to mitigate the related negative effects.
Our managementManagement remains focused on ensuring operational continuity and providing uninterrupted connectivity and other services for customers. OurIn making its going concern assessment, management believes it is taking the appropriate measures to support the sustainability ofconsidered principal risks and existing uncertainties, the Group’s business inliquidity position (Note 28), including the current circumstances.Group’s borrowings and available credit facilities, its expectations on compliance with covenants, capital expenditure commitments and other factors.
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For more information, see Note 33 and 34 to our consolidated financial statements, and “Item 3. Key Information—D. Risk Factors— Risks Relating to Economic Risks in Our Countries of Operation — “Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesgeopolitical situation and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations, prospects and the value of our sharesshares” and ADSs”“Item 3. Key Information—D. Risk Factors— Risks Relating to Economic Risks in Our Countries of Operation — The imposition of sanctions on MTS Bank and the potential for further international sanctions and export restrictions affecting the Group may have a material adverse impact on our business, financial condition and result of operations”.
140
Currency fluctuations
A majority of our capital expenditure and a part of our liabilities and borrowings are either denominated in or tightly linked to the U.S. dollar or euro. A significant part of our financial liabilities, denominated in U.S. dollars, excluding trade accounts payables, is hedged through financial instruments with various banks. We conduct operations within the Russian Federation and Armenia,in multiple countries, and we are therefore subject to currency fluctuations. The local currencies of these countries fluctuate significantly against the U.S. dollar and euro. As a result of the fluctuations we may incur significant currency exchange gains/losses which may adversely affect our profit for the year. Please see also “Item 3. Key Information—D. Risk Factors— “Ruble“Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of ADSs”shares” and “Item 3. Key Information—D. Risk Factors— “Further“Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesgeopolitical situation and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”shares”.
Inflation
Our financial position and results of operations as reflected in our audited consolidated financial statements included elsewhere in this document have been influenced by inflation. We expect inflation-driven increases in costs to put pressure on our margins. While we could seek to raise our tariffs to compensate for such increase in costs, competitive pressures may not permit increases that are sufficient to preserve operating margins. See “Item 3. Key Information—D. Risk Factors—Risks Relating to our Financial Condition—Inflation could increase our costs and adversely affect our results of operations.”
COVID—19 impact
The COVID—19 outbreak has had limited impact on our results of operations. Our operating income was negatively impacted by COVID—19 outbreak, mainly due to the loan impairment provisions at MTS bank and impairment of our e—ticketing business in 2020. In addition, our revenue growth was partly offset by a decrease in revenue from roaming services due to a steep decline in international roaming in 2020, which partly recovered in 2021.
For more information, see “Item 3. Key Information—Risk Factors—The outbreak of COVID—19 may have a material adverse effect on our business, financial condition, results of operations and prospects.”
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Acquisitions
Our results of operations for the periods presented are significantly affected by acquisitions. Results of operations of acquired businesses are included in our audited consolidated financial statements for the periods after their respective dates of acquisition.
Below is a list of our major acquisitions during 2021-2019.2022-2020. See also Note 54 to our audited consolidated financial statements for a description and financial effects of these acquisitions.
| | | | | | | | | | | | | | | | |
| | | | | | | | Purchase | | | | | | | | Purchase |
| | | | Date of | | Stake | | price, RUB | | | | Date of | | Stake | | price, RUB |
Company |
| Type |
| acquisition |
| acquired |
| mln |
| Type |
| acquisition |
| acquired |
| mln |
| | | | | | | | | ||||||||
2022 | | | | | | | | | ||||||||
Webinar | | Videoconferencing solutions | | July 2022 | | 75.5 | %* | 2,095 | ||||||||
Bronevik | | Online hotels booking | | July 2022 | | 100 | % | 4,000 | ||||||||
Gulfstream | | Digital safeguard systems | | April 2022 | | 58.38 | % | 1,999 | ||||||||
VisionLabs | | Developer of AI software (computer vision, machine learning) | | February 2022 | | 100 | % | 6,556 | ||||||||
| | | | | | | | 14,650 | ||||||||
| | | | | | | | | ||||||||
2021 | | | | | | | | | | | | | | | | |
Zelenaya Tochka | | Regional fixed-line operations | | April 2021 | | 49 | %* | 3,101 | | Regional fixed-line operations | | April 2021 | | 49 | %** | 3,101 |
Credit Consulting | | Credit broker | | April 2021 | | 100 | % | 60 | | Credit broker | | April 2021 | | 100 | % | 60 |
Multiregional TransitTelecom | | B2B intelligent connectivity solutions | | June 2021 | | 100 | % | 5,798 | | B2B intelligent connectivity solutions | | June 2021 | | 100 | % | 5,798 |
GDTs Energy Group | | GreenBush data center | | June 2021 | | 100 | % | 5,200 | | GreenBush data center | | June 2021 | | 100 | % | 5,200 |
Sistema Capital | | Investment services | | September 2021 | | 70 | %** | 3,500 | | Investment services | | September 2021 | | 70 | %*** | 3,500 |
| | | | | | | | 17,659 | | | | | | | | 17,659 |
| | | | | | | | | | | | | | | | |
2020 | | | | | | | | | | | | | | | | |
Stopol Auto |
| Auto parts and multimedia devices |
| June 2020 |
| 100 | % | 321 |
| Auto parts and multimedia devices |
| June 2020 |
| 100 | % | 321 |
|
| | | | | | | 321 |
| | | | | | | 321 |
2019 |
|
|
|
|
|
|
|
| ||||||||
MTS Bank |
| Banking services |
| February 2019 |
| 39.48 | % | 11,409 | ||||||||
Objedinennye Russkie Kinostudii (Kinopolis) |
| Movie complex |
| April 2019 |
| 100 | % | 2,042 | ||||||||
RIKT |
| Regional fixed‑line operator |
| June 2019 |
| 97.4 | % | 360 | ||||||||
Narodnoje property complex |
| Administrative properties |
| August 2019 |
| 100 | % | 329 | ||||||||
MTS Bank |
| Banking services |
| December 2019 |
| 4.46 | % | 1,446 | ||||||||
|
| | | | | | | 15,586 |
| | | | | | | 32,630 |
* In September 2022 we increased stake in Webinar to 84.25% through exercise of options entered into at acquisition date.
** Acquisition of 49% in Zelenaya Tochka in addition to the previously held stake of 51% allowed us to obtain control over the entity.
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*** Acquisition of 70% in Sistema Capital in addition to the previously held stake of 30% allowed us to obtain control over the entity.
Results of Operations
Our management has identified the following reportable segments: Telecom and Fintech. See “—Segments.”
Intercompany eliminations presented below consist primarily of sales transactions between segments conducted in the normal course of operations.
99
Financial information by reportable segments is presented below:
| | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, | ||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2022 |
| 2021 |
| 2020 |
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Telecom |
| 448,313 |
| 429,319 |
| 391,103 |
| 438,362 |
| 448,339 |
| 429,319 |
Fintech |
| 49,607 |
| 36,222 |
| 31,185 |
| 68,439 |
| 50,315 |
| 36,771 |
Other |
| 62,823 |
| 49,132 |
| 71,573 |
| 65,779 |
| 55,702 |
| 43,451 |
HQ and eliminations(1) |
| (26,340) |
| (19,747) |
| (23,256) |
| (30,831) |
| (26,435) |
| (19,710) |
Total revenues as reported |
| 534,403 |
| 494,926 |
| 470,605 |
| 541,749 |
| 527,921 |
| 489,831 |
Costs of services and cost of goods |
|
|
|
|
|
|
|
|
|
|
|
|
Telecom |
| 171,315 |
| 157,012 |
| 145,601 |
| 156,490 |
| 171,347 |
| 157,012 |
Fintech |
| 16,284 |
| 13,628 |
| 13,746 |
| 26,700 |
| 16,775 |
| 14,104 |
Other |
| 34,698 |
| 26,274 |
| 29,678 |
| 30,451 |
| 28,305 |
| 21,264 |
HQ and eliminations(1) |
| (16,541) |
| (11,489) |
| (16,096) |
| (20,708) |
| (16,540) |
| (11,491) |
Cost of services and cost of goods as reported |
| 205,756 |
| 185,425 |
| 172,929 |
| 192,933 |
| 199,887 |
| 180,889 |
Sundry operating expenses/(income)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
Telecom |
| 1,509 |
| 3,128 |
| 3,183 |
| 4,599 |
| 1,509 |
| 3,128 |
Fintech |
| 12,266 |
| 10,001 |
| 4,002 |
| 20,991 |
| 12,282 |
| 10,125 |
Other |
| (10,969) |
| (5,014) |
| (11,260) |
| (10,077) |
| (10,994) |
| (5,135) |
HQ and eliminations(1) |
| 235 |
| 277 |
| 46 |
| 72 |
| 235 |
| 276 |
Sundry operating expenses/ (income) as reported |
| 3,041 |
| 8,391 |
| (4,029) |
| 15,585 |
| 3,032 |
| 8,394 |
Selling, general and administrative expenses | | | | | | | | | | | | |
Telecom | | 71,296 | | 68,267 | | 68,309 | | 78,262 | | 71,358 | | 68,267 |
Fintech | | 12,222 | | 8,731 | | 8,864 | | 14,393 | | 12,665 | | 9,187 |
Other | | 14,387 | | 11,865 | | 13,763 | | 17,833 | | 13,679 | | 11,231 |
HQ and eliminations(1) | | (1,666) | | (884) | | (1,003) | | (1,087) | | (1,667) | | (883) |
Selling, general and administrative expenses as reported | | 96,239 | | 87,983 | | 89,933 | | 109,401 | | 96,035 | | 87,802 |
Depreciation and amortization expenses |
| |
| |
| |
| |
| |
| |
Telecom |
| 100,988 |
| 90,871 |
| 85,332 |
| 105,505 |
| 101,112 |
| 90,871 |
Fintech |
| 1,783 |
| 1,248 |
| 1,082 |
| 2,266 |
| 1,882 |
| 1,286 |
Other |
| 14,019 |
| 12,836 |
| 13,192 |
| 14,784 |
| 13,672 |
| 12,707 |
HQ and eliminations(1) |
| (5,701) |
| (4,722) |
| (3,411) |
| (8,162) |
| (5,704) |
| (4,721) |
Depreciation and amortization expenses as reported |
| 111,088 |
| 100,234 |
| 96,195 |
| 114,393 |
| 110,962 |
| 100,143 |
Operating profit |
|
|
|
|
|
|
| |
| |
| |
Telecom |
| 103,206 |
| 110,040 |
| 88,678 |
| 93,506 |
| 103,013 |
| 110,041 |
Fintech |
| 7,051 |
| 2,614 |
| 3,492 |
| 4,089 |
| 6,711 |
| 2,069 |
Other |
| 10,689 |
| 3,170 |
| 26,199 |
| 12,788 |
| 11,040 |
| 3,384 |
HQ and eliminations(1) |
| (2,668) |
| (2,928) |
| (2,792) |
| (946) |
| (2,759) |
| (2,891) |
Operating profit as reported |
| 118,279 |
| 112,893 |
| 115,577 |
| 109,437 |
| 118,005 |
| 112,603 |
(1) | Represents the elimination of inter-company transaction results, primarily interconnect, roaming, rent of channels and telecommunications infrastructure. |
(2) | For the purposes of this analysis “Sundry operating expenses/(income)” consist of allowance for doubtful accounts, impairment of non-current assets and goodwill, other operating expenses/(income), operating share of profit of |
142100
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Revenues and cost of services and cost of goods
Consolidated revenues for the year ended December 31, 2022, increased by RUB 13,828 million, or 26.2%, to RUB 541,749 million from RUB 527,921 million for the year ended December 31, 2021. The principal reason for the growth was the large increase in revenue from telecommunication services, including roaming and interconnect services, (by RUB 22,927 million) attributable to the usage of voice and data tariffs by our subscribers. This was mainly attributable to the increase in mobile internet penetration, an increase in usage of smartphones by our subscribers, active network expansion and the consequent improvement of the quality and uptake of value-added services. Revenue from financial services added to the overall increase of consolidated revenue as it grew by RUB 16,074 million to RUB 60,927 million in 2022 from 44,853 million in 2021. Our revenues remain partly offset by the dynamics in revenue from sales of handsets, accessories and software products by RUB 25,173 million, or 35.8% compared to the year ended December 31, 2021 caused by deficit of devices and accessories due to problems with supply chains. Companies acquired in 2022 and 2021 added up of approximately RUB 7,178 million to the consolidated revenues for the year ended December 31, 2022.
Consolidated cost of services and cost of goods for the year ended December 31, 2022 decreased by RUB 6,954 million and amounted to RUB 192,933 million as compared to RUB 199,887 million for the year ended December 31, 2021 and comprised 35.6% and 37.9% as a percentage of consolidated revenues for the year ended December 31, 2022 and 2021, respectively. The decrease was driven by the decline in the device market which led to the decrease of handsets sales and the consequent decline in cost of handsets, accessories and software products by RUB 25,899 million compared to the year ended December 31, 2021. On the contrary, our cost of telecommunication services, including interconnect and roaming, grew up by RUB 10,168 million in the back of service revenue increase. The growth of revenue from financial services added up of approximately RUB 8,998 million to consolidated cost of services and cost of goods for the year ended December 31, 2022.
Telecom revenues for the year ended December 31, 2022, decreased by 2.3% to RUB 438,362 million from RUB 448,339 million for the year ended December 31, 2021. The decrease was driven by the dynamics in revenue from sales of handsets, accessories and software products by RUB 24,019 million, or 35.6% compared to the year ended December 31, 2021 caused by deficit of devices and accessories due to problems with supply chains. The growth in revenue from telecommunication services, including roaming and interconnect services, (by RUB 14,024 million) attributable to the growth in usage of voice and data tariffs by our subscribers.
Telecom cost of services and cost of goods for the year ended December 31, 2022, decreased by 8.7% to RUB 156,490 million from RUB 171,347 million for the year ended December 31, 2021. The decrease in Telecom cost of services and cost of goods is largely attributable to the decline in cost of handsets, accessories and software products by RUB 26,545 million, driven by the deficit of devices due to problems with supply chains. The decline was partly offset by the dynamics in cost of telecommunication services to RUB 116,432 million from RUB 106,121 million, or 8.9% in line with an increase of revenues from telecommunication services.
Fintech revenues increased by RUB 18,220 million and amounted to RUB 68,439 million for the year ended December 31, 2022 and RUB 50,315 million for the year ended December 31, 2021. Fintech revenues as a percentage of our total revenues represented 12.6% in 2022 and 9.5% in 2021 and its growth is mainly attributable to the increase in the amount of users and expansion of MTS Bank clients portfolio.
Fintech cost of services and cost of goods increased by RUB 9,925 million as a consequence of Fintech revenue growth and amounted to RUB 26,700 million for the year ended December 31, 2022 and RUB 16,775 million for the year ended December 31, 2021, representing 4.9% and 3.2% of our total revenues in 2022 and 2021 respectively.
Other countries and business activities revenues for the year ended December 31, 2022 increased by 18.1% or RUB 10,077 million to RUB 65,779 million as compared to RUB 55,702 million for the year ended December 31, 2021. The increase was mainly attributable to the increase in revenue of fixed-line infrastructure segment (including intercompany revenue), and the increase in revenue from pay-TV services.
Other countries and business activities cost of services and cost of goods for the year ended December 31, 2022 increased by 7.6% or RUB 2,146 million to RUB 30,451 million as compared to RUB 28,305 million for the year ended December 31, 2021. The increase was mainly attributable the increase in cost of services of fixed-line infrastructure segment.
101
Sundry operating expenses/(income)
Consolidated sundry operating expenses for the year ended December 31, 2022, increased by RUB 12,553 million in comparison with the previous year. We generated RUB 15,585 million expenses and RUB 3,032 million expenses for the year ended December 31, 2022 and 2021, respectively. These amounts comprised (2.9)% and (0.6)% as a percentage of consolidated revenue for the year ended December 31, 2022 and 2021, respectively. The increase of consolidated sundry operating expenses in 2022 compared to 2021 was attributable to higher MTS Bank reserves due to significant macroeconomic risks in Russia in the year ended December 31, 2022, compared to the year ended December 31, 2021.
Telecom sundry operating expenses for the year ended December 31, 2022, increased by 204.8% or RUB 3,090 million compared to the year ended December 31, 2021. We generated RUB 4,599 million and RUB 1,509 million expenses for the year ended December 31, 2022 and 2021, respectively. These expenses comprised 1% of Telecom revenues for the year ended December 31, 2022 and 0.3% for the year ended December 31, 2021. The Group decreased income from from sales of old copper cables in MGTS and increased losses from associates in 2022.
Fintech sundry operating expenses for the year ended December 31, 2022, increased by RUB 8,725 million to RUB 20,991 million from RUB 12,282 million for the year ended December 31, 2021. Sundry operating expenses as a percentage of banking service revenues increased to 34.5% for the year ended December 31, 2022, from 27.4% for the year ended December 31, 2021. Increase in Fintech sundry operating expenses was caused by the increase in allowance for expected credit losses (“ECL”) for the bank loans to customers related to the overall increase in loans to customers and impact of macroeconomic problems and sanctions.
Other countries and business activities sundry operating income for the year ended December 31, 2022, decreased by RUB 0,739 million compared to the year ended December 31, 2021. We recognized income of RUB 10,005 million for the year ended December 31, 2022 and RUB 10,744 million for the year ended December 31, 2021.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses for the year ended December 31, 2022, increased by RUB 13,367 million and amounted to RUB 109,401 million as compared to RUB 96,035 million for the year ended December 31, 2021 and comprised 20.2% and 18.2% as a percentage of consolidated revenues for the year ended December 31, 2022 and 2021, respectively, driven by the increase in salaries and social contributions, and advertising and marketing expenses.
Telecom selling, general and administrative expenses for the year ended December 31, 2022 increased by RUB 6,904 million to RUB 78,262 million, or 17.9% of Telecom revenue, from RUB 71,358 million, or 15.9% of Telecom revenue, for the year ended December 31, 2021 mainly due to the increase in payroll expenses for RUB 5,948 million.
Fintech selling, general and administrative expenses for the year ended December 31, 2022, increased by RUB 1,728 million, to RUB 14,393 million, or 21.0% of Fintech revenue, from RUB 12,665 million, or 25.2% of Fintech revenue for the year ended December 31, 2021, driven mainly by the increase in salaries and social contributions.
Other countries and business activities selling, general and administrative expenses for the year ended December 31, 2022, increased by RUB 4,153 million or 27.1% to RUB 17,833 million from RUB 13,679 million for the year ended December 31, 2021. Other countries and business activities selling, general and administrative expenses mainly increased due to the effect of an increase in payroll expenses and in advertising and marketing expenses.
Depreciation and amortization expenses
Consolidated depreciation and amortization of property, network equipment, customer base, license costs, right-of-use assets, and other intangible assets for the year ended December 31, 2022, increased by 3.1% to RUB 114,393 million from RUB 110,962 million for the year ended December 31, 2021.
Telecom depreciation and amortization for the year ended December 31, 2022, increased by 4.3% to RUB 105,505 million from RUB 101,112 million for the year ended December 31, 2021.
102
Fintech depreciation and amortization for the year ended December 31, 2022, amounted to RUB 2,266 million showing an increase compared to RUB 1,882 for the year ended December 31, 2021 mainly due to additions of new assets, in particular software.
Other countries and business activities depreciation and amortization for the year ended December 31, 2022, increased by 8.1% to RUB 14,784 million from RUB 13,672 million for the year ended December 31, 2021.
Operating profit
Consolidated operating profit decreased by RUB 8,568 million, or 4.8%, to RUB 109,437 million in the year ended December 31, 2022 from RUB 118,005 million in the year ended December 31, 2021. The decrease was mainly attributable to lower operating income from Telecom and Fintech partly offset by the increase in Other countries and business activities.
Telecom operating profit for the year ended December 31, 2022 decreased by RUB 9,507 million, or 9.2%, and totaled to RUB 93,506 million against RUB 103,013 million for the year ended 2021. The decrease was caused by the increase of payroll expenses and depreciation and amortization expenses partly offset by the decrease of sales of handsets which has a negative marginality.
Fintech operating profit for the year ended December 31, 2022 decreased by RUB 2,621 million, or 39.1%, and totaled to RUB 4,089 million against RUB 6,711 million for the year ended 2021. MTS Bank operating profit decreased as a percentage of MTS Bank revenue to 6.0% for the year ended December 31, 2022 from 13.3% for the year ended December 31, 2021. The decrease was caused by the increase in allowance for expected credit losses (“ECL”) for the bank loans to customers related to the overall increase in loans to customers and impact of macroeconomic problems and sanctions.
Other countries and business activities operating income for the year ended December 31, 2022, increased by RUB 3,561 million and totaled to RUB 11,842 million from RUB 8,281 million for the year ended December 31, 2021. The increase was mainly attributable to the increase in revenue of fixed-line infrastructure segment (including intercompany revenue), and the increase in revenue from pay-TV services.
Finance costs
Consolidated finance costs for the year ended December 31, 2022, increased by RUB 17,036 million, or 41.21%, to RUB 58,378 million from RUB 41,342 million for the year ended December 31, 2021. The increase was primarily attributable to the increase in total debt and an increase in interest rates due to the growth of Central Bank of Russia key rate since February 2022 till July 2022.
Non-operating share of the profit of associates and joint ventures
Non-operating share of the profit or loss of associates and joint ventures for the year ended December 31, 2022 increased slightly by RUB 28 million to an income of RUB 209 million compared to an income of RUB 181 million for the year ended December 31, 2021. The decrease is primarily attributable to the increase in profit of other individually insignificant associates in the year ended December 31, 2022.
103
Other non-operating expenses/(income), net
Consolidated other non-operating expenses for the year ended December 31, 2022, increased by RUB 2,516 million, to RUB 3,041 million from RUB 525 million for the year ended December 31, 2021. The income from our operations with derivatives increased by RUB 5,901 million, a loss of RUB 6,107 million compared to the loss of RUB 206 for the year ended December 31, 2021. The gain of RUB 3,956 million was mainly attributable to the weakening of the Russian ruble against the U.S. dollar and the euro since February 2022 till July 2022.
Provision for income taxes
Consolidated provision for income taxes for the year ended December 31, 2022 decreased by 11.1% to RUB 13,648 million from RUB 15,360 million for the year ended December 31, 2021 mainly due to the decrease in income before provision for income taxes for, partly offset by the increase in the effective tax rate. The effective tax rate increased to 27.3% in the year ended December 31, 2022, from 19.5% in the year ended December 31, 2021 mainly as a result of an increase in expenses not deductible for tax purposes, increase in the withholding tax on distributed and undistributed profits, and changes in fair value of derivative financial instruments.
Profit attributable to the non-controlling interest
Profit attributable to the non controlling interest for the year ended December 31, 2022 increased by RUB 65 million, or 8.2%, and amounted to RUB 861 million compared to profit attributable to the non-controlling interest of RUB 796 million for the year ended December 31, 2021. The increase was attributable to the overall increase in MGTS profit for the year.
Profit attributable to the Owners of the Company
Profit attributable to the Owners of the Company for the year ended December 31, 2022, decreased by RUB 30,899 million, or 48,7%, to RUB 32,574 million, compared to RUB 63,473 million for the year ended December 31, 2021. Profit as a percentage of revenues was 6.0% in the year ended December 31, 2022 and 12.0% in the year ended December 31, 2021.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenues and cost of services and cost of goods
Consolidated revenues for the year ended December 31, 2021, increased by RUB 39,47738,090 million, or 8.0%7.8%, to RUB 534,403527,921 million from RUB 494,926489,831 million for the year ended December 31, 2020. The principal reason for the growth was the large increase in revenue from telecommunication services (by RUB 20,67320,679 million) attributable to the usage of voice and data tariffs by our subscribers. This was mainly attributable to the increase in mobile internet penetration, an increase in usage of smartphones by our subscribers, active 3G and LTE network expansion and the consequent improvement of the quality and uptake of value-added services. The growth was also attributable to the growth in sales of handsets, accessories and software products by RUB 7,2475,855 million, or 10,4%9.1% compared to the year ended December 31, 2020. Revenue from financial services added to the overall increase of consolidated revenue as it grew by RUB 11,556 million to RUB 44,853 million in 2021 from 33,297 million in 2020. Our revenue remains partly offset by the dynamics in revenue from roaming services due to the COVID-19 pandemic. The revenue from roaming services in the year ended December 31, 2021 increased by RUB 1,291 million, or 15.0% compared to the year ended December 31, 2020, but remains below the level reached in in the year ended December 31, 2019.
Consolidated cost of services and cost of goods for the year ended December 31, 2021 increased by RUB 20,33119,011 million and amounted to RUB 205,756199,898 million as compared to RUB 185,425180,887 million for the year ended December 31, 2020 and comprised 38.5%37.9% and 37.5%36.9% as a percentage of consolidated revenues for the year ended December 31, 2021 and 2020, respectively. The increase was largely driven by the increase in the device market which led to the growth of handsets sales and the consequent increase in cost of handsets, accessories and software products by RUB 8,7627,704 million compared to the year ended December 31, 2020.
Telecom revenues for the year ended December 31, 2021, increased by 4.4% to RUB 448,313448,339 million from RUB 429,319 million for the year ended December 31, 2020. The increase in Telecom revenues in the year ended December 31, 2021, was primarily due to the growth in revenue from telecommunication services for RUB 13,16013,213 million which increased due to the active promotion of mobile only and convergent tariff plans, significant volume of Internet traffic included, and constant quality improvement of services provided, added with effect from acquisitions. The increase in device market led to the growth of handsets, accessories and software sales of Telecom by RUB 5,835 million compared to the year ended December 31, 2020.
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Telecom cost of services and cost of goods for the year ended December 31, 2021, increased by 9.1% to RUB 171,315171,347 million from RUB 157,012 million for the year ended December 31, 2020. The increase in Telecom cost of services and cost of goods is largely attributable to the increase in cost of handsets, accessories and software products by RUB 7,843 million, driven by the growth in sales and shifting brand mix in device sales. Companies acquired in 2021 have contributed RUB 2,947 million to the increase in Telecom cost of services and cost of goods.
Fintech revenues increased by RUB 13,38513,544 million and amounted to RUB 49,60750,315 million for the year ended December 31, 2021 and RUB 36,22236,771 million for the year ended December 31, 2020. Fintech revenues as a percentage of our total revenues represented 9.3%9.5% in 2021 and 7.3%7.5% in 2020 and its growth is mainly attributable to the increase in the amount of users and expansion of MTS Bank clients portfolio.
Fintech cost of services and cost of goods increased by RUB 2,6562,671 million and amounted to RUB 16,28416,775 million for the year ended December 31, 2021 and RUB 13,62814,104 million for the year ended December 31, 2020, representing 3.0%3.2% and 2.8%2.9% of our total revenues in 2021 and 2020 respectively.respectively, and its growth is mainly attributable to the increase in the amount of users and expansion of MTS Bank clients portfolio.
Other countries and business activities revenues for the year ended December 31, 2021 increased by 27.9%28.2% or RUB 13,69212,252 million to RUB 62,82455,702 million as compared to RUB 49,13243,450 million for the year ended December 31, 2020. The increase was mainly attributable to the increase in sales of software products, the increase in revenue of fixed-line infrastructure segment (including intercompany revenue), and the increase in revenue from pay-TV services.
Other countries and business activities cost of goods for the year ended December 31, 2021 increased by 32.1%33.2% or RUB 8,4247,055 million to RUB 34,69828,317 million as compared to RUB 26,27421,262 million for the year ended December 31, 2020. The increase was mainly attributable to the increase in cost of goods for software products and the increase in cost of services of fixed-line infrastructure segment.
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Sundry operating expenses/(income)
Consolidated sundry operating expensesfor the year ended December 31, 2021, decreased by RUB 5,3505,359 million in comparison with the previous year. We generated RUB 3,0413,031 million expenses and RUB 8,390 million expenses for the year ended December 31, 2021 and 2020, respectively. These amounts comprised (0.6)% and (1.7)% as a percentage of consolidated revenue for the year ended December 31, 2021 and 2020, respectively. The decrease of consolidated sundry operating expenses in 2021 compared to 2020 was attributed to a number of reasons presented below, the main of which was the absence of of goodwill and long-lived assets impairment of other business activities for the year ended December 31, 2021, compared to the year ended December 31, 2020.
Telecom sundry operating expenses for the year ended December 31, 2021, decreased by 51.8% or RUB 1,169 million compared to the year ended December 31, 2020. We generated RUB 1,509 million and RUB 3,128 million expenses for the year ended December 31, 2021 and 2020, respectively. These expenses comprised 0.3% of Telecom revenues for the year ended December 31, 2021 and 0.7% for the year ended December 31, 2020. As of the acquisition date in April 2021 the Group remeasured the previously held equity interest in Achemar Holdings Limited from RUB 1,166 million to fair value of RUB 1,582 million and recognized the resulting gain of RUB 416 million in the operating share of the profit of the associates and joint ventures in the accompanying consolidated statement of profit or loss. Please see Note 16 to the consolidated financial statements for the details of the acquisition.
Fintech sundry operating expenses for the year ended December 31, 2021, increased by RUB 2,2662,157 million to RUB 12,26612,286 million from RUB 10,00110,125 million for the year ended December 31, 2020. Sundry operating expenses as a percentage of banking service revenues decreased to 24.7% for the year ended December 31, 2021, from 27.6%27.5% for the year ended December 31, 2020. Increase in Fintech sundry operating expenses was caused by the increase in allowance for expected credit losses (“ECL”) for the bank loans to customers related to the overall increase in loans to customers and impact of COVID-19.
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Other countries and business activities sundry operating income for the year ended December 31, 2021, increased by RUB 5,9555,900 million compared to the year ended December 31, 2020. We recognized income of RUB 10,96910,759 million for the year ended December 31, 2021 and RUB 5,0144,859 million for the year ended December 31, 2020. The increase is mainly due to decrease in ECL provision and the absence of goodwill and long-lived assets impairment of other business activities for the year ended December 31, 2021, compared to the year ended December 31, 2020, due to the partial recovery from the COVID-19 pamdemicpandemic (see also Note 22 to our audited consolidated financial statements).
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses for the year ended December 31, 2021, increased by RUB 8,2578,233 million and amounted to RUB 96,23996,035 million as compared to RUB 87,89387,802 million for the year ended December 31, 2020 and comprised 18.0%18.2% and 17.8%17.9% as a percentage of consolidated revenues for the year ended December 31, 2021 and 2020, respectively, driven by the increase in salaries and social contributions, and advertising and marketing expenses.
Telecom selling, general and administrative expenses for the year ended December 31, 2021 increased by RUB 3,0283,091 million to RUB 71,29671,358 million, or 21.5%15.9% of Telecom revenue, from RUB 68,267 million, or 20.5%15.9% of Telecom revenue, for the year ended December 31, 2020 mainly due to the increase in payroll expenses for RUB 1,135 million and in advertising and marketing expenses for RUB 1,084 million.
Fintech selling, general and administrative expenses for the year ended December 31, 2021, increased by RUB 3,4913,478 million, to RUB 12,22212,665 million, or 24.6%25.2% of Fintech revenue, from RUB 8,7319,187 million, or 24.1%25.0% of Fintech revenue for the year ended December 31, 2020, driven partially by the increase in salaries and social contributions.
Other countries and business activities selling, general and administrative expenses for the year ended December 31, 2021, increased by RUB 2,5212,448 million or 21.3%21.8% to RUB 14,37813,679 million from RUB 11,86511,231 million for the year ended December 31, 2020. Other countries and business activities selling, general and administrative expenses mainly increased due to the effect of an increase in payroll expenses and in advertising and marketing expenses.
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Depreciation and amortization expenses
Consolidated depreciation and amortization of property, network equipment, customer base, license costs, right of useright-of-use assets, and other intangible assets for the year ended December 31, 2021, increased by 10.8% to RUB 111,088110,962 million from RUB 100,234100,143 million for the year ended December 31, 2020.
Telecom depreciation and amortization for the year ended December 31, 2021, increased by 11.1%11.3% to RUB 100,988101,112 million from RUB 90,871 million for the year ended December 31, 2020 mainly due to additions of new assets.
Fintech depreciation and amortization for the year ended December 31, 2021, amounted to RUB 1,7831,882 million showing an increase as compared to RUB 1,2481,286 for the year ended December 31, 2020 mainly due to additions of new assets, in particular software.2020.
Other countries and business activities depreciation and amortization for the year ended December 31, 2021, increased by 9.2%7.6% to RUB 14,01913,672 million from RUB 12,83612,707 million for the year ended December 31, 2020.
Operating profit
Consolidated operating profitincreased by RUB 5,3835,402 million, or 4.8%, to RUB 118,279118,005 million in the year ended December 31, 2021 from RUB 112,896112,603 million in the year ended December 31, 2020. The increase was mainly attributable to higher operating income from Fintech and Other countries and business activities partly offset by the decrease in Telecom operating profit.
Telecom operatingprofit for the year ended December 31, 2021 decreased by RUB 6,8337,028 million, or 6.2%6.4%, and totaled to RUB 103,206103,013 million against RUB 10,040110,041 million for the year ended 2020. The decrease was mainly attributable to the increase in Telecom cost of services and cost of goods attributable to the increase of cost of handsets, accessories and software products by RUB 7,843 million, driven by the gowth in sales and shifting brand mix in device sales and an increase in depreciation due to additions of intangible and fixed assets.
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Fintech operating profit for the year ended December 31, 2021 increased by RUB 4,4384,642 million, or 169.8%224.2%, and totaled to RUB 7,0516,711 million against RUB 2,6142,069 million for the year ended 2020. MTS Bank operating profit increased as a percentage of MTS Bank revenue to 14.2%13.3% for the year ended December 31, 2021 from 7.2%5.6% for the year ended December 31, 2020. The increase was caused by an increase in revenues attributable to the amount of users and expansion of MTS Bank clients portfolio.
Other countries and business activities operating income for the year ended December 31, 2021, increased by RUB 7,5197,788 million or 237.2%, and totaled to RUB 10,6898,281 million from RUB 3,170493 million for the year ended December 31, 2020 due to the absence of the impairment charges for goodwill and long-lived assets in the financial year 2021, and due to the increase in cost of goods for software products and the increase in cost of services of the fixed-line infrastructure segment.
Finance costs
Consolidated finance costsfor the year endedesssnded December 31, 2021, decreased by RUB 732736 million, or 1.74%1.75%, to RUB 41,35241,342 million from RUB 42,08442,078 million for the year ended December 31, 2020. The decrease was primarily attributable to the effect of the derecognition and modification of debt agreements (RUB 1,151 million), the decrease in interests on lease obligations (RUB 457 million) and the effect of our operations with derivatives. The decrease was partly compensated by an increase in total debt and an increase in interest rates due to the growth of Central Bank of Russia key rate (RUB 1,258 million).
Non-operating share of the profit of associates and joint ventures
Non-operating share of the profit or loss of associates and joint ventures for the year ended December 31, 2021 decreased slightly by RUB 91 million to an income of RUB 181 million compared to an income of RUB 273 million for the year ended December 31, 2020. The decrease is primarily attributable to the decrease in profit of other individually insignificant associates in the year ended December 31, 2021.
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Other non-operating expenses/(income), net
Consolidated other non-operating expenses for the year ended December 31, 2021, was RUB 424525 million, compared to an income of 3,0643,097 million for the year ended December 31, 2020. The income from our operations with derivatives decreased by RUB 15,595 million, a loss of RUB 206 million compared to the income of RUB 15,389 for the year ended December 31, 2020. The decrease in a net forex exchange loss by RUB 9,8209,795 million to a loss of RUB 560552 million compared to the loss of RUB 10,38010,347 million for the year ended December 31, 2020 was mainly attributable to the strengthening of the Russian ruble against the U.S. dollar and the euro during the year ended December 31, 2021.
Provision for income taxes
Consolidated provision for income taxes for the year ended December 31, 2021 decreased by 4.5%4.3% to RUB 15,40315,360 million from RUB 16,12616,055 million for the year ended December 31, 2020 mainly due to the decrease in the effective tax rate, partly offset by the increase in income before provision for income taxes. The effective tax rate decreased to 19.4%19.5% in the year ended December 31, 2021, from 20.8% in the year ended December 31, 2020 mainly as a result of a change in the recognition of deferred tax assets, prior period tax effects, and a decrease in expenses not deductible for tax purposes.
Profit attributable to the non-controlling interest
Profit attributable to the non controlling interestfor the year ended December 31, 2021 increased by RUB 135 million, or 20.4%, and amounted to RUB 796 million compared to profit attributable to the non-controlling interest of RUB 661 million for the year ended December 31, 2020. The increase was attributable to the overall increase in MGTS profit for the year.
Profit attributable to the Owners of the Company
Profit attributable to the Owners of the Company for the year ended December 31, 2021, increased by RUB 2,061 million, or 3.3%, to RUB 63,473 million, compared to RUB 61,412 million for the year ended December 31, 2020. Profit as a percentage of revenues was 11.9% in the year ended December 31, 2021 and 12.4% in the year ended December 31, 2020.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues and cost of services and cost of goods
Consolidated revenues for the year ended December 31, 2020, increased by RUB 24,321 million, or 5.2%, to RUB 494,926 million from RUB 470,605 million for the year ended December 31, 2019. The principal reason for the growth was the large increase in revenue from telecommunication services (by RUB 14,985 million) attributable to the usage of voice and data tariffs by our subscribers. This was mainly attributable to the increase in mobile internet penetration, an increase in usage of smartphones by our subscribers, active 3G and LTE network expansion and the consequent improvement of the quality and uptake of value-added services. The growth was also attributable to an increase in in the volume of interconnect traffic consumed by the operators and growth in sales of handsets, accessories and software products by RUB 5,351 million, or 8,3%. Revenue from financial services added to the overall increase of consolidated revenue as it grew by RUB 3,985 million to RUB 33,297 million in 2020 from 29,312 in 2019. The increase of revenues for the year ended December 31, 2020 was partly offset by a decrease in revenue from roaming services by RUB 7,418 million which was attributable to the COVID-19 pandemic.
Consolidated cost of services and cost of goods for the year ended December 31, 2020 increased by RUB 12,496 million and amounted to RUB 185,425 million as compared to RUB 172,929 million for the year ended December 31, 2020 and comprised 37.5% and 36.7% as a percentage of consolidated revenues for the year ended December 31, 2020 and 2019, respectively. The increase in the consolidated cost of services and cost of goods for the year ended December 31, 2020 was supported by the growth in interconnect and line rental expenses by RUB 6,184 million due to an increase in the volume of traffic. Tremendous increase in device market led to the growth of handsets sales and the consequent increase in cost of handsets, accessories and software products by RUB 4,610 million.
Telecom revenues for the year ended December 31, 2020, increased by 9.8% to RUB 429,319 million from RUB 391,104 million for the year ended December 31, 2019. The increase in Telecom revenues in the year ended December 31, 2020, was primarily due to the growth in revenue from telecommunication services (RUB 16,039 million) which increased due to active promotion of
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mobile only and convergent tariff plans, significant volume of Internet traffic included and the constant quality improvement of services provided. Interconnect revenue increased by RUB 5,017 million, and it was driven by the growth in volume of incoming traffic. Telecom revenues were also impacted by reallocation of subscribers to “MGTS Commercial” segment, comprising part of Telecom operations.
The decrease of our revenues from roaming fees of own subscribers by RUB 7,462 million in the year ended December 31, 2020 was due to the COVID-19 pandemic.
The increase in device market led to the growth of handsets, accessories and software sales of Telecom by RUB 3,825 million.
Telecom cost of services and cost of goods for the year ended December 31, 2020, increased by 7.8% to RUB 157,012 million from RUB 145,601 million for the year ended December 31, 2019. The increase in Telecom cost of services and cost of goods is attributable to the growth in interconnect and line rental expenses by RUB 5,404 million due to an increase in the volume of traffic and an increase in network maintenance expenses by RUB 1,067 million.
The overall increase in Telecom cost of services and cost of goods was partly offset by a decrease in roaming expenses by RUB 1,979 million which was caused by the COVID-19 pandemic.
The increase in device market led to the growth of handsets, accessories and software sales of Telecom and consequent increase of cost of sales by RUB 3,908 million.
Fintech revenues increased by RUB 5,037 million and amounted to RUB 36,222 million for the year ended December 31, 2020 and RUB 31,185 million for the year ended December 31, 2019. Fintech revenues as a percentage of our total revenues represented 7.3% in 2020 and 6.6% in 2019. The growth of Fintech revenue is mainly attributable to the increase in the amount of users and expansion of MTS Bank clients portfolio.
Fintech cost of services increased by RUB 96 million and amounted to RUB 13,842 million for the year ended December 31, 2020 and RUB 13,746 million for the year ended December 31, 2019. Cost of Fintech services as a percentage of our total revenues represented 2.8% in 2020 and 2.9% in 2019.
Other countries and business activities revenues for the year ended December 31, 2020 as compared to the year ended December 31, 2019 decreased by RUB 22,441 million and amounted to RUB 49,132 million and RUB 71,573 million, respectively, mainly also impacted by reallocation of subscribers to “MGTS Commercial” segment, comprising part of Telecom operations.
Other countries and business activities cost of goods for the year ended December 31, 2020 as compared to the year ended December 31, 2019 remained relatively stable and amounted to RUB 26,226 million and RUB 29,776 million, respectively.
Sundry operating expenses/(income)
Consolidated sundry operating expenses for the year ended December 31, 2020, increased by RUB 10,395 million in comparison with the previous year. We generated RUB 6,368 million expenses and RUB 4,027 million income for the year ended December 31, 2020 and 2019, respectively. These amounts comprised (1.3)% and 0.9% as a percentage of consolidated revenue for the year ended December 31, 2020 and 2019, respectively. The increase of consolidated sundry operating expenses in 2020 compared to 2019 was attributed to a number of reasons presented below, the main of which was the increase in MTS Bank allowance of expected credit losses (ECL) due to the COVID-19 pandemic.
Telecom sundry operating expenses for the year ended December 31, 2020, decreased slightly by 1.7% or RUB 55 million compared to the year ended December 31, 2019. We generated RUB 3,128 million and RUB 3,183 million expenses for the year ended December 31, 2020 and 2019, respectively. These expenses comprised 0.7% and 0,8% of Telecom revenues for the year ended December 31, 2020 and 2019, respectively.
Fintech sundry operating expenses for the year ended December 31, 2020, increased by RUB 5,999 million to RUB 10,001 million from RUB 4,002 million for the year ended December 31, 2019. Sundry operating expenses as a percentage of fintech revenues increased to 27.6% for the year ended December 31, 2020, from 12.8% for the year ended December 31, 2019. Such a
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significant increase in Fintech sundry operating expenses was caused by the increase in impairment loss of financial assets (bank deposits and loans to customers) related to the COVID-19 pandemic.
Other countries and business activities sundry operating income for the year ended December 31, 2020, decreased by RUB 6,246 million compared to the year ended December 31, 2019. We recognized income of RUB 5,014 million for the year ended December 31, 2020 and RUB 11,260 million for the year ended December 31, 2019. The decrease was mainly due to growth of expenses due to the expansion of our business and the gain recognized as a result of the sale of fixed assets and leaseback in 2019.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses for the year ended December 31, 2020, decreased by RUB 1,950 million and amounted to RUB 87,893 million as compared to RUB 89,933 million for the year ended December 31, 2019 and comprised 17.8% and 19.1% as a percentage of consolidated revenues for the year ended December 31, 2020 and 2019, respectively.
Telecom selling, general and administrative expenses for the year ended December 31, 2020 decreased slightly by RUB 42 million to RUB 68,267 million, or 15.9% of Telecom revenue, from RUB 68,309 million, or 17.5% of Telecom revenue, for the year ended December 31, 2019 mainly due to savings related to retail operations during the COVID-19 pandemic.
Fintech selling, general and administrative expenses for the year ended December 31, 2020, decreased slightly by RUB 133 million, to RUB 8,731 million, or 24.1% of Fintech revenue, from RUB 8,864 million, or 28.4% of Fintech revenue for the year ended December 31, 2019.
Other countries and business activities selling, general and administrative expenses for the year ended December 31, 2020, decreased by RUB 1,989 million or 13.8% to RUB 11,865 million from RUB 13,763 million for the year ended December 31, 2019.
Depreciation and amortization expenses
Consolidated depreciation and amortization of property, network equipment, customer base, license costs, right-of-use assets, and other intangible assets for the year ended December 31, 2020, increased by 4.2% to RUB 100,234 million from RUB 96,195 million for the year ended December 31, 2019.
Telecom depreciation and amortization for the year ended December 31, 2020, increased by 6.5% to RUB 90,871 million from RUB 85,332 million for the year ended December 31, 2019 mainly due to additions of new assets.
Fintech depreciation and amortization for the year ended December 31, 2020, amounted to RUB 1,248 million showing an increase of 15.4% as compared to RUB 1,082 for the year ended December 31, 2019.
Other countries and business activities depreciation and amortization for the year ended December 31, 2020, decreased slightly by 2.7% to RUB 12,836 million from RUB 13,192 million for the year ended December 31, 2019.
Operating profit
Consolidated operating profit decreased by RUB 2,684 million, or 2.3%, to RUB 112,893 million in the year December 31, 2020 from RUB 115,577 million in the year ended December 31, 2019. The decrease was mainly attributable to lower income from Russia convergent, Moscow fixed line and MTS Bank as well as a decrease of other countries and business activities operating loss.
Telecom operatingprofit for the year ended December 31, 2020 increased by RUB 21,361 million, or 24.1%, and totaled to RUB 110,040 million against RUB 88,678 million for the year ended 2019. Telecom operating profit grew as a percentage of Telecom revenues to 25.6% for the year ended December 31, 2020, from 22.7% for the year ended December 31, 2019. The increase was mainly attributable to the growth in revenue from telecommunication services which increased due to active promotion of mobile only and convergent tariff plans, significant volume of Internet traffic included and the constant quality improvement of services provided, also impacted by reallocation of subscribers to “MGTS Commercial” segment, comprising part of Telecom operations.
Fintech operating profit for the year ended December 31, 2020 decreased by RUB 879 million, or 25.2%, and totaled to RUB 2,614 million against RUB 3,492 million for the year ended 2019. Fintech operating profit decreased as a percentage of Fintech
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revenue to 7.2% for the year ended December 31, 2020 from 11.2% for the the year ended December 31, 2019. The decrease was caused by the increase in impairment loss of financial assets (bank deposits and loans to customers) related to the COVID-19 pandemic.
Other countries and business activities operating loss for the year ended December 31, 2020, decreased by RUB 23,029 million, or 87.9%, and totaled to RUB 3,170 million from RUB 26,199 million for the year ended December 31, 2019. The decrease was partly attributable to the gain recognized in the previous year ended December 31, 2019 as a result of the sale of fixed assets and leaseback and several cost optimization initiatives. The decrease was also attributable to the reallocation of subscribers to “MGTS Commercial” segment, comprising part of Telecom operations.
Currency exchange and transaction gains/losses
Consolidated currency exchange and transaction loss for the year ended December 31, 2020, was RUB 10,380 million, compared to a gain of 5,266 million for the year ended December 31, 2019. The loss recognized in the year ended December, 31 2020 was mainly attributable to the appreciation of the Russian ruble against U.S. dollar and euro during the year ended December 31, 2020.
Finance costs
Consolidated finance costs for the year ended December 31, 2020, decreased by RUB 5,282 million, or 11.2%, to RUB 42,084 million from RUB 47,366 million for the year ended December 31, 2019. The decrease was primarily attributable to effect arisen on the derecognition of debt agreements (RUB 2,220 million), improved loan terms and decreased Central Bank of Russia key rate (RUB 1,930 million).
Non-operating share of the profit of associates and joint ventures
Non-operating share of the profit or loss of associates and joint ventures for the year ended December 31, 2020 decreased by RUB 3,223 million to an income of RUB 273 million compared to an income of RUB 3,496 million for the year ended December 31, 2019. The decrease is primarily attributable to the gain on sale of equity investment in OZON of RUB 3,837 million recognized in 2019 and the increase in profit of other individually insignificant associates in the year ended December 31, 2020.
Other expenses (income), net
Consolidated other expenses for the year ended December 31, 2020 decreased to RUB 553 million, as compared to the expense of RUB 2,449 million for the year ended December 31, 2019 due to a decrease of the realized exchange differences of MTS Bank in the year ended December, 31, 2020.
Provision for income taxes
Consolidated provision for income taxes for the year ended December 31, 2020 increased by 2.9% to RUB 16,126 million from RUB 15,667 million for the year ended December 31, 2019 mainly due to an increase in income before provision for income taxes, partly offset by a decrease in the effective tax rate. The effective tax rate decreased to 20.8% in the year ended December 31, 2020, from 23.0% in the year ended December 31, 2019 mainly as a result of a change in income tax rates of subsidiaries (decrease of income tax rate to 18% from 20% in Armenia), prior period tax effects, a decrease in withholding tax on distributed profits from subsidiaries (decrease of tax rate on dividends to 0% in Armenia) and a decrease in expenses not deductible for tax purposes.
Profit attributable to the non-controlling interest
Profit attributable to the non controlling interest for the year ended December 31, 2020 decreased by RUB 197 million, or 23.0%, and amounted to RUB 661 million compared to profit attributable to the non-controlling interest of RUB 858 million for the year ended December 31, 2019. The decrease was caused by the overall decrease of MGTS net income.
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Profit attributable to the Owners of the Company
Profit attributable to the Owners of the Company for the year ended December 31, 2020,2021, increased by RUB 7,1712,061 million, or 13.2%3.4%, to RUB 61,41263,473 million, compared to RUB 54,24161,412 million for the year ended December 31, 2019.2020. Profit as a percentage of revenues was 12.4%12.0% in the year ended December 31, 2020,2021 and 11.4%12.5% in the year ended December 31, 2019. The increase was mainly caused by the other non-operating income arising on derivatives in the amount2020.
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B. | Liquidity and Capital Resources |
Our borrowings consist of notes and bank loans. Our bank loans consist of ruble-denominatedruble- denominated borrowings totaling approximately RUB 270.1290.2 billion as of December 31, 2021.2022. We repaid approximately RUB 36.4119.2 billion of indebtedness in 2021.2022. As of December 31, 2021,2022, the total amount available to us under our credit facilities amounted to RUB 207.3206.1 billion. We had total indebtedness of approximately RUB 616.6629.6 billion as of December 31, 2021,2022, including lease obligations, compared to approximately RUB 580.1616.6 billion as of December 31, 2020.2021. Our total finance costs for the years ended December 31, 2022, 2021 2020 and 2019,2020, were RUB 41,35258,378 million, RUB 42,08441,342 million and RUB 47,36642,078 million, net of amounts of interest capitalized, respectively. See Note 98 to our audited consolidated financial statements for a description of our finance costs.
Capital Requirements
We need capital to finance the following:
● | capital expenditures, consisting of purchases of property, plant and equipment and intangible assets; |
● | acquisitions; |
● | repayment of debt and related interest payments; |
● | changes in working capital; and |
● | general corporate activities, including dividends. |
We anticipate that capital expenditures, acquisitions, repayment of long-term debt and dividends will represent the most significant uses of funds for several years to come.
Our cash outlays for capital expenditures for the years ended December 31, 2022, 2021 and 2020 and 2019 were RUB 112,581 million, RUB 111,683 million and RUB 97,838 million, and RUB 91,736 million, respectively. We plan to finance our capital expenditures primarily through operating cash flows, and to the extent necessary, through additional external financing. Historically, a significant portion of our capital expenditures has been related to the installation and build out of our network and expansion into new license areas. In 20222023 we plan on spending for further network expansion, special projects relating to the development of big data, media, artificial intelligence and ecosystem products, fixed network modernization, further construction of radio subsystem and additional storage, processing and indexing centers to comply with requirements of “Yarovaya Ozerov bundle of laws,” maintenance capital expenditures, construction of new sites and purchase of software for network managing in Armenia and other initiatives. As the business scale grew, weMTS increased investment until 2021 and planfrom 2022 started plans to stabilize ourits capital expenditures and change investments structure starting from 2022 by focusing on the building theof its ecosystem and digital products. We plan to finance our capital expenditures primarily through operating cash flows, and to the extent necessary, through additional external financing. The actual amount of our capital expenditures for 20222023 may vary depending on subscriber growth, demand and network development, as well as currency volatility, vendor terms and the availability of external financing. Additionally, the recent geopolitical events and any future developments thereto may adversely impact our actual capital expenditures for 2022 as a significant portion of such expenditures are denominated in or linked to foreign currencies. Please see also “Item 3. Key Information—D. Risk Factors— “Ruble volatility and regulatory changes in foreign currency regulation could increase our costs, decrease our available funds or make it more difficult for us to comply with financial covenants and to repay our debts and would affect the value of dividends received by holders of ADSs”shares” and “Item 3. Key Information—D. Risk Factors— “Futher“Further deterioration in relations between Russia and states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesgeopolitical situation and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations, prospects and the value of our sharesshares”.
Geopolitical and ADSs”economic volatility may have an impact on our cash flows, liquidity, capital resources, cash requirements, financial position.
We cannot assess the probability and amount of potential impacts at the moment.
Throughout 2020 to 2022, we completed various acquisitions. For details on these, please see “Item 4—Information on our Company—A. History and Development”.
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In February 2019, we increased our ownership in MTS Bank to 94.97% and later in December 2019 we acquired an additional 4.46% stake for RUB 1.4 billion. As a result of these transactions, MTS’ effective share in MTS Bank increased to 99.9% (including a 0.2% share in the bank held by our subsidiary PJSC MGTS and MTS Bank’s ownership of its own treasury shares).
In June 2019, the Group acquired a 97.4% ownership interest in JSC RIKT (“RIKT”), a fixed-line operator in the Kemerovo region, for cash consideration of RUB 360 million. This acquisition allowed the Group to increase its market share in the Kemerovo region. In September 2019, the Group finalized the mandatory share repurchase from minority shareholders of RIKT and increased its share in RIKT to 100%. In April 2019, the Group acquired JSC Objedinennye Russkie Kinostudii (“Kinopolis”) from Business-Nedvizhimost, a subsidiary of Sistema, for total consideration of RUB 2,042 million. Kinopolis owns fully equipped movie complex in Saint Petersburg. Acquisition of Kinopolis enabled the Group to develop its own entertainment content.
In August 2019, the Group acquired Narodnoje property complex from Sistema for total consideration of RUB 329 million. The property complex comprised office facilities leased by the Group and hostel premises leased by a third party and operated under a management agreement with Business-Nedvizhimost, a subsidiary of Sistema. The acquisition enabled the Group to optimize its rental expenses and enhance its investment property portfolio. In November 2019, we acquired a 7.5% stake in JUST AI Limited, an IT-company specialized in artificial intelligence technologies, machine learning and natural language processing. In December 2019, we acquired a 15.01% stake in SWIPGLOBAL Ltd, an IT-company specialized in face recognition payment without using a smartphone or QR code. Both acquisitions are part of our CLV 2.0 strategy.
In February 2020, we purchased 51% stake in each of Achemar Holdings Limited and Clarkia Holdings Limited, the owners of the operational companies of “Zelenaya Tochka” Group, a fixed-line operator in multiple regions of Russia for RUB 1,370 million. The purchase of this stake was accounted as investment in joint venture, with a call and put option arrangement existing over another 49% of shares.
In June 2020, the Group acquired a 100% ownership interest in LLC “Stopol Auto” and LLC “Koagent Rus” (jointly referred as “Stopol”), wholesalers of auto parts and multimedia devices. The purchase price constituted a cash payment of RUB 312 million paid in July 2020 and contingent consideration. This acquisition allowed the Group to enter into the market of the smart multimedia systems for cars.
In April 2021, the Group increased its stake in Achemar Holdings Limited, owner of the operational companies of “Zelenaya Tochka” Group, to 100% and obtained control over the entity to expand its regional footprint. The “Zelenaya Tochka” Group includes fixed-line operators in Stavropol and Tambov regions. The purchase price constituted a cash payment of RUB 1,512 million paid in April 2021 and deferred payment of RUB 7 million.
In April 2021, the Group acquired a 100% ownership interest in LLC “Credit Consulting”, a credit broker. The purchase price comprised a cash payment of RUB 10 thousand paid in May 2021 and contingent consideration at fair value of RUB 60 million, payable in 5-year period based on operating performance targets.
In June 2021, the Group acquired a 100% ownership interest in OJSC “Multiregional TransitTelecom” (“MTT”), a provider of intelligent connectivity solutions for businesses, to expand its connectivity services portfolio The purchase price included a cash payment of RUB 3,680 million paid in June 2021, transfer of receivables from former owners offset against the purchase price for RUB 1,958 million and deferred payment of RUB 160 million.
In June 2021, the Group acquired a 100% ownership interest in LLC “GDTs Energy Group” (“GreenBush”), the operator of the GreenBush data center in Tehnopolis special economic area, to use the facility’s additional capacity to offer colocation and cloud solutions to customers as well as to facilitate the Group’s own compute and storage needs. The purchase price comprised a cash payment of RUB 5,200 million paid in July 2021.
In September 2021, in addition to the previously held 30% stake, the Group acquired a 70% stake in the investment services company Sistema Capital from subsidiaries of Sistema, for total consideration of RUB 3,500 million. The acquisition of Sistema Capital enabled the Group to enhance its retail financial services portfolio, adding a comprehensive set of investment services.
We have also used cash provided by operating activities as well as external credit facilities to finance our capital expenditures. We plan to finance future acquisitions through operating cash flows and additional borrowings. We may continue to
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expand our business through acquisitions. Our cash requirements relating to potential acquisitions can vary significantly based on market opportunities.
We expect to refinance our existing debt when it becomes due. For scheduled maturities of debt principal outstanding as of December 31, 20212022 see Note 2423 of our audited consolidated financial statements. We generally use the proceeds from our financing activities for our corporate purposes and refinancing existing indebtedness.
On March 21, 2019, ourThe Group continues to include dividend payments as part of its commitment to maximizing shareholder value. Decisions on dividends are proposed by the Board of Directors approvedand voted upon thereafter at a new dividend policy which sets a minimum payoutGeneral Meeting of RUB 28.0 per ordinary MTS share (RUB 56.0 per ADS) per calendar year.Shareholders. In determining actual dividendsthe Company’s dividend payout, we will considerthe Board of Directors considers a number of factors, including cash flow from operations, capital expenditures, and the Group’s debt position. The policy covered 2019 - 2021. Payments will continue to be made on a semi-annual basis.
The Group may take decisions on the dividend payout based not only on annual results but also on interim results for three, six or nine months of the fiscal year. Annual and interim dividend payments, if any, must be recommended by the Board of Directors and approved by the shareholders. A new dividend policy has not been adopted yet.
We anticipate that any dividends we may pay in the future on the shares represented by the ADSs will be declared and paid to the depositary in rubles and will be converted into U.S. dollars by the depositary and distributed to holders of ADSs, net of the depositary’s fees, expenses, and applicable tax withholding. Accordingly, the value of dividends received by holders of ADSs will be subject to fluctuations in the exchange rate between the ruble and the dollar. Please see also “Item 3. Key Information—D. Risk Factors—Political and Social Risks—Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countries and sanctions imposed as a result thereof, could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs” for the risks related to the value and recoverability of dividends by holders of ADSs.
In accordance with Russian laws, earnings available for dividends are limited to profits determined under Russian statutory accounting regulations,Accounting Standards (RAS), denominated in Russian Rubles, after certain deductions.
The following table summarizes the Group’s declared cash dividends for the years ended December 31, 2022, 2021 and 2020:
| | | | | | |
|
| 2022 |
| 2021 |
| 2020 |
Dividends declared (including dividends on treasury shares of 9,318, 12,082 and 6,936 respectively) |
| 66,334 |
| 74,049 |
| 58,948 |
Dividends, RUB per ADS |
| 67.70 |
| 74.12 |
| 59.00 |
Dividends, RUB per share |
| 33.85 |
| 37.06 |
| 29.50 |
The conflict between Russia and Ukraine, and the consequential actions by the EU, US, UK and certain other countries, have resulted in restrictions on our ability to pay dividends. For more information, see “—A. Operating Results—Certain Factors Affecting our Financial Position and Results of Operations—Potential adverse effects of economic volatility and sanctions in Russia”.
As of December 31, 2022, 2021 2020 and 20192020 dividends payable were RUB 6816,591 million, RUB 10868 million and RUB 23.1108 million, respectively, and were included in trade and other payables within the consolidated statement of financial position.
We generally intend to finance our dividend requirements through operating cash flows, and accordingly, our payment of dividends may make us more reliant on external sources of capital to finance our capital expenditures and acquisitions.
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Capital Resources
We plan to finance our capital requirements through a mix of operating cash flows and financing activities, as described above. Our major sources of cash have been cash provided by operations and the proceeds of our ruble-denominated note issuances and loans. We expect that these sources will continue to be our principal sources of cash in the future.
The availability of financing is influenced by many factors, including our profitability, operating cash flows, debt levels, credit ratings, contractual restrictions and market conditions. We cannot assure you that we will be able to continue to obtain large amounts of financing in the future through debt or equity offerings, bank financings or otherwise.
As of December 31, 2021, our outstanding indebtedness consistedThe Group’s borrowings represent interest bearing bank loans and bonds issued in the capital markets. Borrowings are initially recorded at fair value plus transaction costs that are directly attributable to the issue of the following notesfinancial liability and bank loans:
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Notessubsequently measured at amortized cost, using the effective interest rate method.
As of December 31, 2021, our outstanding notes consisted of the following:
| | | | | | |
| | | | Interest rate (actual | | |
| | | | at December 31, | | |
|
| Currency |
| 2021) |
| December 31, 2021 |
MTS International Notes due 2023 | | USD | | 5.00 | % | 33,291 |
MTS PJSC Notes due 2022 | | RUB | | 7.70 | % | 14,991 |
MTS PJSC Notes due 2025 | | RUB | | 8.00 | % | 14,990 |
MTS PJSC Notes due 2023 |
| RUB |
| 6.85 | % | 14,982 |
MTS PJSC Notes due 2027 |
| RUB |
| 6.60 | % | 14,975 |
MTS PJSC Notes due 2022 |
| RUB |
| 9.00 | % | 10,000 |
MTS PJSC Notes due 2026 |
| RUB |
| 7.90 | % | 9,999 |
MTS PJSC Notes due 2022 |
| RUB |
| 5.50 | % | 9,995 |
MTS PJSC Notes due 2022 |
| RUB |
| 6.45 | % | 9,994 |
MTS PJSC Notes due 2025 |
| RUB |
| 7.25 | % | 9,993 |
MTS PJSC Notes due 2024 |
| RUB |
| 8.70 | % | 9,991 |
MTS PJSC Notes due 2023 |
| RUB |
| 6.50 | % | 9,923 |
MTS PJSC Notes due 2024 | | RUB | | 8.60 | % | 7,491 |
MTS PJSC Notes due 2027 |
| RUB |
| 6.60 | % | 6,983 |
MTS PJSC Notes due 2022 |
| RUB |
| 8.40 | % | 4,997 |
MTS PJSC Notes due 2026 |
| RUB |
| 6.60 | % | 4,992 |
MTS PJSC Notes due 2024 |
| RUB |
| 6.50 | % | 4,319 |
MTS PJSC Notes due 2031 |
| RUB |
| 7.50 | % | 78 |
MTS PJSC Notes due 2021 |
| RUB |
| 8.85 | % | — |
MTS PJSC Notes due 2021 |
| RUB |
| 7.10 | % | — |
Other |
| |
| |
| 12 |
Total notes |
| |
|
|
| 191,996 |
Less: current portion |
| |
|
|
| (49,923) |
Total notes, non-current |
| |
|
|
| 142,073 |
We have an unconditional obligation to repurchase certain MTS Notes at par value if claimed by the noteholders subsequent to the announcement of the sequential coupon. The date of the announcement for the particular note issue is as follows:
| |||
|
|
|
Notes of the Group are subject to certain covenants limiting the Group’s ability to create liens on properties, dispose assets, including cellular licenses in core Russian regions, issue guarantees and grant loans to the third parties, delay payments for the borrowings merge or consolidate MTS PJSC with a third party or be a subject to unsatisfied judgments (excluding the total penalty under the agreements with the DOJ). If we fail to comply with these and the other covenants contained in the indentures, after certain notice and cure periods, the noteholders can accelerate the debt to be immediately due and payable.
Our ruble-denominated notes contain certain covenants limiting our ability to delist the notes from the quotation lists and delay coupon payments. We may from time to time seek to repurchase or redeem our outstanding notes through cash purchases and/or exchanges for new debt securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on market conditions, our liquidity requirements, contractual restrictions and other factors.
We were in compliance with our covenants as of December 31, 2021.
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Bank loans
As of December 31, 2021, our outstanding loans from banks and other financial institutions consisted ofcomprise the following:
| | | | | | |
| | | | Interest rate (actual at | | December 31, |
|
| Maturity |
| December 31, 2021) | | 2021 |
RUB‑denominated: | |
| |
| |
|
Sberbank |
| 2022-2024 |
| 5.99%-CBR key rate + 1.19% | | 135,000 |
VTB | | 2024-2026 | | CBR key rate + 0.50% - CBR key rate + 1.25% | | 129,307 |
Related party loans |
| 2022-2024 |
| 8.70% - CBR key rate | | 1,968 |
Subsidized loans |
| 2025 |
| 0,1 CBR key rate + 2.42% | | 1,769 |
| | | | | | |
Other |
| |
| | | 2,099 |
Total bank and other loans |
| |
|
| | 270,143 |
Less: current portion |
| |
|
| | (61,916) |
Total bank and other loans, non-current |
| |
|
| | 208,227 |
| | | | |
|
| December 31, | ||
| | 2022 |
| 2021 |
Notes |
| 195,929 | | 191,996 |
Bank and other loans |
| 290,211 | | 270,143 |
Total borrowings | | 486,140 | | 462,139 |
Less: current portion | | (117,747) | | (111,839) |
Total borrowings, non-current |
| 368,393 | | 350,300 |
See also Note 24
On November 21, 2022, the Group announced a consent solicitation in relation to our audited consolidated financial statements.the MTS International Notes due 2023 on the terms and subject to the conditions set forth in the Consent Solicitation Memorandum dated November 21, 2022.
On December 13, 2022 in connection with the Consent Solicitation, the Extraordinary Resolution was duly passed and became effective.
Pursuant to the terms of the Extraordinary Resolution, amongst other things, the November 30, 2022 coupon payment under the Notes were to be paid by the Group in accordance with the Amended Payment Mechanics within sixty (60) calendar days from November 30, 2022 by January 30, 2023. The Group paid coupon payments in respect of the Notes due on January 16, 2023.
Bank loans and notes of the Group are subject to certain covenants limiting the Group’s ability to create liens on properties, dispose assets, including cellular licenses in core Russian regions, issue guarantees and grant loans to the third parties, delay payments for the borrowings, merge or consolidate MTS PJSC with a third party or be a subject to unsatisfied judgments (excluding the total penalty under the agreements with the DOJ). The Group is required to comply with certain financial ratios.We wereratios.
The noteholders of MTS International Notes due in 2023 have the right to require the Group to redeem the notes at 101% of their principal amount and related interest, if the Group experiences a change in control.
If the Group fails to meet covenants, after the notice and cure periods, the debtholders are entitled to demand accelerated principal repayment.
The Group was in compliance with our loanall existing notes and bank loans covenants as of December 31, 2021.2022.
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The following table presents the aggregate scheduled maturities of debt principal outstanding as of December 31, 2021:2022:
| | | | | | | | |
| | December 31, 2021 | | December 31, 2022 | ||||
| | | | Bank | | | | Bank |
| | | | loans and | | | | loans and |
|
| Notes |
| other debt |
| Notes |
| other debt |
Payments due in the year ending December 31, | |
| | | |
| | |
2022 | | 62,772 | | 83,862 | ||||
2023 |
| 66,809 |
| 58,523 | | 63,963 | | 90,636 |
2024 |
| 27,346 |
| 72,799 |
| 67,213 | | 76,944 |
2025 |
| 28,529 |
| 93,385 |
| 41,246 | | 150,222 |
2026 |
| 17,448 |
| 15,136 |
| 38,415 | | 15,242 |
Thereafter |
| 22,477 |
| — | ||||
2027 |
| 22,477 | | — | ||||
|
| | | | ||||
Contractual undiscounted cash flows |
| 225,381 |
| 323,705 |
| 233,314 | | 333,044 |
|
| | | | ||||
Less: unamortized debt issuance costs |
| (184) |
| — |
| (321) | | — |
Less: interest |
| (33,201) |
| (52,628) |
| (37,064) | | (41,762) |
Less: debt modification |
| — |
| (693) |
| — | | (459) |
Less: subsidized interest rate effect |
| — |
| (241) | | — | | (612) |
| | | | | ||||
Total debt |
| 191,996 |
| 270,143 | | 195,929 | | 290,211 |
In March 2022, Cisco Systems Finance International UC (CSFI) made a decision to stop all business operation in Russia and Belarus. On February 16, 2023 MTS signed an additional agreement with CSFI where the parties agreed that all the loans were terminated and there are no outstanding obligations of the parties under or in connection with the loans. As of December 31, 2022, the Group’s total debt to Cisco amounted to RUB 1,234 million.
In addition, we had lease obligations in the amount of RUB 154,509143,502 million and RUB 150,814154,509 million as of December 31, 20212022 and 2020,2021, respectively. The terms of our material lease obligations are described in Note 2524 to our audited consolidated financial statements.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to our Financial Condition—Condition — Indentures relating to some of our notes contain, and some of our loan agreements contain, restrictive covenants, which limit our ability to incur debt and to engage in various activities.”
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Consolidated Cash Flow Summary
A summary of our cash flows and cash outlays for the years ended December 31, 2022, 2021 2020 and 20192020 is as follows:
| | | | | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
| 2022 |
| 2021 |
| 2020 |
| | (amounts in million RUB) | | (amounts in million RUB) | ||||||||
Cash flows from: |
|
|
|
|
|
| |
|
|
|
|
|
Net cash provided by operating activities |
| 142,846 |
| 155,507 |
| 106,652 | | 190,592 |
| 142,846 |
| 155,507 |
Net cash used in investing activities |
| (116,432) |
| (81,133) |
| (29,554) | | (118,238) |
| (116,432) |
| (81,133) |
Net cash used in financing activities |
| (71,214) |
| (27,360) |
| (120,448) | | (34,622) |
| (71,214) |
| (27,360) |
Effect of exchange rate changes on cash and cash equivalents |
| (79) |
| 385 |
| (2,655) | | (30) |
| (79) |
| 385 |
Net increase/(decrease) in cash and cash equivalents |
| (44,879) |
| 47,399 |
| (46,005) | | (37,702) |
| (44,879) |
| 47,399 |
Cash outlays for: |
| |
| |
| | | |
| |
| |
Capital expenditures(1) |
| (111,683) |
| (97,838) |
| (91,736) | | (112,581) |
| (111,683) |
| (97,838) |
Acquisition of subsidiaries, net of cash acquired |
| (10,186) |
| (262) |
| (2,052) | | (13,948) |
| (10,186) |
| (262) |
Disposal of subsidiaries, net of cash disposed |
| 3,891 |
| 3,461 |
| 37,386 | | (149) |
| 3,891 |
| 3,461 |
Cash payments for the acquisition of subsidiaries under common control and non‑controlling interests |
| (3,474) |
| — |
| (15,312) | ||||||
Cash payments for the acquisition of subsidiaries under common control and non-controlling interests | | — |
| (3,474) |
| — | ||||||
Cash inflow from sale and liquidation of associates |
| 3,014 |
| 2,450 |
| 3,067 | | — |
| 3,014 |
| 2,450 |
(1) | Includes acquisitions of property, plant and equipment and intangible assets |
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For the year ended December 31, 2021, net cash provided by operating activities was RUB 142,846 million, a decrease of 8.1% compared to the year ended December 31, 2020. The decrease in amount of RUB 26,000 million or 16.7% related to MTS Bank activities reflecting ongoing rapid growth in consumer banking and lending, was partially offset by a stronger telecom business performance.
Net cash used in investing activities for the year ended December 31, 2021 was RUB 116,432 million, an increase of 43.5% compared to the year ended December 31, 2020 reflecting our deliberate steps to allocate additional capital in 2021 to network development, new growth segments, as well as strategic acquisitions.
Net cash used in financing activities for the year ended December 31, 2021 increased by RUB 43,854 million or 160.3% compared to the year ended December 31, 2020, and totaled to RUB 71,214 million. The increase was mainly driven by cash flows related to our debt.We repaid RUB 126,299 million less of our indebtness than in 2020. At the same time proceeds from loans and issuance of notes decreased by RUB 172,741 million compared to the year ended December 31, 2020.
For the year ended December 31, 20202022 net cash provided by operating activities amounted to 155,507RUB 190,592 million, a decreasean increase of RUB 6,75247,746 million or 6.3% year-over-year when excluding the one-time payment of RUB 55,607 million made in 2019 under the resolution with the U.S. DOJ and settlement with the SEC.33.4% year-over-year. The decreaseincrease was mainly driven by the disposal of our Ukraine operations, which contributed RUB 17,156 million of operating cash inflow for the year ended December 31, 2019. The negative impact of the disposal was partially offsetdecline in comsumer lending by relatively lower tax payments and financing costs.MTS Bank.
For the year ended December 31, 2020,2022, the cash outflows generated by the Group investing activities increased by RUB 51,5791,806 million or 174.5%1.6% compared to the year ended December 31, 20192021 and totaled to RUB 81,133118,238 million. The increase was mainly attributable to cash receipts from the sale of our associates (Ozon) and subsudiaries (VF Ukraine operations and lowerRent Nedvizimost) and higher investing in purchases of new businesses, which contubuted 7,054 million and RUB 3,762 million of the increase, respectively. At the same time our net inflows from investing in deposits, traded debt securities and assets in trust management of Sistema-Capital which declinedgrew by RUB 34,3888,716 million, which partially compensated the effect of sale and RUB 18,468 million year-over-year, respectively. Our capital expenditures in the financial year 2020 increased by RUB 6,102 million due to increased USD/EUR exchange rates,acquisition of our subsibiaties and were partially offset by inflows from our FX related swap contracts.associates.
For the year ended December 31, 2020,2022, the cash outflows generated by the Group financing activities decreased by RUB 93,08836,592 million or 77.3%51.4% from RUB 120,44871,214 million in the year ended December 31, 20192021 to RUB 27,36034,622 million mainly due to an increase in borrowed funds. In 2020, net inflows relating to our borrowing activities grew by RUB 100,537 million in the year ended December 31, 2019. Further positive effect resulted from the reductionlower dividend payments and completion of cash outflows related to acquisition of subsidiaries under common control by RUB 15,312 million in the year ended December 31, 2019. The dividends paid in the year ended December 31, 2020 increased by RUB 22,418 million due to special dividends distributed following the sale of our Ukraine operations.shares buy back programme.
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Liquidity
As of December 31, 2021,2022, we had total cash and cash equivalents of RUB 40,59078,292 million (RUB 34,50444,125 million in rubles, RUB 2,89912,404 million in Chinese yuan, RUB 11,902 million in in U.S. dollars, RUB 7,516 million in euros, RUB 1,766 million in U.S. dollars, RUB 367314 million in Turkmenistan manat RUB 139 million in Ukrainian hryvnias and RUB 1,8392,031 million in other currencies). In addition, as of December 31, 2021,2022, we had short-term investments of RUB 28,97224,422 million, mostly in form of investments in mutual funds and debt securities as well as deposits. We also had RUB 207,323206,099 million available under existing credit facilities as of December 31, 2021.2022. For a description of our outstanding external financing, see Note 2423 to our audited consolidated financial statements.
As of December 31, 2021,2022, we had a working capital deficit of RUB 210,120250,462 million compared to a deficit of RUB 66,260210,120 million as of December 31, 2020.2021. The increase primarily related to an increase in the current portion of our debtbank deposits and liabilities by RUB 77,714 million as well as an increase in trade and other payables by RUB 16,06153,689 million. At the same time our cash and cash equivalents deacreased by RUB 44,879 million compared to December 31, 2020. We believe that our operating cash flows, together with our plans for external financing, will provide us with sufficient funds for our present requirements.
Russian law requires that dividends can only be paid in an amount not exceeding net profits as determined under Russian accounting standards, denominated in rubles, after certain deductions. In addition, dividends may only be paid if the value of the company’s net assets is not less than the sum of the company’s charter capital, the company’s reserve fund and the difference between the liquidation value and the par value of the issued and outstanding preferred stock of the company, if any, as determined under Russian accounting standards. Our profit for the year underavailable for distribution determined in accordance with Russian accounting standards and Russian legislation for the years ended December 31, 20212022 and 2020 that was distributable under Russian legislation2021 amounted to RUB 84,573123,057 million and RUB 61,62284,573 million respectively.
As a result of an escalation inFollowing the conflict between Russia and Ukraine, the EU, US, UK and certain other countries have imposed significant sanctions and export controls on Russian and Belarusian persons and entities, which could have a material adverse effect on our liquidity (for more details please refer to“Item 3. Key Information—D. Risk Factors—Political and Social Risks—Factors — Risks Relating to Economic Risks in Our Countries of Operation — Further deterioration in relations between Russia and other states that were part of Soviet union as republics, as well as other geopolitically related disagreements and allegations between Russia and other countriesgeopolitical situation and sanctions imposed as a result thereof could materially adversely affect our business, financial condition, results of operations, prospects and the value of our shares and ADSs”shares” for the risks related to the value and recoverability of dividends by holders of ADSs”. We remain focused on ensuring operational continuity and providing uninterrupted connectivity and other services for our customers as well as servicing our obligations.
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Credit Rating Discussion
Our credit ratings impact our ability to obtain short- and long-term financing and the cost of such financing. In determining our credit ratings, the rating agencies consider a number of factors, including our operating cash flows, total debt outstanding, commitments, interest requirements, liquidity needs and availability of liquidity. Other factors considered may include our business strategy, the condition of our industry and our position within the industry and the strategy, activity and/or credit rating of Sistema. Although we understand that these and other factors are among those considered by the rating agencies, each agency might calculate and weigh each factor differently. However due to the current geopolitical situation we have no ability to obtain financing from international sources. In March 2022, our international credit ratings were downgraded and further withdrawn following the sovereign ratings of Russia. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We have a significant shareholder, which may limit your ability to influence corporate matters and may give rise to conflicts of interest”.
Accounting Policies
Please refer to the Notes to our audited consolidated financial statements included elsewhere in this document.
Recent Accounting Pronouncements
Please refer to Note 2 to our audited consolidated financial statements included elsewhere in this document.
C. | Research and Development, Patents and Licenses, etc. |
Not applicable.
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D. | Trend Information |
Sales
Our mobile subscriber base in Russia and Armenia increaseddecreased to 82.3 million subscribers as of December 31, 2022 from 82.7 million subscribers as of December 31, 2021 from 80.6 million subscribers as of December 31, 2020.2021. We expect our consolidated subscriber base to remain stable in 20222023 as a result of continued marketing and advertising activity. We expect growth of our subscriber base in the long terma long-term percpective due to an increased use of IoT (M2M) devices. We anticipate our consolidated revenues will remain stable in 20222023 mainly based on growth in development of our broadband business and convergent services.
Average monthly minutes per subscriber in Russia decreased and amounted to 340 minutes in 2022 as compared to 375 minutes in 2021 as compared to 397 minutes in 2020 as2021as a result of the spread of the use of instant messaging and voice communication services over IP for everyday communication. We expect an increase in megabytes per subscriber due to our efforts aimed to stimulate data usage, such as increasing the volume of traffic included in the tariff without increasing the cost, facilitating access to social networks, and preferential access to public services.
Our subscriber base in Armenia slightly increased and amounted to 2.27 million subscribers in 2022 as compared to 2.23 million subscribers in 2021 as compared to 2.15 million subscribers in 2020.2021. We expect that the growth of competition in these markets may, in turn, lead to decreasing tariffs, the addition of lower-value mass market subscribers and macroeconomic trends calling for “save mode.”
Russia is the largest market for us, both in terms of subscribers and revenue. In 2021,2022, the underlying developments within this market remained positive and included high mobile penetration, strong demand for mobile services and increased consumption of data services, especially remote or online services. We focused our efforts to develop new competencies in the digital economy amid the global pandemic of COVID-19. We expect growth of business activity in Russia to continue throughout 2022.2023.
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We expect a challenging operating environment in 20222023 due to continued macroeconomic and market volatility in the countries where we operate, increasing competition and significant changes in the mobile retail market in Russia. We also experienced significant exchange rate volatility and depreciation of local currencies in the countries where we operate against the U.S. dollar. The volatility and devaluation of local currencies against the U.S. dollar and/or euro may adversely affect our costs, including our non-cash foreign exchange loss due to the translation of our U.S. dollar-anddollar- and euro-denominated debt. For further information on these risks, see “—A. Operating Results—Certain Factors Affecting our Financial Position and Results of Operations—Currency Fluctuations,” and “Item 3. Key Information—D. Risk Factors—Risks Relating to our Financial Condition—Inflation could increase our costs and adversely affect our results of operations.” For information on the risks ensuing from international sanctions against Russia, see “Item 3. Key Information—D. Risk Factors—Risks Relating to our Financial Condition,” and “Item 3. Key Information—D. Risk Factors—Political and Social Risks.”
However, considering current macroeconomic conditions, our management believes that we will experience medium-andmedium- and long-term growth. Due to the fact that the Russian market is highly penetrated, we believe the next wave of revenue growth for the overall market is likely to come from customers’ increasing use of data and convergent services.
Moscow Fixed Line Operations
In 2021,2022, the total revenue of MGTS decreasedincreased by 0.09% compared to 2020. In 2021,4.6%. MGTS revenue from broadband access services decreased by 7.6% compared to 2020.2.2%. Revenue from digital television services decreased by 5.5%8.2% in 2021 compared to 2020.2022. In 2022,2023, we expect a further decline in revenue from broadband Internet access and digital television services due to the transfer of the subscriber base to MTS and the reorientation of sales to the red brand.
In 2021,2022, revenue from MGTS fixed-line services decreased by 10.3% compared to 2020. In 2021, the6.8%. The subscriber base of the B2C and B2B segments decreased by 7.4%6.8% and 8.3%6.7%, respectively. Due to the reduction of the subscriber base in 2021,2022, we expect a further decrease in MGTS revenue from fixed-line services.
In 2021,2022, MGTS revenue from data transmission services in the B2G segment increased by 24.5% compared to 2020 due to the increase of services to government customers.26.9%.
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Churn
We define churn as the total number of subscribers who cease to be a subscriber during the reference period (whether involuntarily due to non-payment or voluntarily), expressed as a percentage of the average number of our subscribers during that period.
A vast majority of our subscribers are prepaid subscribers with no contractual commitment to us. As a result, these subscribers have unfettered freedom to migrate between operators at their convenience. This freedom, combined with the relative ease with which subscribers can obtain SIM cards, contributes to churn and increasing penetration levels in the markets where we operate.
The churn rate is highly dependent on competition in our license areas and those subscribers who migrate as a result of such competition. Our churn rate in Russia remained relatively stable at aroundup to 34% for the year ended December 31, 2021.2022. We continued to offer our popular tariff plans “SMART” (integrated voice and data bundles): “My Smart”MTS”, “MTS Dostup”, “Tarifische” and “NETARIF”. We expect that the possibility of choosing traffic bundles, connecting of converged services and other our activities will increase customer loyalty and allow us to keep churn rate under control in 2022.2023.
Moscow Fixed Line Operations Churn
The outflow rate in the services provided varies. The main services of MGTS are fixed-line communication services. The level of outflow of fixed-line services in 2021 increased2022 decreased by 1.8%0.46% to 7.6%7.16% compared to 5.8%7.62% in 2020.2021.
In 2021,2022, the percentage of outflow of broadband Internet access services decreased to 13.68%10.72% compared to 14.95%13.68% in 2020.2021. The percentage of outflow of MGTS digital television services decreased to 12.3% in 2022 compared to 14.1% in 2021 compared to 14.4% in 2020.2021.
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E. | Critical Accounting Estimates |
Please see Note 4 to our consolidated financial statements.
Off-balance Sheet Arrangements
We believe that our existing off-balance sheet arrangements do not have and are not reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Obligations under derivative contracts
We have entered into several cross currency interest rate swap agreements. These contracts are mainly designated to manage the exposure of changes in currency exchange rate. The contracts assumed periodic exchange of principal and interest payments from RUB denominated amounts to USD denominated amounts at a specified exchange rate. The rate was determined by the market spot rate upon issuance. Cross-currency interest rate swap contracts mature in 2023 - 2024.
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Tabular Disclosure of Contractual Obligations
We have various contractual obligations and commercial commitments to make future payments, including debt agreements, lease obligations (including interest) and certain committed obligations. The following table summarizes our future obligations under these contracts due by the periods indicated as of December 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | | |
| | Payments due by period | | Payments due by period | ||||||||||||||||
| | Less than | | | | | | More than | | | | Less than | | | | | | More than | | |
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| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years |
| Total |
| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years |
| Total |
| | (amounts in millions of RUB) | | (amounts in millions of RUB) | ||||||||||||||||
Contractual Obligations:(1) | |
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Long‑term principal debt obligations(2) |
| 111,999 |
| 182,448 |
| 146,117 |
| 22,000 |
| 462,564 |
| 118,107 |
| 296,836 |
| 71,981 |
| — |
| 486,924 |
Interest payments(3) |
| 34,402 |
| 42,569 |
| 8,381 |
| 477 |
| 85,829 |
| 36,117 |
| 38,554 |
| 4,155 |
| — |
| 78,826 |
MTS Bank deposits and liabilities |
| 215,293 |
| 15,910 |
| 114 |
| 1 |
| 231,318 |
| 270,285 |
| 19,430 |
| 79 |
| 719 |
| 290,513 |
Lease obligations(4) |
| 29,758 |
| 50,983 |
| 50,982 |
| 91,031 |
| 222,754 |
| 31,450 |
| 55,875 |
| 40,947 |
| 84,646 |
| 212,918 |
Purchase obligations(5) |
| 41,288 |
| 23,981 |
| 10,647 |
| 122 |
| 76,038 |
| 33,134 |
| 6,031 |
| 1,801 |
| 70 |
| 41,036 |
Provision for decommissioning and restoration |
| 284 |
| — |
| — |
| 7,206 |
| 7,490 |
| 133 |
| — |
| — |
| 4,963 |
| 5,096 |
Retirement and post‑retirement obligation |
| 270 |
| 18 |
| 14 |
| 50 |
| 352 |
| 328 |
| — |
| — |
| 56 |
| 384 |
Payments related to business acquisitions |
| 198 |
| 44 |
| — |
| — |
| 242 |
| 313 |
| 504 |
| — |
| — |
| 817 |
Total |
| 433,492 |
| 315,953 |
| 216,255 |
| 120,887 |
| 1,086,587 |
| 489,867 |
| 409,766 |
| 126,427 |
| 90,454 |
| 1,116,514 |
(1) | Debt payments could be accelerated upon violation of covenants in our debt agreements. |
(2) | Does not include the amount of debt modification. |
(3) | Interest payments are calculated based on indebtedness as of December 31, |
(4) | Undiscounted. |
(5) | Includes future payments under purchase agreements to acquire property, plant and equipment, intangible assets, costs related thereto, inventory and services. We plan to finance our capital commitments through operating cash flow and additional borrowings. |
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Item 6. Directors, Senior Management and Employees
A. | Directors and Senior Management |
Key Biographies
Our directors and executive officers, their dates of birth and positions as of the date of this documentApril 17, 2023 are as follows:
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| Position |
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Artem I. Zassoursky | | 1979 | | Non-Executive Director |
Regina Dagmar Benedicta von Flemming(1)(2) | | 1965 | |
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Thomas Holtrop(1)(2) | | 1954 | |
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Nadia Shouraboura(2) | | 1970 | |
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Valentin B. Yumashev(1) | | 1957 | |
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Vyacheslav K. Nikolaev | | 1970 | | President and Chief Executive Officer (“CEO”), Executive Director |
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Andrey M. Kamenskiy | | 1972 | |
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(1) | Member of the Remuneration and Nomination Committee. |
(2) | Member of the Audit Committee. |
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1 Mr. VoroninPaul Berriman has served as a Vice President for Technologies from June 17, 2021 till December 31, 2021. Since January 1, 2022 he has been serving as a First Vice President for Technologies.
2 Became a Memberone of our ESG Committee on February 10,Directors since June 2022.
Felix V. Evtushenkov was appointed Chairman of our Board of Directors in June 2019. He is the Chairmana member of our Strategy Committeeseveral committees of the Board of Directors. He isholds various positions, including as an independent director, in other large companies. At the Memberdifferent stages of the Board of Sistema and Senior Managing Partner, Member of the Strategy Committee of Sistema, as well as the Chairman of the Board of the Sistema Charity Fund. He is also a Member of the Board of Directors of Redline Capital Partners S.A, OJSC “Element,” SCP GROUP HOLDINGS SA. From 2012 he has served as First Vice President at Sistema. Prior to that from 2011 to 2012, he served as First Vice President, Head of Core Assets. In 2008, he was appointed Vice President, Head of Consumer Assets, at Sistema. From 2000 to 2006 he worked as General Director, CJSC Sistema Gals, and from 2006 to 2008 as President OJSC Sistema Gals. Mr. Evtushenkov began his career, he held such positions as Chief Technical Director. Mr. Berriman has a Bachelor's degree in Electroacoustics and an Associate of the President in Sistema Invest CJSC and Executive Director of the Industry Department at Sistema from 1999 to 2000.MBA.
Artem I. Zassoursky has served as one of our Directors since June 2017. He also is a Member of our Corporate Governance, Environmental and Social Responsibility Committee, Strategy Committee and Special Committeesome Committees of the MTS Board of Directors of MTS on compliance. Mr. Zassoursky is alsoDirectors. He has deep expertise in strategy, held and holds positions as a Vice President for Strategy and Development and a Membermember of the Management Board of Sistema. He was a Member of the BoardBoards of Directors of Business-Real Estate, Agroholding Steppe JSC, Stream LLC, Sitroniks JSC, Detskiy Mir PJSC, Insitel Services Private Limited, and he is now a Member of the Board of Directors of Medsi JSC, Sistema Asia Capital PTE, LTD and Alium JSC. Prior to joining Sistema, he held the position of General Director of Stream LLC,Management Boards in 2013 he served as a Vice President of SMM OJSC. He held various senior positions at major media companies prior to 2013.companies.
Regina von Flemming has served as one of our Directors since June 2015. She is the Deputy Chairperson of the Board of Directors.Directors and financial expert. She is also the Chairperson of ourthe Remuneration and Nomination Committee, and Corporate Governance, Environmental and Social Responsibility Committee. She also is a Member of our Audit Committee, Strategy Committee, Special Committee of the Board of Directors of MTS on compliance and Special Committee of independent directors for the project of MTS’s staff co-location
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of our Board of Directors. Also, she is a Member of the Board of Directors of JSC INTECO, Raspadskaya PJSC and also serves on the Board of Directors of the Russian Standard Charitable Foundation. Ms. Von Fleming also is counselor to the CEO of Accenture in Russia (Russian legal entity). She also served as the Chairman of the nominations and remunerations committee and as a Member of the audit committee of Chelpipe PJSC and Marketing Director at Weinstube in 2020. Previously, from 2016 to 2018, she was a Member of our Remuneration and Nomination Committee. Ms. von Flemming served as the CEO and Publisher of Axel Springer Russia from 2005 to 2015. Prior to that, she was the founder and owner of Flemming & Partner GmbH Berlin—Moscow, a consultancy firm providing services in the areas of crisis management, start up, interim management and restructuring, interim CEO in Russia mainly for German and Russian entities. From 2000 to 2003, she worked as Vice President of the “US Russia Investment Fund” at Delta Capital, one of the first private equity funds in Russia. Prior to joining Delta Capital, she held various management roles in German companies.
Shaygan Kheradpir has served as one of our Directors since June 2020. He is also the Deputy Chairman of our Remuneration and Nomination Committee, the Member of the Audit Committee and Special Committeeother committees of the MTS Board of Directors. She has extensive managerial experience and is a member of the Boards of Directors of MTS on compliance and Special Committeevarious companies. At the different stages of the Board of Directors. He is the Member of the Board of Directors of MTN Group, Cerberus Telecom Acq Corp (CTAC), Aura Network Systems, Pivotal Commware, Untether AI, Red River, Chairman of the Board of Directors Live Earth and President of Shaygan Technology Partners. Previously, from 2015 to 2018 Shaygan was Chairman and CEO of Coriant. He also servedher career, she held such positions as CEO, of Juniper Networks in 2014Vice President, counselor to the CEO, and from 2011 to 2014 he served as COO of Barclays Bank. Prior to that, from 2000 to 2010 he served in multiple roles, including as CTO and CIO in Telecom, at Verizon. Shaygan holds bachelor’s, master’s, and doctoral degrees in electrical engineering from Cornell University.more.
Thomas Holtrop has served as one of our Directors since February 2013. He is also the Chairman of our Audit Committee, Special Committee of the Board of Directors of MTS on compliance, Special Committee and Special Committee of independent directors for the project of MTS’s staff co location of our Board of Directors. He is alsofinancial expert, a Member of Remuneration and Nomination Committee. From 2005 to 2011, Mr. Holtrop servedCommittee and other committees of the MTS Board of Directors. He has extensive managerial experience and deep expertise in audit. At the different stages of his career, he held such positions as a Member of the Supervisory Board, at Gruner & Jahr (Hamburg). Prior to that, from 2001 to 2004, he served as the President of T Online International AG. Mr. Holtrop also served as a Member of the Board of Directors at Deutsche Telecom AG from 2002 to 2004. Prior to that, he served asCEO, Vice President, at American Express International Inc. and was a Member of the Board of Directors at Bank 24 AG and Deutsche Bank 24 AG.more.
Nadia Shouraboura has served as one of our Directors since June 2020. She is also thea Deputy Chairperson of our Audit Committee, and the Membera member of the Strategy Committee, Special Committee and the Chairperson of the Special Committee for Cloud and Infrastructure Development of the Board of Directors. Mrs. Shouraboura is a Memberother Committees of the Board of Directors and financial expert. She has deep expertise in Digital and Tech. She is a member of X5 Retail Group, Ferguson, Blue Yonder, Ocado PLC and Tosca. She was also a Member of the BoardBoards of Directors of Anko Retail from 2018 to 2020. Prior to that from 2012 to 2018various companies. At different stages of her career, she was founder andheld such positions as CEO, of Hointer. From 2004 to 2012 she served as the Vice President for Technology, at Amazon and headHead of systems development, at Exelon Power. Previously, from 1994 to 2001 she worked as a Senior Principal Consultant, at Diamond Management & Technology. She began her career in 1989 asand more. Nadia has a robotics engineer at Robcad.
Mrs. Shouraboura holds a bachelor’sbachelor's degree, from Moscow State University, a master’smaster's degree, from the University of Tel Aviv, and a PhD in Mathematics from Princeton University.Mathematics.
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Valentin B. Yumashev has served as one of our Directors since June 2019. He is also the Deputy Chairmana member of the Corporate Governance, Environmental and Social Responsibility Committee, a Member of our Remuneration and Nomination Committee and a Memberother Committees of the Special Committee of independent directors for the project of MTS’s staff co location of ourMTS Board of Directors. He is also the CEO and Chairman of the Management Board counselor of VTB Bank. He is a Member of the Board and Advisor of the Boris Yeltsin Presidential Center Fund. He also serves as Advisor to the President of the Russian Federation on a pro bono basis. In 1997 1998, he served as the head of the Russian Presidential Administration. In 1996, he worked as a media relations advisor to the Russian president. From 1987 to 1995 he served in a series of leadership roles at Ogoniok magazine, including as General Director. Mr. Yumashev began his career in 1978 as a journalist at Moskovsky Komsomolets.has extensive managerial experience. Mr. Yumashev holds a degree in journalism from Lomonosov Moscow State University.journalism.
Vyacheslav K. Nikolaev has served as our President and CEO since March 2021. He is the Chairman of our Management Board. Prior to that he served as our First Vice President for Customer Experience, Marketing and Ecosystem Development from March 2020, and earlier served as our Vice President for Customer Experience and Marketing from August 2019. Before that he served as our Vice President for Marketing from July 2017. He is a Member of the Board of Directors of MTS Bank, RTC, LLC “Mobile TeleSystems” (MTS associate in the Republic of Belarus) and MTS Media, LLC, LLC “MTS AI”.some companies. Mr. Nikolaev has been working for MTS since October 2004 and has held various positions within the Group. Prior to joining MTS, he held various key positions in Renaissance Capital LLC —Financial Consultant and TRUST Investment Bank, OJSC.
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Pavel A. Voronin was appointed Vice President for Technologies in June 2021. Since January 1, 2022 he has served as First Vice President for Technologies. He is a Member of our Management Board. Prior to joining MTS, he worked as Vice President for Technology Development at subsidiaries within the Sberbank ecosystem. From 2016 to 2020, he was Deputy General Director for Information Technologies at S7 Airlines, where he founded and led the S7 Techlab innovation center. He also co-founded business projects in cloud solutions as well as workplace and application virtualization.
In addition, he founded and headed the Department of Information Technologies in Aviation at the Moscow Institute of Physics & Technology. Mr. Voronin is a graduate of the Mechanics & Mathematics Faculty at Moscow State University. He is also a certified specialist (MBA) in IT project management and development in Big Data, and during his studies he won multiple student mathematics Olympiads.
Inessa V. Galaktionova has served as First Vice President for Telecommunications since August 2019, having earlier joined us in February 2019 as our Vice President for Sales and Customer Service. She is a Member of our Management Board. Ms. Galaktionova brings to our team extensive industry experience, deep domain expertise, and a laser sharp focus on operational rigor, having held multiple senior executive roles at leading Russian companies, including as Deputy CEO of Russian Post from 2013 to 2019 and Chief Commercial Officer of Tele2 Russia from 2009 to 2013. She began her career at Philips, where she worked from 1996 to 2009, ascending to Chief Marketing Officer of the Russia & Central Asia region. Ms. Galaktionova is a Member of the Board of Directors of, MGTS, RTC, MTS Armenia, LLC “MTS AI”.
Alexander E. Gorbunov has served as our Vice President for Strategy and Development since April 2018. He is a Member of our Management Board. Before that, he was a Member of our Board of Directors, and Deputy Chairman of our Board of Directors. In addition, Mr. Gorbunov serves as a Chairman of Board of Directors of MTS Bank and a Member of the Board of Directors of YouDo. From 2011 until 2018 he served as Vice-President managing telecom assets of Sistema. From 2010 until 2011, Mr. Gorbunov served as Executive Vice President for the development of telecommunication assets at Core Assets Business Unit of Sistema and from 2011 until 2015—as Executive Vice-President. From 2006 until 2010, he served as Vice President for Strategy and Development at Comstar. Prior to that, from 2005 to 2006, Mr. Gorbunov headed Corporate Development Department at Sistema.
Ilya V. Filatov has served as our Vice President for Financial Services since August 2019. He is a Member of our Management Board. He also serves as the CEO of MTS Bank. He is also a Member of the Board of Directors of RTC, East-West United Bank S.A. (EWUB), Sistema Capital, MTS Bank and AMARAN LIMITED. Mr. Filatov joined MTS Bank in 2014 as First Deputy Chairman of the Management Board and was appointed MTS Bank’s CEO in 2015. He earlier held a series of leadership positions at UralSib Bank from 2005 to 2014, including Deputy Chairman of the Management Board.
Ruslan S. Ibragimov has served as our Vice President—Government Relations since August 2019. He is a Member of our Management Board. He earlier served as Vice President for Corporate and Legal Affairs from 2008 to 2019 and has been a member of our Management Board since 2007. Mr. Ibragimov is a Member of the Managing Board of Big Data Association, Vice President of the Russian Corporate Counsel Association (RCCA) and Senior Director of the Association of Independent Directors. Mr. Ibragimov also serves as a Member of the Board of Directors of Vysshaya Shkola Publishers OJSC, NPO “Digital economy” - a Member of the Board of Supervisors, a Member of the Management Board of Non-Commercial Partnership “Corporate Counsel Association”, Media Communication Association, a Member of the Management Board and Vice president for GR&PR of Big Data Association and Prosveshcheniye Publishers. Before that, he was a Chairman of the Management Board of the National Payments Council Association until 2018 and a Member of the Board of Directors of the Doctor Ryadom LLC until 2020. From February 2007 to January 2008, Mr. Ibragimov served as our Director—Chief Legal Counsel. He joined us in June 2006 and initially served as the Director for legal matters as well as heading our Legal Department. Prior to joining us, Mr. Ibragimov was a Member of the law firm Ibragimov, Kagan and Partners from July 2002 to June 2006. From 1996 to 2002, he served as Deputy General Director and Senior Partner at RSM Top Audit, a tax and legal consulting firm. From 1992 to 1996, Mr. Ibragimov headed legal departments at various commercial banks.
Andrey M. Kamenskiy has served as our Vice President—Chief Financial Officer since April 2018. He is a Member of our Management Board. He is also a Member of the Board of Directors of Mobile TeleSystems LLC, MTS Bank, RTC, LLC “MTS AI” and MTS Media. Prior todifferent companies. Before that, he served as Executive Vice President, Finance and Economics for Sistema since 2011. From 1997 to 2011, he held senior positions in finance in Trade House Perekrestok, San InBev and ING Bank (Eurasia).
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Igor N.Mishin has served as our Vice President for Media since September 2019. He is a Member of our Management Board. He serves as CEO and Member of the Board of Directors of MTS Media and Member of the Board of Directors of “URS JSC”. He is also Vice President of the Russian Academy of Television, Member of the European Film Academy, Science & Technology Laureate of the Russian Federation, and Chairman of the Board of Trustees of the Outdoor Film Festival, the world’s largest open-sky movie watching event. From 2014 to 2016, he served as General Director of TNT, one of Russia’s most-watched TV networks. Prior to that, he worked as President of A-One Concept Media, Inc., General Producer for TV Service CJSC (Muz-TV music channel) and General Director of Amedia, President of “Urban quarter”, CEO of MIG Series Production LLC and Member of the Management Board of Association of Film and Television Producers.
Alexey V. Barsegian has served as our Vice President for Corporate & Legal Affairs since September 2019. He is a Member of our Management Board. He is also a Member of our Corporate Governance, Environmental and Social Responsibility Committee and Special Committee on compliance of our Board of Directors. Before that, from 2018 to 2019 he served as Executive Director of Legal Affairs of Sistema and earlier, from 2013 to 2018 as Executive Vice President for Legal Affairs of Sistema. He is also a Member of the Board of Directors of MTS Armenia, LLC “MTS AI”, MGTS and BF “Sistema”. Previously, from 2011 to 2013 he served as Director of Legal Department in Sistema. He began his career as a legal consultant, working at firms such as EM & Co. and Padva & Partners. Alexey holds an MBA from the American Institute of Business & Economics as well as a law degree from Moscow State Institute of International Relations (MGIMO).
Farid S. Kamalov was appointed Vice President for Retail Development in June 2021. He is a Member of our Management Board. Prior to joining MTS, he worked for Russian children’s retailer Detsky Mir PJSC, most recently as Chief Operating Officer (2014-2021) and before that as Director of Sales Management (2012-2014). He earlier headed the sales department at Russia’s Korablik retail chain (2010-2012). He began his career on the sales floor at M.Video, a leading Russian electronics chain, where he worked his way up to senior operational roles. Between 2014 and 2020, Mr. Kamalov participated in the governing boards of JSC RTC, LLC Detmir KGZ, LLP Detsky Mir - Kazakhstan, LLC Detmir BEL, Detsky Mir PJSC. He is also CEO and Member of the Board of Directors of “Russian Telephone Company” JSC.Mr. Kamalov holds an undergraduate degree from the Moscow State Institute of Electronic Engineering as well as an MBA from the Moscow International Higher School of Business.
Alexander A. Khanin has served as Vice President for Artificial Intelligence since October 2020. He is a Member of our Management Board. He is also the head of the MTS Artificial Intelligence Center and Member of its Board of Directors. In addition, he is a Co-founder and Chairman of the Board of Directors at VisionLabs. He is also a Member of our Strategy Committee of the Board of Directors. He is a Member of the Board of Directors of VisionLabs LLC, VL Solutions LLC, VisionLabs B,V and Member of the Coordination Board of AI Alliance Russia.
Igor A. Egorov was appointed Vice President for Infrastructure Development in July 2021, in which capacity he oversees MTS’s strategy to build out high-quality digital infrastructure to help ensure robust connectivity as well as capturing new growth opportunities in next-generation cloud, web, and digital B2B services. He is a Member of our Management Board. Mr.Egorov first joined MTS in 2013 and has held a series of senior leadership roles, most recently as Vice President for Regional Development (2019-2021) and before that as Regional Director for Moscow (2016-2019), Regional Director for Central Russia (2014-2016), and Regional Director of the Far East (2011-2014). Mr.Egorov holds a degree from St. Petersbrug State Electrotechnical University (ETU “LETI”) as well as an MBA from the Russian Presidential Academy of National Economy & Public Administration (RANEPA). He is a Member of the Board of Directors of “GDC ENERGY CROUP” LLC, MGTS and CEO of MTS Web Services.
Olga N. Ziborova was appointed Vice President for Ecosystem Development & Marketing in April 2021, in which capacity she oversees the operational execution of MTS’s strategy to build out an expanding ecosystem of innovative digital products and services. She is a Member of our Management Board. Since February 10, 2022 she has been a member of our Corporate Governance, Environmental and Social Responsibility Committee. Her prior role was as Director for Ecosystem Marketing, where she strengthened the Company’s market position by driving consumer awareness across the full spectrum of MTS products and bundle offers. From 2017 to 2020 she headed MTS’s marketing department, where she was responsible for telecommunications marketing across both B2C and B2B segments. She also oversaw the development and promotion of convergent offers across the Company’s product lines and markets. From 2010 to 2013 she headed MTS’s Tariff Policy Department, and from 2013 to 2017 she served as Marketing Director for Tariffs & Services. Earlier, from 2003 to 2010 she advanced through a series of senior marketing roles across MTS’s regional operations in Russia. She is also a Member of the Board of Directors of “Russian Telephone Company” JSC, MTS Armenia, MTS Media, “United Russian Studios” JSC, MDTZK LLC and Member of the Management Board of Media Communication Association. Ms. Ziborova holds a degree from St. Petersburg State University and has studied digital project management at Moscow’s SKOLKOVO Business School.
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Victor L. Belov was appointed Tech Vice President in January 2020, in which role he serves as MTS’s chief technology officer overseeing our network infrastructure. He is a Member of our Management Board. Victor joined MTS in 2011 and held a series of increasingly senior role across network operations, most recently as Director of Convergent & Backhaul Networks (2018-2020) after having headed the core network department since 2012 and before that the data transmission department. He earlier worked for Comstar-OTS JSC (2009-2011) as head of development of network and platform services. From 1998 to 2008 he held leadership positions at MTU-Intel CJSC, Sistema Multimedia LLC, Enterprise Business Communications JSC, and Zenon N.S.P. LLC. He is a Member of the Board of Directors of METRO-TELEKOM JSC, “IT-GRAD 1 CLOUD” LLC, of “GDC ENERGY CROUP” LLC, MGTS and MTS Turkmenistan.various companies.
All members of our Board of Directors were elected at the annual shareholders’ meeting on June 23, 202122, 2022 and will serve until their terms expire at the next annual shareholders’ meeting, which will take place no later than June 2022.2023. The business address of each of our directors is 4 Marksistkaya Street, Moscow 109147, Russian Federation.
On April 11, 2023, Felix Evtushenkov, the Chairman of our Board of Directors, was designated under asset freeze and travel ban sanctions by the HM Treasury of the United Kingdom. Mr. Evtushenkov resigned as Chairman and member of the Board of Directors effective April 17, 2023.
B. | Compensation of Directors and Senior Management |
We accrued compensation to our directors and senior management during 20212022 for services in all capacities provided to us in an aggregate amount of approximately RUB 1,8852,864 million, including social contributions of RUB 374 million.730 million. This amount comprised RUB 7191,453 million in base salaries and RUB 1,1661,412 million in bonuses paid pursuant to a bonus plan and in other monetary compensations for our management and directors. Bonuses are awarded annually based on our financial performance.
Our management and directors are also entitled to cash-settled and equity-settled share-based payments. Related compensation accrued in 20212022 amounted to RUB 2,9293,465 million, including social contributions amounted to RUB 338254 million.
Members of the Board of Directors who are independent non-executivenon-employee directors receive annual base compensation of $300,000 (RUB 22.120.6 million) *or $400,000 (RUB 29.527.4 million)* in the case of an independent non-executivenon-employee director who serves as Chairman of the Board of Directors. “Non-Employee Director” shall mean a member of the Board of Directors (including Independent Directors) who is not an employee of the Company (neither a member of its executive bodies), its controlled entities, the controlling shareholder of the Company or its controlled entities. For the purposes of these Regulations, a Director who holds offices only in boards of directors (supervisory boards) of the Company, its controlled entities, the controlling shareholder of the Company and its controlled entities shall be considered to be a Non-Employee Director.
Independent non-executiveNon-employee directors who also serve on board committees receive additional compensation as follows. Members of the Remuneration and Nomination Committee, Committee on Corporate Governance and Environmental and Social Responsibility (ESG), Strategy Committee and Audit Committee receive additional annual compensation of $30,000 (RUB 2.22.1 million), and a director serving as Chairman of the foregoing committees receives additional annual compensation of $50,000 (RUB 3.73.4 million). Members of special committees of the Board of Directors, which are committees established for undertaking preliminary consideration and making recommendations to the full Board of Directors in relation to certain assigned matters, receive additional annual compensation of $30,000 (RUB 2.22.1 million), and a director serving as Chairman of a special committee receives additional annual compensation of $50,000 (RUB 3.73.4 million). Members of all other board committees receive additional annual compensation of $25,000 (RUB 1.81.7 million) and a director serving as Chairman of any other board committee receives additional annual compensation of $30,000 (RUB 2.22.1 million).
Independent non-executiveNon-employee members of the Board of Directors are also eligible for remuneration in the form of shares. The number of shares to be transferred to each non-employee director based on the results of the corporate year shall be determined as the quotient obtained by:
● | the ruble equivalent of $100,000 (RUB |
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the weighted average price of the share for the last 30 calendar days preceding the annual meeting of shareholders, during which the trading was held on the Moscow Exchange. |
The aggregate amount of compensation received by an independent non-executive director (including annual base compensationthe basic remuneration and remuneration for performance of additional duties (except for serving asremuneration for the work in Special Committees) received by a board committee membernon-employee director on the basis of performance in the Corporate Year should not exceed $400,000 (RUB 29.527.4 million) and for serving as Chairman of the Board of Directors should not exceed $500,000 (RUB 36.834.3 million). In the event of early termination of a director, such director receives a pro rata share of the base, committee and bonus compensation based on the amount of time the director served on our Board of Directors.
The amounts of compensation were recalculated to Russian rubles from US dollars.
We provide all of our directors with professional liability insurance and reimburse them for all documented expenses incurred in connection with their attendance at board meetings and other expenses.
164* Hereafter, the USD amounts are converted into RUB using the average exchange rate during the year ended December 31, 2022 which equals 68,55 RUB per 1 USD.
C. | Board Practices |
Board of Directors
Members of our Board of Directors are elected by a majority vote of shareholders at the annual shareholders’General Meeting of Shareholders meeting using a cumulative voting system. Directors are typically elected by the annual meetingGeneral Meeting of shareholdersShareholders for one year until the next annual meetingGeneral Meeting of shareholdersShareholders and may be re-elected an unlimited number of times. The Joint Stock Companies Law requires that companies with more than 10,000 holders of voting shares have a board of directors consisting of not less than nine members. Our Board of Directors currently consistswas formed at the annual General Meeting of eight members3.Shareholders consisting of nine members. The Board of Directors has the authority to make overall management decisions for us, except for those matters reserved to the shareholders. Planned meetings of the Board of Directors shall be held periodically when needed, but at least 2 (two) times per each quarter of a year.year according to our bylaws. See “—B. Compensation of Directors and Senior Management” for a description of compensations for the members of our Board of Directors.
Audit Committee
The members of our Audit Committee are appointed by the Board of Directors and all members of this committee must be independent directors. The current members are Thomas Holtrop (Independent Director, Committee Chairman), Nadia Shouraboura (Deputy Committee Chairperson, Independent Director) and Regina von Flemming Shaygan Kheradpir and Nadia Shouraboura, all of whom are independent members of the Board of Directors. Mr. Thomas Holtrop serves as the Chairman of the Audit Committee and Mrs Nadia Shouraboura – as Deputy Chairperson of the Audit Committee.(Independent Director). The Audit Committee is primarily responsible for the integrity of our financial statements; overseeing our risk management, internal control system and corporate governance system, including reviewing certain related party transactions and interested personparty transactions; overseeing our accounting and financial reporting processes and the internal and external audits of our financial statements; our compliance system, compliance with the Code of Business Conduct and Ethics of MTS PJSC; recommending the appointment and compensation of the independent auditors to the Board of Directors; overseeing the performance of the auditors; reviewing issues raised by the auditors, management and/or Board of Directors and, as required, making recommendations to the Board of Directors; resolving matters arising during the course of audits; and since February 25, 2015 exercising functions related to ethics matters.
According to our bylaws, the Audit Committee shall convene with our external auditors at least four times per year, but may convene more frequently if the Audit Committee chooses to do so.
StrategyRemuneration and Nomination Committee
Our StrategyRemuneration and Nomination Committee consists of ninethree members appointed by the Board of Directors. The current members are Yury Misnik, Mikhail Khanov, Victor Klimovich, Alexander Khanin (Member of the Management Board-Vice President for Artificial Intelligence), Artem Zassoursky (Non-Executive Director), Nadia Shouraboura (Independent Director), Regina von Flemming (Independent Director), Alexey Katkov (DeputyDirector, Committee Chairperson) and Felix Evtushenkov (Chairman of the Board of Directors and Committee Chairperson). The Committee is responsible for preparing recommendations to the Board of Directors upon review of the Company’s strategic development and implementation of its investment projects and long-term investment programs.
According to our bylaws, the Strategy Committee shall be convened by the Committee Chairperson, at his sole discretion, or at the suggestion of any member of this committee, a member of the Board of Directors or our President.
Committee on Corporate Governance and Environmental & Social Responsibility (ESG)
Our ESG Committee currently consists of six members appointed by the Board of Directors. ESG includes Polina Ugryumova - Director of Investor Relations, Olga Ziborova – Member of the Management Board-Vice President for Ecosystem Development & Marketing , Alexey Barsegian – Member of the Management Board-Vice President for Corporate & Legal Affairs, Artem Zassoursky - Non-Executive Director, Valentin Yumashev - Independent Director, Deputy Committee Chairperson(Independent Director) and Regina von Flemming - Independent Director, Committee Chairperson. The ESG Committee leads the development of MTS's sustainability strategy as well as coordinates the Board's oversight across corporate governance, environmental initiatives, and corporate social responsibility.
3 In 2021, our Board of Directors consisted of nine members. Currently, due to resignation of one of our directors, our Board of Directors consists of eight members.
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According to our bylaws, the ESG Committee shall be convened by the Committee Chairperson, at her sole discretion, or at the suggestion of any member of this committee, a member of the Board of Directors or our President.
Remuneration and Nomination Committee
Our Remuneration and Nomination Committee consists of four members appointed by the Board of Directors. The current members are, Shaygan Kheradpir, Thomas Holtrop Valentin Yumashev, and Regina Dagmar Benedicta von Flemming , who serves as the Chairman of the Remuneration and Nomination Committee and Shaygan Kheradpir who serves as Depity Chairman.(Independent Director). The Remuneration and Nomination Committee is primarily responsible for developing a remuneration structure and compensation levels for management executives.
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According to our bylaws, the Remuneration and Nomination Committee shall be convened by the Chairman of the Remuneration and Nomination Committee Chairperson, at hisher sole discretion, or at the suggestion of any member of this committee, a member of the Board of Directors or our President.
In addition to the above-mentioned committees of the Board of Directors, also otherESG Committee (Corporate Governance, Environmental and Social Responsibility Committee), Strategy Committee and special committees were also formed in “MTS” PJSC. The relevant list of committees and their members is presented on our website.
President
Our President is elected by the Board of Directors for a term of three years and can be re-elected for an unlimited number of terms.times. The rights, obligations and the times and amounts of payment for the President’s services are determined by a contract between him and us, as represented by our Chairman or by a person authorized by our Board of Directors. The President is responsible for the day to day management of our activities, except for matters reserved to our shareholders or the Board of Directors and the Management Board. The President reports to the shareholders’ meetingGeneral Meeting of Shareholders and to the Board of Directors and is responsible for carrying out decisions made by the shareholders and by the Board of Directors and the Management Board.
In March 2021, the Board of Directors elected Vyacheslav Nikolaev, the first vice-president of MTS for customer experience, marketing and ecosystem development, as new President effective from March 13, 2021.
Management Board
In October 2006, we revised our charter to establish a new governing body called the Management Board. The Management Board is an executive body, which oversees certain aspects of our ongoing activities. The overall number of the Management Board members is approved by the Board of Directors at the proposal of the President with each member being elected by the Board of Directors upon nomination by the President. Each board member is elected for a three-year period and can be reelected an unlimited number of times.
The President is the Chairman of the Management Board. Currently our Management Board consists of 14 members.
Disclosure Committee
In April 2007, we established an advisory body called the Disclosure Committee. The Disclosure Committee supervises our compliance with disclosure standards in connection with all public information regarding us. These disclosure standards are based on principles of timeliness, accuracy and completeness. Members of the Disclosure Committee may be nominated by various divisions of MTS, willing to have representatives in the Disclosure Committee. Members are appointed by the President. Andrey M. Kamensky, our CFO is the Chairman of the Disclosure Committee. Currently, our Disclosure Committee consists of seven members, three of whom are officers of the Company.
Auditing Commission
Our Auditing Commission supervises our financial and operational activities. Members of the Auditing Commission are nominated and elected by our shareholders at annual meetingsGeneral Meetings of shareholders.Shareholders. A director may not simultaneously be a member of the Auditing Commission. As of the date of this document, our Auditing Commission has three members:members.
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The members of our Auditing Commission serve until their terms expire at the next annual shareholders’ meeting,General Meeting of Shareholders, which will take place no later than June, 2022.2023.
Audit Committee Financial Expert
Our Board of Directors has determined that Thomas Holtrop, and Nadia Shouraboura and Regina von Flemming are “audit committee financial experts” as defined in Item 16A of Form 20 F. Mr. Holtrop is “independent” as defined in Rule 10A 3 under the Exchange Act and current New York Stock Exchange listing rules applicable to us. For a description of Mr. Holtrop’s, and Mrs Shouraboura and Regina von Flemming experience’s, please see “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Key Biographies.”
Code of Business Conduct and Ethics
MTS strives to comply with applicable legal requirements and leading international practices, and therefore periodically updates its compliance policies and procedures. As one of fundamental documents of the Company, the Code of Business Conduct and Ethics (hereinafter referred to as the Code) was updated in 2021 and has undergone significant changes.
The provisions of the Code apply to all employees and directors of MTS (regardless of position, duties, length of service and place of work), including all subsidiaries, affiliates and joint ventures. The Company also strives to ensure compliance with the Code by affiliated companies, in respect of which MTS does not exercise control, as well as by partners and counterparties.
The content of the Code covers the following main topics relevant to all groups of MTS stakeholders:
1. MTS Values and Principles (introduction on behalf of the Management Board of MTS).
MTS’ business strategy is based, among other things, on building stable value relationships with customers and other stakeholders, in connection with which the Code formulates the principles and values that guide the Company in achieving its goals.
2. Consultations.
The Code contains ways to get advice if there are questions about the topics covered in the Code, doubts about whether a situation is regulated by the Code or whether it is a violation thereof.
3. Responsible business practice (ethics of making business decisions in MTS).
The Code cannot describe all kinds of situations regulated by the Code, however, the Code offers a kind of universal algorithm for making business decisions by persons to whom the Code applies.
4. Compliance with laws (anti-corruption legislation, internal labor regulations, information security and data protection, insider, intellectual property protection, asset protection and reliable reporting).
The Code is a unified regulatory and ethical standard of regulation within the MTS Group and includes various regulatory requirements applicable to the Company’s activities. In terms of compliance with legal requirements, the Company’s Code contains, at a minimum, references to policies and procedures governing certain business processes relevant to the entire MTS ecosystem.
5. Principles of sustainable development (quality of life and service, innovation).
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The company adheres to the principles of sustainable development: it conducts business ethically, takes responsibility for the consequences of its decisions and its activities, as well as for the impact of these consequences on society.
6. Reporting violations, prohibition of retalitation.
In the new version of the Code, the Company has made changes in terms of feedback and the operation of a hotline: the number of channels for appeals has been increased; all appeals are registered by an external independent provider; the possibility of submitting anonymous messages is available. At the same time, the Company strongly supports the culture of open dialogue and guarantees protection from retalitation to persons in case of a conscientious report of a problem or violation.
In order to ensure the effectiveness of the Code, the Company uses a language that is simple and understandable to all stakeholders, an interactive format, provides easy access to the Code, other compliance policies and procedures of the Company on its open resources (internal and external), and also conducts periodic training in accordance with the requirements of the Code.
A copy of our Code of Business Conduct and Ethics is available on our website at http://ir.mts.ru/.
Corporate Governance
We are required under the New York Stock Exchange listing rules to disclose any significant differences between the corporate governance practices that we follow under Russian law and applicable listing standards and those followed by U.S. domestic companies under New York Stock Exchange listing standards. This disclosure is posted on our website (http://ir.mts.ru/about-mts/corporate-governance/default.aspx). See also “Item 16G. Corporate Governance.”
D. | Employees |
At December 31, 2021,2022, we had 57,84360,388 employees. Of our 56,16659,120 employees in Russia, we estimate that 792904 were executives; 14,00414,494 were technical and maintenance employees; 25,07125,370 were sales, marketing and customer service staff; and 16,29918,352 were administration and finance staff. In addition, of the 56,16659,120 employees in Russia, we estimate that 12,00310,786 were employed in our retail unit.
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As of December 31, 2021, 4642022, 116 of our employees worked in Czech Republic. Of these employees, we estimate that 146 were executives; 37795 were technical and maintenance employees; 72 were sales, marketing and customer service staff; and 6613 were administration and finance staff.
As of December 31, 2021, 1,1162022, 1,084 of our employees worked in Armenia. Of these employees, we estimate that 109 were executives; 130 were technical and maintenance employees; 668644 were sales, marketing and customer service staff; and 308 were administration and finance staff.
As of December 31, 2021, 97 of our employees worked in other countries, such as Turkmenistan, Ukraine and Belarus. Of these employees, we estimate that 9 were executives; 55 were technical and maintenance employees; 6 were sales, marketing and customer service staff; and 27301 were administration and finance staff.
The following chart sets forth the number of our employees at December 31, 20212022 and 2020:2021:
| | | | | | | | |
| | Years ended | | Years ended | ||||
|
| December 31, 2021 |
| December 31, 2020 |
| December 31, 2022 |
| December 31, 2021 |
Russia |
| 56,166 |
| 56,590 |
| 59,120 |
| 56,166 |
Czech Republic | | 464 | | 451 | | 116 | | 464 |
Armenia |
| 1,116 |
| 1,169 |
| 1,084 |
| 1,116 |
Other |
| 97 |
| 205 |
| 68 |
| 97 |
Total |
| 57,843 |
| 58,415 |
| 60,388 |
| 57,843 |
Our employees are not unionized, except for 1,143983 employees of MGTS, who are members of trade unions. We have not experienced any work stoppages and we consider our relations with employees to be strong.
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Objectives that we focus on in managing the human capital resources depend on current needs of our ecosystem. We expect to acquire new employees as a consequence of our regular acquisitions in line with the development of new products and services.
E. | Share Ownership |
As of March 24, 2022,April 10, 2023, we believe, that our directors, senior management and employees owned more than 1% but less than 2% of our outstanding common stock.stock, except for Felix V. Evtushenkov, who effectively owned 7.59%.
The following table sets forth information with respect to the beneficial ownership of our common stock as of March 24, 2022,April 10, 2023, by our current directors and executive officers. All shares of common stock have the same voting rights.
| | | | | |
| | Beneficial ownership as |
| ||
| | of March 24, 2022 | | ||
Directors and Executive officers |
| Number(1) |
| %(2) | |
Vyacheslav K. Nikolaev*, Executive Director, President and Chief Executive Officer (“CEO”) | | 20,419,297 | | 1.21252 | % |
Ilya V. Filatov, Vice President, Financial Services—Member of the Management Board |
| 3,298,028 |
| 0.19584 | % |
Ruslan S. Ibragimov, Vice President, Government Relations—Member of the Management Board | | 431,338 | | 0.02561 | % |
Igor A. Egorov, Member of the Management Board - Vice President, Infrastructure Development |
| 268,121 |
| 0.01592 | % |
Inessa V. Galaktionova, First Vice President, Telecommunications—Member of the Management Board |
| 126,845 |
| 0.00753 | % |
Andrey M. Kamenskiy, Vice President, Finance—Member of the Management Board and Chief Financial Officer (“CFO”) |
| 108,581 |
| 0.00645 | % |
Pavel A. Voronin, Since 01/01/2022 First Vice President, Technologies —Member of the Management Board |
| 74,170 |
| 0.00440 | % |
Alexander A. Khanin, Vice President, Artificial Intelligence |
| 61,929 |
| 0.00368 | % |
Regina von Flemming, Non Executive Independent Director | | 56,954 | | 0.00338 | % |
Olga N. Ziborova, Member of the Management Board - Vice President, Ecosystem Development & Marketing |
| 52,187 |
| 0.00310 | % |
Thomas Holtrop, Non Executive Independent Director | | 46,172 | | 0.00274 | % |
Victor L. Belov, Member of the Management Board-Vice President, Tech | | 37,634 | | 0.00223 | % |
Farid S. Kamalov, Retail Development, CEO of MTS Retail (RTC) | | 37,332 | | 0.00222 | % |
Alexey V. Barsegian, Vice President, Corporate & Legal Affairs | | 37,241 | | 0.00221 | % |
Alexander E. Gorbunov, Vice President, Strategy and Development—Member of the Management Board | | 37,232 | | 0.00221 | % |
Valentin B. Yumashev, Non Executive Independent Director | | 36,649 | | 0.00218 | % |
Nadia Shouraboura, Non Executive Independent Director | | 15,058 | | 0.00089 | % |
Shaygan Kheradpir, Non Executive Independent Director | | 15,032 | | 0.00089 | % |
Total |
| 25,159,800 |
| 1.49402 | % |
| | | | | |
| | Beneficial ownership as | |||
| | of April 10, 2023 | | ||
Directors and Executive officers | Number(1) | %(2) | | ||
Vyacheslav K. Nikolaev, Executive Director, President and Chief Executive Officer (“CEO”) | | — | (3) | — | (3) |
Andrey M. Kamenskiy, Vice President, Finance and Chief Financial Officer (“CFO”) | | — | (4) | — | (4) |
Regina von Flemming, Independent Director | | — | (4) | — | (4) |
Valentin B. Yumashev, Independent Director | | — | (4) | — | (4) |
Thomas Holtrop, Independent Director | | — | (4) | — | (4) |
Nadia Shouraboura, Independent Director | | — | (4) | — | (4) |
Total | | — | (3) | — | (3) |
(1) | Based on information provided by our directors and executive ofiicers as of |
(2) | Percentage of |
(3) | Indicates ownership more than 1% and less than 2% |
(4) | Indicates ownership of less than 1% |
* Before March 24, 2022 free float was 41,19%. On March 24, 2022 Viacheslav Nikolaev has received 19,983,816120
Our management is entitled to remuneration in the form of options granted to them for MTS ordinary shares, which will expire in a weighted average term of approximately three years. The transfer of such shares is probable and is subject to certain employment conditions. In 2021,2022, options related to compensation accrued in the amount of RUB 2,9293,465 million.
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The following table sets forth information with respect to our ordinary shares in the form of share options granted to our current directors and executive officers as of March 24, 2022.April 10, 2023. All shares of common stock have the same voting rights.
| | | | | |
| | Number of ordinary |
| ||
| | shares | | ||
| | as of March 24, 2022 | | ||
Directors and Executive officers |
| Number |
| %(1) | |
Vyacheslav K. Nikolaev, Executive Director, President and CEO | | 3,084,099 | | 0.18314 | % |
Inessa Galaktionova, First Vice President, Telecommunications—Member of the Management Board | | 1,132,175 | | 0.06723 | % |
Pavel A. Voronin, First Vice President, Technologies —Member of the Management Board | | 696,157 | | 0.04134 | % |
Alexander A. Khanin, Vice President, Artificial Intelligence | | 599,673 | | 0.03561 | % |
Olga N. Ziborova, Member of the Management Board-Vice President, Ecosystem Development & Marketing |
| 464,105 |
| 0.02756 | % |
Andrey M. Kamenskiy, Vice President, Finance—Member of the Management Board and CFO |
| 421,362 |
| 0.02502 | % |
Alexander E. Gorbunov, Vice President, Strategy and Development—Member of the Management Board |
| 418,919 |
| 0.02488 | % |
Ruslan S. Ibragimov, Vice President, Government Relations and PR—Member of the Management Board |
| 412,568 |
| 0.02450 | % |
Alexey V. Barsegian, Vice President, Corporate & Legal Affairs |
| 412,568 |
| 0.02450 | % |
Igor A. Egorov, Vice President, Infrastructure Development - Member of the Management Board | | 406,092 | | 0.02411 | % |
Farid S. Kamalov, Retail Development, CEO of MTS Retail (RTC) | | 348,079 | | 0.02067 | % |
Victor L. Belov, Vice President, Tech - Member of the Management Board | | 348,079 | | 0.02067 | % |
Igor N. Mishin, Vice President, Media—Member of the Management Board |
| 85,496 |
| 0.00508 | % |
Total |
| 8,829,372 |
| 0.52430 | % |
| | | | | |
| | Number of ordinary | |||
| | shares | | ||
| | as of April 10, 2023 | | ||
Directors and Executive officers | Number | %(1) | | ||
Vyacheslav K. Nikolaev, Executive Director, President and Chief Executive Officer (“CEO”) | | — | (2) | — | (2) |
Andrey M. Kamenskiy, Vice President, Finance and Chief Financial Officer (“CFO”) | | — | (2) | — | (2) |
Total | | — | (2) | — | (2) |
(1) | Percentage of ordinary shares in the form of share options granted to each named director and executive officer is based on |
(2) | Indicates ownership of less than 1% |
F. | Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation |
Not applicable.
Item 7. Major Shareholders and Related Party Transactions
A. | Major Shareholders |
The following table sets forth, as of March 24, 2022,April 10, 2023, certain information regarding the beneficial ownership of our outstanding common stock. All shares of common stock have the same voting rights.
| | | | | | | | | | |
| | Beneficial ownership as of |
| | Beneficial ownership as of |
| ||||
| | March 24, 2022 | | | April 10, 2023 | | ||||
Name |
| Number |
| Percentage |
|
| Number |
| Percentage |
|
Sistema(1) | | 620,552,329 | | 36.85 | % | | 620,552,329 | | 36.69 | % |
STA(2) |
| 220,467,234 |
| 13.09 | % |
| 220,467,234 |
| 13.04 | % |
ADS holders(3) |
| 508,907,572 |
| 30.22 | % |
| 318,362,986 |
| 18.82 | % |
Other Public Float (including our directors and executive officers)(4) |
| 334,110,183 |
| 19.84 | % |
| 531,811,675 |
| 31.45 | % |
Total(5) |
| 1,684,037,318 |
| 100.00 | % |
| 1,691,194,224 |
| 100.00 | % |
(1) | As of April 10, 2023 Vladimir P. Evtushenkov |
(2) | STA is a limited liability company formed under the laws of Russia. Sistema owns 100% of STA, STA holds |
(3) | As of |
(4) | We believe that our directors and executive officers as a group own more than 1% but less than 2% of our |
(5) | Excludes treasury shares, as described |
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Our subsidiary MGTS owned 5,452,327 of our ordinary shares as of March 24, 2022.April 10, 2023.
As a result of series of buy backsbuy-backs since 2016 Stream Digital LLC owned 87,245,832 of our shares as of March 24, 2022.April 10, 2023.
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As a result of series of buy backs since 2018 our subsidiary Bastion LLC owned 107,254,000175,824,490 of our shares and 75,676,260 in the form of ADSs as of March 24, 2022.shares.
As March 24, 2022,April 10, 2023, MTS PJSC held a total of 38,715,83838,664,702 of our ordinary shares, which were redeemed by MTS PJSC during 2017 - 2021 within procedure of buy-backs in connection with decisions on reorganization of MTS PJSC made by General shareholders’ meeting.
As of March 24, 2022,April 10, 2023, we and our subsidiaries held a total of 314,344,257 shares, 75,676,260 of which were held in the form of ADSs.308,254,829 shares. These shares are excluded from the total number of shares presented in the table above.
Sistema’s (including STA) current stake in the share capital of MTS is 42.085% while effective ownership in MTS is 49,9449,73 % (as of March 24, 2022)April 10, 2023).
B. | Related Party Transactions |
Transactions with Sistema and its Affiliates
Sistema
In March 2019, we disposed of our 18.69% interest in the Group’s associate OZON to Sistema for RUB 7,902 million. As of December 31, 2021 Sistema has fully repaid its obligations. As of December 31, 2020 the balance of accounts receivable amounted to RUB 2,829 million.
Nvision Group
In October 2020, we disposed of 100% in Nvision Group to Sistema and since then Nvision Group is considered to be a related party rather than a subsidiary of the Group (see Note 11 to the consolidated financial statements).
We continue to purchase software, services and other intangible assets from Nvision Group. The amounts of software, services and other intangible assets purchased during the years ended December 31, 2021 and 2020, were RUB 7,181 million and RUB 6,261 million, respectively.
Business Nedvizhimost
In February 2015 and further in May 2015, we sold our 100% stake in Rent Nedvizhimost to Business Nedvizhimost for RUB 8,500 million, repaid mainly in 2015-2018. The remaining part of receivable was restructured in 2018 implying Central Bank key rate + 1.5% and maturing in December 31, 2021. As of December 31, 2021 receivables in the amount of RUB 3,372 were fully repaid.
In March 2019, in order to optimize the processes of real estate management, we sold a number of buildings with carrying value of RUB 1,479 million to Business Nedvizhimost for the consideration of RUB 7,247 million (including VAT). The consideration is payable by installments for 10 years at 9% per annum with the collateral in the form of disposed buildings granted by the buyer. At the same time, we entered into a number of agreements to lease spaces in the buildings sold for the period of up to 15 years (leaseback).
As a result of this transaction, we recorded right-of-use assets of RUB 3,123 million, lease obligation of RUB 5,197 million and recognized a gain in the amount of RUB 1,745 million as a part of “Other income” in consolidated statement of profit or loss in 2019.
In December 2021, we purchased 5-year 10.8% coupon notes of Business-Nedvizhimost,JSC “Business-Nedvizhimost” or “Business-Nedvizhimost”, in the amount of RUB 2,100 million. The notes were accounted as financial assets at fair value through profit and loss and disclosed within subtotal “Assetsshort-term investments in
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Sistema Capital trust management” (Note 28 to the consolidated financial statements).position. As of December 31, 2022 and 2021, the investment amounted to RUB 2,105 million.
Objedinennye Russkie Kinostudiimillion and RUB 2,105 million respectively.
In April 2019,2022, we acquiredentered into a 100%novation agreement in respect to the disposal of property to Business Nedvizhimost in 2019. Under the terms of new agreement part of the receivables were converted to a loan with a similar repayment schedule and interest rate. The loan is payable by “Sistema-Invest” JSC, Sistema’s subsidiary. As of December 31, 2022, the amount of the loan was recognized as part of other investments and short-term investments in Joint Stock Company Objedinennye Russkie Kinostudii, a management companythe accompanying consolidated statements of “Kinopolis” movie studio with its own movies production complexfinancial position totaled to RUB 3,095 million and RUB 164 million, respectively. During the year ended December 31, 2022 we recognized expenses from Business Nedvizhimost,discounting in the amount of RUB 380 million as part of financial expenses.
Sistema
We holds Sistema notes that were accounted as financial assets at fair value through profit and loss and disclosed within short-term investments in the accompanying condensed consolidated statements of financial position. As of June December 31, 2022 and 2021, the investment amounted to RUB 1,459 million and RUB 1,443 million respectively.
Nvision Group
We acquire software, services and other intangible assets from Nvision Group, a subsidiary of Sistema for
The purchases of software, services and other intangible assets during the years ended December 31, 2022 and 2021, amounted to RUB 2,042 million. Please see Note 5 to our audited consolidated financial statements for details on this acquisition11,466 million and RUB 7,181 million, respectively.
VisionLabs Group
In February 2022, we purchased of 24% in VisionLabs Group from Sistema Venture Capital Fund I, and since then it is considered a subsidiary instead of related party.
Koncel
During the years ended December 31, 2019, 2020, 2021 and 2021,2022, we received income from the scrap metal realizations minus the costs of dismantling services with Koncel, subsidiary of Sistema, for a total amount of RUB 3,32882 million, RUB 2,1342,398 million and RUB 2,398 million, respectively.
TelecomCapStroi122
Transactions with Associates
Vorsicher
In 2019, 2020April 2022, we purchased of 54% in Gulfstream Group and 2021 wetherefore entered into a series of agreementsthe put option agreement with TelecomCapStroi, a subsidiary of Sistema and a major constructor of MGTS fixed line network.Vorsicher Holding Limited to buy the non-controlling stake. As of December 31, 2020 and 20212022 the totaloption agreement had been valued in the amount of advances paid to TelecomCapStroi, was RUB 2,396 million and RUB 1,148 million, respectively. During the year ended December 31, 2021 we purchased equipment for RUB 2,3962,081 million.
Accounts receivable and accounts payable
We had total accounts receivable of RUB 16,65914,189 million, RUB 14,1897,287 million and RUB 7,2874,409 million, from, and total accounts payable of RUB 5583,146 million, RUB 3,1464,107 million and RUB 4,1071,451 million to, related parties as of December 31, 2019, 2020, 2021 and 2021,2022, respectively. We had total Bank deposits and liabilities of RUB 41,35152,372 million, RUB 52,37268,212 million and RUB 68,21271,892 million from related parties as of December 31, 2019, 2020, 2021 and 2021.2022. We do not have the intent or ability to offset the outstanding accounts payable and/or accounts receivable with related parties under the term of existing agreements with them. See Note 3130 to our audited consolidated financial statements for details of our accounts payable and accounts receivable.
C. | Interests of Experts and Counsel |
Not applicable.
Item 8. Financial Information
A. | Consolidated Statements and Other Financial Information |
8.A.1-3. See Item 18.
8.A.4-6. Not applicable.
8.A.7. Litigation
Uzbekistan
In June 2012, the authorities of the Republic of Uzbekistan commenced audits of the financial and operating activities of MTS’ wholly-owned subsidiary Uzdunrobita. Various claims for violation of tax, antimonopoly and industry legislation were made against Uzdunrobita, which resulted in significant amounts of fines and penalties, revocation of all licenses and suspension of services. Fines and penalties amounted to approximately RUB 18,375 million payable in equal installments over eight months.
Uzdunrobita paid two scheduled installments in November and December 2012 totaling approximately RUB 4,583.4 million. On January 14, 2013, further to its partial payment of the third installment due in January 2013 totaling approximately RUB
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481 million and constituting the remaining amount of cash held in its bank accounts, Uzdunrobita filed a petition for voluntary bankruptcy to the Tashkent Economic Court on the grounds of its inability to meet further obligations.
Considering the adverse impact of such circumstances on the Group’s ability to conduct operations in Uzbekistan, the Group tested goodwill and other long-lived assets attributable to Uzbekistan for impairment upon first receiving notification of the investigations. As a result, an impairment loss on the long-lived assets in the amount of RUB 20,037 million was recorded in the consolidated statements of profit or loss for the year ended December 31, 2012. In 2013 these losses were assigned to discontinued operations.
In 2012, the Group filed a claim against the Republic of Uzbekistan in the International Centre for Settlement of Investment Disputes (“ ICSID”), part of the World Bank Group, in Washington, D.C.
On April 22, 2013, the Tashkent Economic Court declared Uzdunrobita bankrupt and initiated a liquidation process. Uzdunrobita was later liquidated. As a result the Group lost control over the subsidiary and deconsolidated Uzdunrobita.
In July 2014, the dispute between MTS and the Republic of Uzbekistan was resolved. The parties signed the Settlement Agreement and according to its terms all mutual claims were eliminated. The Settlement Agreement is governed by English law and provides for resolution of any disputes arising out of the Settlement Agreement in the ICSID. ICSID has discontinued international arbitration proceedings between us and the Republic of Uzbekistan following the submission of a joint application by both parties.
The Republic of Uzbekistan established a legal entity, UMS, with such entity having no legal connection to the previously liquidated entity, Uzdunrobita. UMS was granted 2G, 3G and LTE licenses valid until 2029, and received frequencies, numbering capacity and other permits required for the launch of operations. On September 24, 2014, a 50.01% ownership interest in UMS was transferred to MTS by the State Unitary Enterprise Center of Radio Communications, Radio Broadcasting and Television on behalf of the Republic of Uzbekistan. We have also received certain guaranties in relation to the protection of any future investment in the Republic of Uzbekistan.
In March 2014, we received requests for the provision of information from the SEC and the US Department of Justice (“DOJ”) relating to a currently conducted investigation of our former subsidiary in Uzbekistan.
In July 2015, activities related to our operations in Uzbekistan were referenced to a civil forfeiture complaints (“The Complaints”), filed by DOJ in the U.S. District Court, Southern District of New York (Manhattan), directed at certain assets of an unnamed Uzbek government official. The Complaints allege among other things that we and certain other parties made corrupt payments to the unnamed Uzbek official to assist their entering and operating in the Uzbekistan telecommunications market. The Complaints are solely directed towards assets held by the unnamed Uzbek official and none of our assets are affected by the Complaints.Compliance monitorship
In March 2019, we reached a resolution with the SECUnited States Securities and Exchange Commission (“SEC”) and the DOJUnited States Department of Justice (“DOJ”) relating to these investigations. Wethe previously disclosed investigation concerning our former subsidiary in Uzbekistan, consented to the entry of an administrative cease-and-desist order (the “Order”)by the SEC. The United States District Court for the Southern District of New York approved theSEC and entered a deferred prosecution agreement “DPA” entered by us and a plea agreement entered into our former subsidiary in Uzbekistan. Under the agreements with the DOJ and SEC, we agreed to pay a total of USD 850 million (RUB 59.1 billion as of December 31, 2018) to the United States, which was comprised of a criminal fine, criminal forfeiture and civil penalty. We provided a provision of USD 850 million (RUB 55.8 billion as of the date of accrual), which was recognized as a part of discontinued operations in our audited consolidated statement of profit or loss for the year ended December 31, 2018. In March 2019, the Group paid the total penalty of USD 850 million (RUB 55.6 billion as of the payment date)(“DPA”).
Under the DPA and the Order we agreed to appoint and in September 2019 the Group appointed an independent compliance monitor for, among other things, reviewing,inter alia, review, testing and perfecting ourMTS’ anti-corruption compliance code, policies, and procedures.
We have not received notice from the SEC, the DOJ or the monitor of any breach of the terms of the DPA or the Order. However,In 2021 given a variety of factors, including the COVID-19 pandemic, we have agreed to a one-year extension of the DPA and the monitorship with the DOJ and the SEC to (i) provide us with adequate time to implement necessary enhancements to certain critical components of our anti-corruption compliance and ethics program and (ii) allow the monitor sufficient time to be able to complete its review of the remedial efforts, including our implementation of the monitor’s recommendations and an assessment of the sustainability of our remedial actions. The term of the monitorship will continue until September 2023.
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In connection with compliance monitorship, certain transactions were identified relating to our subsidiary in Armenia, and such transactions were disclosed to the DOJ and SEC. The DOJ and SEC have requested information regarding the transactions and we have initiated an investigation into the matter. It isIt’s currently impossible to predict the timing or outcome of the investigation.
In December 2020, we received a request for information from the DOJ concerning certain historical transactions with a supplier of telecommunication and information technology. Currently, we are cooperating to provide information to the DOJ and the SEC responsive to the request.
In March 2019, a proposed class action complaint on behalf123
For additional information please refer to Note 34 to our audited consolidated financial statements, “Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—The inability of our subsidiaries in the countries in which we are present to maintain control over their operations and assets may adversely affect our business, financial condition and results of operations” regarding suspension of our services in Uzbekistan and “—We are subject to anti-corruption laws in the jurisdictions in which we operate, including anti-corruption laws of Russia and the US Foreign Corrupt Practices Act (the “FCPA”), and we may be subject to the UK Bribery Act 2010 (the “UK Bribery Act”). Our failure to comply therewith could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations,” “—We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA and the SEC Order” and “—We could be subject to criminal prosecution or civil sanction if we breach the DPA and the SEC Order, and we may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ and SEC and other authorities, including additional investigations and litigation.”
Turkmenistan
In September 2017, our subsidiary in Turkmenistan, MTS Turkmenistan or MTS-TM, suspended the provision of telecommunication services to its subscribers, due to the termination by Turkmen state-owned companies and state authorities of line rental, frequency allocation, interconnect, and other agreements necessary to provide telecommunication services. The license for the provision of telecommunication services on the territory of Turkmenistan was valid until July 2018.
In July 2018, we filed a Request for Arbitration against the Sovereign State of Turkmenistan with the ICSID in order to protect our legal rights and investments in Turkmenistan. In April 2019, we filed a Memorial (statement of claim) in the dispute with the Sovereign State of Turkmenistan with the ICSID. As of December 31, 20212022 the case was pending. See “Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—An outcome of the proceedings relating to sustaining operations of our subsidiary in Turkmenistan is unpredictable.”
Tax Audits and Claims
In the ordinary course of business, we may be party to various tax proceedings, and subject to tax claims, some of which relate to the developing markets and evolving fiscal and regulatory environments in which we operate. In the opinion of our management, our liability, if any, in all pending tax proceedings or tax claims will not have a material effect on our financial condition, results of operations or liquidity. We believe that we have adequately provided for tax liabilities in the accompanying consolidated financial statements; however, the risk remains that relevant authorities could take differing positions with regard to interpretive issues and the effect could be significant. See also Note 3433 to our audited consolidated financial statements.
In December 2018, the Russian tax authorities completed a secondary tax audit of MGTS for the year ended December 31, 2014. Based on the results of this audit, the Russian tax authorities argued the possibility of utilization by MGTS of tax assets in the amount of RUB 1,065.79 million. In September 2019 we filed an appeal with the Commercial Court of the City of Moscow. In June 2021 the Commercial Court of the City of Moscow issued a ruling to dismiss our claim, which was subsequently confirmed by the Appellate Commercial Court in October 2021. WeIn March 2022 the Arbitrate Court of the Moscow Region confirmed the aforementioned rulings. In July 2022 the Supreme Court of the Russian Federation declined to review decisions of lower courts.
In 2022 the tax authorities of the Republic of Uzbekistan claimed for violation of tax against LLC «Kolorit dizayn INK» in the total amount of approximately 32 977 687 215 soms (approximately RUB 207 million as of December 31, 2022). Based on the aforementioned claims the tax authorities applied for the bankruptcy of the company with the Tashkent economic court. Meanwhile we filed an appeal with the Commercial Court ofTashkent administrative court to dismiss the Moscow Circuit, which was dismissedaforementioned claims. The case hearing in February 2022. We intend to appeal this resolution.
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In December 2019, the Russian tax authorities initiated a tax audit of Stream LLC forTashkent economic court is postponed till the years ended December 31, 2016, 2017 and 2018. In November 2020,Tashkent administrative court issues the tax audit was completed. Based on the results of this audit, the Russian tax authorities determined that RUB 348,98 million in additional taxes and penalties were payable by us, subsequently reduced to RUB 76,4 million. The additional taxes and penalties were fully paid in 2021.ruling.
In December 2020, the Russian tax authorities initiated a tax audit of MDTZK LLC for the years ended December 31, 2017, 2018 and 2019. In December 2021, based on the results of this audit, the Russian tax authorities determined that RUB 0.1 million in additional taxes and penalties were payable by us.
In December 2020, the Russian tax authorities initiated a tax audit of Cultural Service LLC for the years ended December 31, 2017, 2018 and 2019. In 2021, based on the results of this audit, the Russian tax authorities determined that RUB 1,6 million in additional taxes and penalties were payable by us.The additional taxes and penalties were fully paid in 2021.
Since 2016, we communicate with tax authorities within Tax Monitoring regime. Under this regime, we disclose information and documents related to calculation of our tax liabilities on line; the tax year is considered closed for disputes by October of the year following the reporting tax year. Generally, according to Russian tax legislation, tax declarations remain open and subject to inspection for a period of three years following the tax year. As of December 31, 2021,2022, tax declarations of our Russian subsidiaries were open for audit for the preceding three fiscal years. Since 2016, we communicate with tax authorities within Tax Monitoring regime. Under this regime, we disclose information and documents related to calculation of our tax liabilities on-line; the tax year is considered closed for disputes by October of the year following the reporting tax year.
Antimonopoly Proceedings
In August 2018, the Federal Antimonopoly Service (“FAS”) charged us and other federal operators with violation of antimonopoly laws in respect to establishing distinguisheddiscriminatory terms and conditions for bulk SMS pricing for the banks with state ownedstate-owned equity interest as compared to the terms and conditions for the other banks and later – with establishing unreasonably high bulk SMS prices. In May 2019, FAS ruled onconsidered that MTS breachinghad breached the provisions of antimonopoly laws in respect to establishing discriminatory terms and conditions for bulk SMS pricing and charging unreasonably high bulk SMS prices, and prescribedprescribing MTS to cease its violations. MTS contested the decision and the prescription of FAS, in the Commercial Court of the City of Moscow, whichhowever courts at different levels upheld the position of FAS in November 2019, followed by the Appellate Commercial Court in March 2020. MTS filed a cassation appeal to the Commercial Court of the Moscow Circuit, which also upheld the position of FAS Russia. In December 2020, MTS cassation appeal was rejected by the Judicial Chamber of the Supreme Court. In March 2021, Deputy Chairman of the Supreme Court of the Russian Federation upheld the rejection.FAS. In August 2021, we paid the fine imposed by FAS Russia in full amount of RUB 189 million.
In April, June and July 2021, JSC “Tinkoff Bank”, PJSC “Sovсombank” and JSC “Raiffeisenbank”certain financial institutions in Russia initiated litigations against us, claiming reimbursement for losses incurred in connection with violation of antimonopoly laws in respect to establishing unreasonably high bulk SMS prices. Commercial Court of the City of Moscow hasThe arbitration courts at three levels have dismissed all threethe claims in full. It isIt’s currently impossible to predict the timingpossibility or outcome of thenew litigations on violation of antimonopoly laws in respect to establishing unreasonably high bulk SMS prices.
We believe that as of December 31, 20212022 we had adequately provided for claims related to SMS pricing.
8.A.8. Dividend Distribution Policy
The company’s dividend policy for the 2016 - 2018 period was approved by the MTS Board of Director on April 8, 2016 and set a target payout of RUB 25.0 - 26.0 per ordinary MTS share (RUB 50.0 - 52.0 per ADR) per calendar year, with a guaranteed minimum payout of RUB 20.0 per ordinary MTS share (RUB 40.0 per ADR) per calendar year. Payments were made on a semi-annual basis.
Annual and semi-annual dividend payments, if any, must be recommended by the Board of Directors and approved by a General Meeting of Shareholders (GM). We anticipate that any dividends we may pay in the future on the shares represented by the ADSs will be declared and paid to the depositary in Russian rubles and will be converted into U.S. dollars by the depositary and distributed to holders of ADSs, net of the depositary’s fees and expenses. Accordingly, the value of dividends received by holders of ADSs will be subject to fluctuations in the exchange rate between the ruble and the dollar.
On March 21, 2019, the MTS Board of Directors approved a new dividend policy covering the period 2019 - 2021 that set a minimum payout of RUB 28.0 per ordinary MTS share (RUB 56.0 per ADR) per calendar year. In determining actual dividendantimonopoly proceedings.
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payouts,8.A.8. Dividend Distribution Policy
As a leading telecommunications group operating in rapidly developing, yet volatile, markets, MTS’ primary need is to maintain sufficient resources and financial flexibility to meet our financial and operational requirements. As demonstrated throughout our history, MTS continually seeks ways to create shareholder value through both commercial and financial strategies, which may include both organic and inorganic development as well as the Company’s capital management practices.
Following historical practice, MTS continues to pay dividends as part of our commitment to enhancing shareholder value. In determining the Company’s payout, the Board of Directors considers a number of factors, were taken into consideration, including cash flow from operations, capital expenditures and the company’s overallCompany’s debt position. Decisions on dividends are proposed by the Board of Directors and voted upon thereafter at an annual general meeting of shareholders (AGM) or extraordinary meeting of shareholders (EGM).
Payments continuedin 2019, 20201 and 2021 amounted to be madeRUB 28.66, RUB 29.50 and 37.06 rubles respectively, in line with the dividend policy, which provided a minimum cumulative payout of RUB 28.0 per share per calendar year through two semi-annual payments. In May 2022 The Board of Directors recommended that the AGM approve annual dividends of RUB 33.85 per ordinary MTS share based on the Company’s full-year 2021 financial results, equivalent to a semi-annual basis.total of RUB 66.3 billion2. In June 2022, shareholders at the AGM approved the dividend payment. The record date for shareholders entitled to receive dividends for the 2021 fiscal year was July 12, 2022.
In April 2022, Russian Federal Law No. 114-FZ dated April 16, 2022 (the “Delisting Law”) which required Russian companies to terminate their depositary receipt programmes unless granted an exemption by the Russian Government Commission on Monitoring Foreign Investment came into force. PJSC MTS submitted an application for such exemption, and in May 2022 received permission to maintain ADR Program until July 12, 2022.
MTS believes that there is a possibility of interpretation of the Delisting Law, as currently effective, according to which the holders of depositary receipts do not have the right to vote or receive dividends from July 13, 2022 and until the conversion of the depositary receipts into shares. According to such interpretation, after conversion of the depositary receipts into shares, holders of shares thereby received had the right to claim unpaid dividends within three years from the date of the Company’s decision to pay them in the manner prescribed by Federal Law No. 208-FZ “On Joint Stock Companies” of December 26, 1995 and the Company’s Articles of Association for the receipt of unclaimed dividends. According to the terms of the Deposit Agreement, the period guaranteed for converting ADRs into ordinary shares ended on January 12, 2023 (inclusive), whereafter, as we understand, the depositary may continue to convert ADRs in ordinary shares and/or sell unconverted ordinary shares to distribute the proceeds of sale among ADRs holders.
As of December 31, 2022 dividends payable were RUB 16.5 bn, and were included in trade and other payables within the consolidated statement of financial position.
B. | Significant Changes |
AcquisitionPurchase of VisionLabsstake in Buzzoola - In February 2022, we acquired a 100% ownership interest in VisionLabs B.V. ("VisionLabs"2023 the Group purchased 67% of Buzzoola Internet Technologies LLC («Buzzoola»), a leading provider of computer visiondigital advertising services. Total consideration contains cash payment of RUB 371 million and machine learning solutions.contingent consideration. The acquisitionpurchase of 67% stake was accounted as investment in joint venture.
Sanctions on MTS Bank - In February 2023, the US Office of Foreign Assets Control (OFAC) and the UK Office of Financial Sanctions Implementation (OFSI) designated MTS Bank as a sanctioned person pursuant to applicable sanctions regulations adopted by the US and the UK, respectively. Accordingly, MTS Bank became subject to so-called “blocking” (asset-freeze) sanctions maintained by the US and the UK. Among other matters, these sanctions require US and UK third parties, including banks, to block or freeze assets which MTS Bank holds with such parties or otherwise block the settlement of payments to or from MTS Bank and its counterparties. The full impact and potential implications of the imposed sanctions on MTS Bank on our operations, assets and liabilities cannot be reliably estimated at this time. Management believes it is aimed at reinforcingtaking the appropriate measures to mitigate the related negative effects.
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See also “Item 3. Key Information—D. Risk Factors— Risks Relating to Economic Risks in Our Countries of Operation — The imposition of sanctions on MTS Bank and enhancing the potential for further international sanctions and export restrictions affecting the Group may have a material adverse impact on our business, financial condition and result of our digital ecosystem. See Note 5 to our consolidated financial statements.
operations.”
Item 9. Offer and Listing Details
A. | Offer and Listing |
(Only Items 9.A.4 and 9.C areNot applicable.)
|
|
Not applicable.
C. | Markets |
Our ADS, each representing two ordinary shares, have been listed on the NYSE sincefrom July 6, 2000 to August 8, 2022 under the symbol “MBT.” Our ordinary shares have been listed on MICEX (currently Moscow Exchange) since December 2003. In addition, we issued additional ordinary shares in connection with our merger with Comstar, which have been listed on MICEX (currently Moscow Exchange) since May 2011. The shares of the additional issuance became fully fungible with our previously issued ordinary shares in July 2011. Set forth below, for the periods indicated, are the high and low closing prices per ADS as reported by the NYSE and the high and low closing prices per ordinary share as reported by the Moscow Exchange.
| | | | | | | | | | |
| | | | | | | | Ordinary | | Ordinary |
|
| ADS High |
| ADS Low |
| Share High |
| Share Low | ||
Monthly High and Low | | | | | | | | | | |
March 2022(1) | | | N.A. | | | N.A. |
| 236.00 RUB |
| 171.50 RUB |
February 2022(2) | | $ | 8.10 | | $ | 5.34 |
| 294.90 RUB |
| 155.00 RUB |
January 2022 | | $ | 8.18 | | $ | 6.71 |
| 306.50 RUB |
| 263.30 RUB |
December 2021 | | $ | 8.30 | | $ | 7.47 |
| 300.60 RUB |
| 265.70 RUB |
November 2021 | | $ | 9.47 | | $ | 7.95 |
| 318.75 RUB |
| 291.00 RUB |
October 2021 | | $ | 9.88 | | $ | 9.11 |
| 330.45 RUB |
| 310.00 RUB |
Quarterly High and Low | |
|
| |
|
|
|
|
|
|
First Quarter 2022(3) | | $ | 8.18 | | $ | 5.34 |
| 306.50 RUB |
| 155.00 RUB |
Fourth Quarter 2021 | | $ | 9.47 | | $ | 6.71 |
| 330.45 RUB |
| 265.70 RUB |
Third Quarter 2021 | | $ | 10.07 | | $ | 8.49 |
| 350.95 RUB |
| 314.20 RUB |
Second Quarter 2021 | | $ | 9.70 | | $ | 8.40 |
| 346.35 RUB |
| 315.00 RUB |
First Quarter 2021 | | $ | 9.46 | | $ | 8.10 |
| 340.10 RUB |
| 311.80 RUB |
Fourth Quarter 2020 | | $ | 9.10 | | $ | 7.72 |
| 344.95 RUB |
| 308.20 RUB |
Third Quarter 2020 | | $ | 9.81 | | $ | 8.53 |
| 349.70 RUB |
| 312.50 RUB |
Second Quarter 2020 | | $ | 9.66 | | $ | 7.41 |
| 339.85 RUB |
| 293.50 RUB |
First Quarter 2020 | | $ | 11.00 | | $ | 6.20 |
| 353.05 RUB |
| 250.55 RUB |
Annual High and Low(4) | |
|
| |
|
|
|
|
|
|
2021 | | $ | 10.07 | | $ | 6.71 |
| 350.95 RUB |
| 265.70 RUB |
2020 | | $ | 11.00 | | $ | 6.20 |
| 353.05 RUB |
| 250.55 RUB |
2019 | | $ | 10.24 | | $ | 7.31 |
| 323.75 RUB |
| 299.60 RUB |
2018 | | $ | 12.80 | | $ | 6.64 |
| 321.00 RUB |
| 222.40 RUB |
2017 | | $ | 11.58 | | $ | 7.77 |
| 296.95 RUB |
| 223.05 RUB |
|
|
|
|
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Our common stock has been listed on the Moscow Interbank Currency Exchange (currently Moscow Exchange) since December 2003. ADSs, each representing two shares of our common stock, have been listed on the New York Stock Exchange under the symbol “MBT” since July 6, 2000. Our U.S. dollar-denominatedU.S.dollar-denominated notes due in 2023 are listed on the Irish Stock Exchange. Our ruble-denominated notes are listed on the Moscow Exchange.
In April 2022, Russian Federal Law No. 114-FZ dated April 16, 2022 (the “Delisting Law”) which required Russian companies to terminate their depositary receipt programmes unless granted an exemption by the Russian Government Commission on Monitoring Foreign Investment came into force. PJSC MTS submitted an application for such exemption, and in May 2022 received permission to maintain ADR Program until July 12, 2022.
In June, MTS informed JPMorgan Chase Bank, N.A., the depositary under the existing MTS ADR program, of its intention to terminate the Deposit Agreement, effective as of July 13, 2022.
In August, MTS received confirmation from the NYSE that the Company’s ADRs had been delisted from the NYSE effective August 8, 2022. Under the terms of the Deposit Agreement, the conversion of MTS’s ADRs into MTS’s ordinary shares shall be completed within six months after July 12, 2022, i.e., by January 12, 2023 (inclusive).
Item 10. Additional Information
A. | Share Capital |
Not applicable.
B. | Charter and Certain Requirements of Russian Legislation |
Charter and Certain Requirements of Russian Legislation
We describe below material provisions of our charter and certain requirements of Russian legislation. In addition to this description, we urge you to review our charter to learn its complete terms.
Our Purpose
Article 2.1 of our charter provides that our principal purpose is to obtain profits through the planning, marketing, establishing and operating communications network and facilities, to provide access to Internet and to render communications services on our license territories.
We are registered with the Ministry of Taxes and Duties of the Russian Federation under the state registration number 1027700149124.
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General Matters
Pursuant to our charter, we have the right to issue registered common stock, preferred stock and other securities provided for by legal acts of the Russian Federation with respect to securities. Our capital stock currently consists of 1,998,381,575 common shares, each with a par value of 0.10 rubles, all of which are issued and fully paid. Under Russian legislation, charter capital refers to the aggregate par value of the issued and outstanding shares. We are also authorized to issue an additional 100,000,000 common shares with a par value of 0.10 rubles each. We have issued only common stock. No preferred shares are authorized or outstanding. Preferred stock may only be issued if corresponding amendments have been made to our charter pursuant to a resolution of the general meeting of shareholders.
The Joint Stock Companies Law requires us to dispose of any of our shares that we acquire within one year of their acquisition or, failing that, reduce our charter capital. We refer to such shares as treasury shares for the purposes hereof. Russian legislation does not allow for the voting of such treasury shares. Any of our shares that are owned by our subsidiaries are not considered treasury shares under Russian law (i.e., they are considered outstanding shares), and our subsidiaries holding such shares are able to vote and dispose of such shares without any further corporate actions by our shareholders or Board of Directors.
Until March 24, 2022, Sistema owned 42.085% of MTS’s ordinary shares directly and through Sistema Finance (“SF”) and Sistema Telecom Activy (“STA”). That stake was below 50% but it exceeded the total stake held by other unaffiliated shareholders (free-float) which was 41.185% before March 24, 2022. Until March 24, 2022, quasi-treasury shares (i.e., MTS’s ordinary shares owned by MTS’s subsidiaries) amounted to 14.79% of MTS’s share capital while treasury shares (i.e., MTS’ ordinary shares owned by MTS) amounted to 1.94% of MTS’s share capital.
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Treasury shares are non-voting shares pursuant to the Russian Federal Law on Joint-Stock Companies. Additionally, MTS, as a public company listed on the Moscow Exchange and NYSE, does not exercise voting rights with respect to its quasi-treasury shares according to the best practices and recommendations of the Corporate Governance Code by the Central Bank of Russia. Moreover, the right and discretion on how to vote with regard to the quasi-treasury shares owned by MTS’s subsidiaries are vested in the CEOs of these subsidiaries. Such CEOs are appointed by shareholder resolutions, following a proposal from the President of MTS or, in the case of MGTS, solely by the board of the subsidiary.
Sistema’s former 42.085% stake in MTS, compared to the 41.185% stake of other shareholders, gave Sistema the ability to elect the majority of the members of MTS’s Board of Directors and therefore appoint MTS’s executive bodies, thus exercising indirect control over MTS and its subsidiaries.
On March 24, 2022, the President and Chairman of the Management Board of MTS acquired 19,983,816 ordinary shares of the Company, which resulted in a decrease of Sistema’s effective ownership in MTS below 50% as the stake of other shareholders (free float) in MTS, equal to 42.185% as of March 24, 2022, became higher than Sistema’s stake in MTS, equal to 42.085% as of March 24, 2022.
As a result, Sistema, jointly with its subsidiaries, ceased to have an unconditional unilateral ability to elect the majority of the members of the Board of Directors and appoint the executive bodies of MTS.
As of December 31, 2019 MTS held 17,664 treasury shares. MTS held 405,347 and 38,715,838 treasury shares as of December 31, 2020 and 2021 respectively. As of March 24, 2022, MTS held a total of 38,715,838 of MTS shares.
Pursuant to our shareholders’ right to demand share repurchase under article 75 of the Joint Stock Companies Law, we repurchased in April, 2020 - 387,683, in May, 2021 - 9,805,921, in December, 2021 - 28,504,570 shares from our shareholders. As of December 31, 2019, our subsidiaries held a total of 225,529,758 of MTS shares. As of December 31, 2020, our subsidiaries held a total of 271,074,059 of MTS shares. As of December 31, 2021, our subsidiaries held a total of 297,041,619 of MTS shares. As of March 24, 2022, our subsidiaries held a total of 275,628,419 of MTS shares.
See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.” In our consolidated financial statements prepared in accordance with IFRS, these shares are considered treasury shares (i.e., they are considered not outstanding).
As of the date of this document, we had more than ten thousand shareholders for purposes of the Joint Stock Companies Law.
Rights Attaching to Shares
Holders of our common stock have the right to vote at all shareholders’ meetings. As required by the Joint Stock Companies Law and our charter, all shares of our common stock have the same par value and grant identical rights to their holders. Each fully paid share of common stock, except for treasury shares, gives its holder the right to:
● | freely transfer the shares without our consent and the consent of other |
● | receive |
● | participate in shareholders’ meetings and vote on all matters within shareholders’ competence; |
● | transfer voting rights to a representative on the basis of a power of attorney; |
● | participate in the election and dismissal of members of the Board of Directors and Auditing Commission; |
● | exercise its pre-emptive right in certain circumstances, as determined by the Joint Stock Companies Law; |
● | if holding, alone or with other holders, 1% or more of the outstanding common shares, file a lawsuit against a member of the Board of Directors or member of any executive body of the company (including the company’s CEO and/or the company’s managing organization) to reimburse damages suffered by the company as the result of their fault (however, |
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until December 31, |
● | if holding, alone or with other holders, 1% or more of the outstanding common shares, file a lawsuit with the claim for recognition of the invalid major transaction and interested party transaction made with violation of a procedure of receiving consent (however, until December 31, |
● | if holding, alone or with other holders, more than 1% of the voting shares, demand from the holder of register of shareholders to provide information on shareholders of the company and shares held by such shareholders (however, until December 31, |
● | if holding, alone or with other holders, 2% or more of the voting stock, within 100 days after the end of our fiscal year, make proposals for the agenda of the annual shareholders’ meeting and nominate candidates (including by self-nomination) to the Board of Directors, the Counting Commission and the Auditing Commission; |
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● | if holding, alone or with other holders, 10% or more of the voting stock, demand from the Board of Directors the calling of an extraordinary shareholders’ meeting or an unscheduled audit by the Auditing Commission or an independent auditor, and file a lawsuit against the company to convene an extraordinary shareholders’ meeting if the Board of Directors fails to take a decision to convene an extraordinary shareholders’ meeting or decides against convening such meeting; |
● | demand, under the following circumstances, the repurchase by us of all or some of the shares owned by it, as long as such holder voted against or did not participate in the voting on the decision approving the following: |
● | any reorganization; |
● | the conclusion of a major transaction, the value of which exceeds 50% of the balance sheet value of the assets calculated under Russian Accounting Standards (“RAS”); |
● | any amendment of our charter or approval of a restated version of our charter in a manner that restricts the holder’s rights; |
● | delisting of our shares from a stock exchange; and |
● | the amendment of the public company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares (i.e., transformation to a non-public company); |
● | upon liquidation, receive a proportionate amount of our property after our obligations are fulfilled; |
● | have free access to certain company documents, receive copies for a reasonable fee and, if holding alone or with other holders, 25% or more of the voting stock, have access to accounting documents and minutes of the management board meetings; |
● | if holding, alone or with other shareholders at least 1% of the voting shares, demand consent for an interested party transaction; and |
● | exercise other rights of a shareholder provided by our charter, Russian legislation and decisions of shareholders’ meeting approved in accordance with its competence. |
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Pre-emptive Rights
The Joint Stock Companies Law and our charter provide existing shareholders with a pre-emptive right to purchase shares or securities convertible into shares during an open subscription in the amount proportionate to their existing shareholdings. In addition, the Joint Stock Companies Law provides shareholders with a pre-emptive right to purchase shares or securities convertible into shares, in an amount proportionate to their existing shareholdings, during a private subscription if the shareholders voted against or did not participate in the voting on the decision approving such subscription. The pre-emptive right does not apply to a private subscription to the existing shareholders provided that such shareholders may each acquire a whole number of shares or securities convertible into shares being placed in an amount proportionate to their existing shareholdings. We must provide shareholders with written notice of their pre-emptive right to purchase shares and the period during which shareholders can exercise their pre-emptive rights may not be less than 45 or, under certain circumstances, 20 or even eight business days. We cannot sell the shares or securities convertible into shares which are subject to the pre-emptive rights during this period.
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Dividends
The Joint Stock Companies Law and our charter set forth the procedure for determining the quarterly and annual dividends that we may distribute to our shareholders. We may declare dividends based on our first quarter, six month, nine month or annual results. Dividends are recommended to a shareholders’ meeting by a majority vote of the Board of Directors and approved by the shareholders by a majority vote. A decision on quarterly, six month and nine month dividends must be taken within three months of the end of the respective quarter at the extraordinary shareholders’ meeting; and a decision on annual dividends must be taken at the annual general shareholders’ meeting. The dividend approved at the shareholders’ meeting may not be more than the amount recommended by the Board of Directors.
The Joint Stock Companies Law allows dividends to be declared only out of net profits calculated under RAS as long as the following conditions have been met:
● | the charter capital of the company has been paid in full; |
● | the value of the company’s net assets on the date of the adoption of the decision to pay dividends is not less (and would not become less as a result of the proposed dividend payment) than the sum of the company’s charter capital, the company’s reserve fund and the difference between the liquidation value and the par value of the issued and outstanding preferred stock of the company; |
● | the company has repurchased all shares from shareholders having the right to demand repurchase; and |
● | the company is not, and would not become, insolvent as the result of the proposed dividend payment. |
The Joint Stock Companies Law and the Securities Market Law have been amended on December 29, 2012 to adopt new dividend payment rules that came into force January 1, 2014. These amendments include new rules on determining the shareholders entitled to dividend distribution whereby the list of such shareholders is fixed at date determined in the decision of the General shareholders’ meeting on the distribution of dividends. The date shall be not earlier than 10 days and not later than 20 days following the date of such decision. The dividends are to be paid to private shareholders registered in the share register of the company within 25 business days and to nominal holders and professional managers within 10 business days from the date on which persons entitled to receive dividends are determined. If shares are held on a depo account with a depository, dividends will be transferred to such shareholders by such depositary within seven business days of receipt of funds by the depositary.
Pursuant to InstructionsDecree of the BankPresident of Russia No. 018-34-3/120295 dated February 28,March 5, 2022 professional participants(version as of the securities market engagedOctober 10, 2022), the dividends for non- Russian residents are to be paid according to the special procedure established by the Decree. Dividends which exceed of 10 million rubles are to be through special accounts of type "С".
The funds held in depository activities and maintenancea bank account of registerstype "С" can be used only for several operations, such as:
● | payment of taxes, duties, fees and other mandatory payments payable in accordance with the budget legislation of the Russian Federation; |
● | transfers for the purchase of federal loan bonds placed by the Ministry of Finance of the Russian Federation at auctions; |
● | transfers to another bank accounts of type "С"; |
● | payment of commissions to the authorized bank that is servicing the account. |
To use the funds held in the type "С" account for other purposes other than the above, it is necessary to obtain a special permit from the Ministry of security holders are instructedFinance of the Russian Federation.
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Moreover, the terms for obtaining the permission to suspend the transfer of payments on securitiespay dividends of Russian issuersjoint-stock and limited liability companies exceeding 10 mln RUB to foreign individuals and entities. Among other things, this effectively means prohibiting foreigners from receiving dividends on shares. The Instructions will remain in force for six months unless revoked earlier.certain non-residents were introduced. These are:
● | the amount of paid profit (dividends) is not more than 50% of the amount of net profit for the previous year; |
● | the results of a retrospective analysis of the payment of profits (dividends) for previous periods are taken into account; |
● | there is a willingness of foreign participants (shareholders) to continue commercial activities in the territory of the Russian Federation; |
● | the positions of the federal executive authorities and the Central Bank of the Russian Federation on the assessment of the significance of the organization's activities and the impact of the activities carried out by the organization on the technological and industrial sovereignty of the Russian Federation, the socio-economic development of the Russian Federation (regions of the Russian Federation) are taken into account; |
● | federal executive authorities have established quarterly key performance indicators for the organization; |
● | it is possible to pay dividends on a quarterly basis, provided that the established key performance indicators are met. |
Distributions to Shareholders on Liquidation
Under Russian legislation, liquidation of a company results in its termination without the transfer of rights and obligations to other persons as legal successors. The Joint Stock Companies Law and our charter allow us to be liquidated:
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● | by a three-quarters majority vote of a shareholders’ meeting; or |
● | by a court order. |
Following a decision to liquidate us, the right to manage our affairs would pass to a liquidation commission appointed by a shareholders’ meeting. In the event of an involuntary liquidation, the court may assign the duty to liquidate the company to its shareholders. Creditors may file claims within a period to be determined by the liquidation commission, but such period must not be less than two months from the date of publication of notice of liquidation by the liquidation commission.
The Civil Code of the Russian Federation gives creditors the following order of priority during liquidation:
● | individuals owed compensation for injuries or deaths; |
● | employees and authors of intellectual property; |
● | federal and local governmental entities claiming taxes and similar payments to the federal and local budgets and to non-budgetary funds; and |
● | other creditors in accordance with Russian legislation. |
Claims of creditors in obligations secured by a pledge of the company’s property (“secured claims”) are satisfied out of the proceeds of sale of the pledged property prior to claims of any other creditors except for the creditors of the first and second priorities described above, provided that claims of such creditors arose before the pledge agreements in respect of the company’s property were made. To the extent that the proceeds of sale of the pledged property are not sufficient to satisfy secured claims, the latter are satisfied simultaneously with claims of the fourth priority creditors as described above.
The Federal Law on Insolvency (Bankruptcy), however, provides for a different order of priority for creditors’ claims in the event of bankruptcy.
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The remaining assets of a company are distributed among shareholders in the following order of priority:
● | payments to repurchase shares from shareholders having the right to demand repurchase; |
● | payments of declared but unpaid dividends on preferred shares and the liquidation value of the preferred shares determined by the company’s charter, if any; and |
● | payments to holders of common and preferred shares. |
Liability of Shareholders
The Civil Code of the Russian Federation and the Joint Stock Companies Law generally provide that shareholders in a Russian joint stock company are not liable for the obligations of a joint stock company and bear only the risk of loss of their investments. This may not be the case, however, when one company is capable of determining decisions made by another company. The company capable of determining such decisions is called an “effective parent.” The company whose decisions are capable of being so determined is called an “effective subsidiary.” The effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:
● | this decision-making capability is provided for in the charter of the effective subsidiary or in a contract between such persons; and |
● | the effective parent gives binding instructions or consent for a transaction to the effective subsidiary (except for voting of the effective parent in a shareholders’ meeting of its effective subsidiary and approval by the effective parent’s governing body of a transaction if such approval is required under the charter of the effective parent or the effective subsidiary). |
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In addition, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt resulting from the act or omission of an effective parent only when the effective parent has used the right to give binding instructions, knowing that the consequence of carrying out this act or omission would be insolvency of this effective subsidiary. This is the case no matter how the effective parent’s capability to determine decisions of the effective subsidiary arises, such as through ownership of voting securities or by contract. In these instances, other shareholders of the effective subsidiary may claim compensation for the effective subsidiary’s losses from the effective parent that caused the effective subsidiary to take any action or fail to take any action knowing that such action or failure to take action would result in losses.
Alteration of Capital
Charter Capital Increase
We may increase our charter capital by:
● | issuing new shares; or |
● | increasing the par value of previously issued shares. |
A decision on any issuance of shares or securities convertible into shares by private subscription, or an issuance by open subscription of common shares or securities convertible into common shares constituting 25% or more of the number of issued common shares, requires a three-quarters majority vote of a shareholders’ meeting. Otherwise, a decision to increase the charter capital by increasing the par value of issued shares requires a majority vote of a shareholders’ meeting. In certain circumstances provided in our charter, a decision to increase the charter capital may be taken by our Board of Directors. In addition, the issuance of shares above the number provided in our charter necessitates a charter amendment, which requires a three-quarters affirmative vote of a shareholders’ meeting.
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The Joint Stock Companies Law requires that the value of newly issued shares be determined by the board of directors based on their market value but not less than their par value. The price of newly issued shares for existing shareholders exercising their pre-emptive right to purchase shares could be less than the price paid by third parties, but not less than 90% of the price paid by third parties. Fees paid to intermediaries may not exceed 10% of the shares placement price. The board of directors shall value any in-kind contributions for new shares, based on the appraisal report of an appraiser.
Russian securities regulations set out detailed procedures for the issuance and registration of shares of a joint stock company. These procedures require:
● | taking a decision on a share placement; |
● | approval of a resolution on a share issuance; |
● | prior registration of the share issuance with the CBR; |
● | placement of shares; |
● | filing with the CBR and registration of a report or a notice (as applicable) on results of the share issuance; and |
● | public disclosure of information relating to the issuance of shares. |
Charter Capital Decrease; Share Buy-Backs
The Joint Stock Companies Law does not allow a company to reduce its charter capital below the minimum charter capital required by law, which is 100,000 rubles for a public joint stock company. The Joint Stock Companies Law and our charter require that any decision to reduce our charter capital through the repurchase and cancellation of shares, be made by a majority vote of a shareholders’ meeting and through reduction of the par value of shares, by a three-quarter majority vote of a shareholders’ meeting. Additionally, within three business days of a decision to reduce our charter capital, we must notify the federal executive body in
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charge of the state registration of legal entities on the decision taken and publish within the same three-day period a notice regarding the charter capital reduction, as well as a second notice one month after the first notice is published. Our creditors, whose claims arose before the decision on the charter capital decrease was taken, would then have the right to demand, not later than 30 days of the second publication of the notice, early termination or settlement of relevant obligations by us, as well as compensation for damages.
The Joint Stock Companies Law and our charter allow our shareholders or the Board of Directors to authorize the repurchase of up to 10% of our shares in exchange for cash. The repurchased shares pursuant to a board decision must be resold at the market price within one year of their repurchase or, failing that, the shareholders must decide to cancel such shares and decrease the charter capital. Repurchased shares do not bear voting rights.
Shares repurchased pursuant to a decision of our shareholders’ meeting to decrease the overall number of shares are cancelled at their redemption.
The Joint Stock Companies Law allows us to repurchase our shares only if, at the time of repurchase:
● | our charter capital is paid in full; |
● | we are not and would not become, as a result of the repurchase, insolvent; |
● | the value of our net assets at the time of repurchase of our shares is not less (and would not become less, as a result of the proposed repurchase) than the sum of our charter capital, the reserve fund and the difference between the liquidation value and par value of our issued and outstanding preferred shares; and |
● | we have repurchased all shares from shareholders having the right to demand repurchase of their shares in accordance with Russian law, as described immediately below. |
However, the Federal Law No. 46-FZ dated March 8, 2022 enforced a new simplified procedure for share buy-backs until August 31, 2022. According to the new rules we have a right to repurchase our shares if the following conditions are satisfied:132
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However, these temporary rules are not applicable if we repurchase shares in order to reduce the overall number of shares.
Information about the repurchase may not be disclosed, if this is provided for by the decision on the Board of Directors. Moreover, the provisions of paragraphs 4, 5, 7, 8 of Article 72 of the Joint Stock Companies Law do not apply to the Company, including:
-on receipt of statements from shareholders on the sale of their shares to the Company;
-the Company does not need to notify shareholders about the repurchase;
-the Board of Directors should not approve the report on the results of the shareholders’ statements on the sale of their shares.
Our subsidiaries are not restricted from purchasing our shares, and our subsidiaries can vote these shares. However, our subsidiaries did not vote with such shares in 2019, 2020, 2021 and 2021.2022.
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The Joint Stock Companies Law and our charter provide that our shareholders may demand repurchase of all or some of their shares as long as the shareholder demanding repurchase voted against or did not participate in the voting on the decision approving any of the following actions:
● | any reorganization; |
● | the conclusion of a major transaction, which involves assets having value of more than 50% of the balance sheet value of the assets calculated under RAS (including those which are simultaneously interested party transactions); or |
● | any amendment of our charter or approval of a restated version of our charter in a manner which restricts shareholders’ rights; and |
● | the amendment of the public company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares. |
We may spend up to 10% of our net assets calculated under RAS on the date of the adoption of the decision which gives rise to a share redemption demanded by the shareholders. If the value of shares in respect of which shareholders have exercised their right to demand repurchase exceeds 10% of our net assets, we will repurchase shares from each such shareholder on a pro-rata basis. Repurchase of the shares is made at a price agreed on by the board of directors, but it should not be less than the market price.
Registration and Transfer of Shares
Russian legislation requires that a joint stock company ensures maintenance of a register of its shareholders, which for a public joint stock company, shall be maintained by a registrar. Registrar NIKoil OJSC had maintained our register of shareholders since May 10, 2000. In July 2014, it has been merged into Independent Registration Company JSC (known as Computershare Registrar JSC prior to October 6, 2015) and on February 4, 2019, Independent Registration Company JSC has been merged into JSC IRC—R.O.S.T. which now maintainswas maintaining our register of shareholders by way of universal succession.
On December 19, 2019, our Board of Directors adopted a decision to terminate the existing agreement with JSC IRC—R.O.S.T. and enter into relevant agreement with JSC REESTR and starting from April 10, 2020 our register is maintained by REESTR.
The Federal Law No. 414-FZ “On the Central Depositary” dated December 7, 2011 (the “Central Depositary Law”), which came into force on January 1, 2012, set out a legal framework for establishment and operation of the central depositary. On November 6, 2012, the Russian Federal Financial Markets Service granted the JSC National Settlement Depositary the status of central depositary which opened its nominee holder accounts in, among others, all securities registers of the issuers which are obliged to disclose information in accordance with Russian securities law. As we are required to make public disclosures, the above requirement is applicable to us, which means that the central depositary became the only person having a nominee holder account in our share register. Also, the Central Depositary Law prohibits persons maintaining securities registers from opening and depositing securities (save for limited exceptions) to other nominee holder accounts from the date of the opening of a nominee holder account with the central depositary.
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Ownership of our registered shares is evidenced by entries made in the register of shareholders, on the books of the central depositary or a Russian licensed depositary. Any of our shareholders may obtain an extract from the register of our shareholders maintained by the registrar or from their respective depositary, as the case may be, certifying the number of shares that such shareholder holds. We are also entitled to obtain an extract from our shareholders’ register which sets out all of our shareholders registered directly therein. In addition, we are entitled to obtain a list of nominal holders that opened depo accounts with the central depository, as well as a list of entities that have accounts opened with the nominal holders, given that such list is provided by the relevant nominal holder. However, we are unable to monitor transfers of our shares that are held on the books of depositaries registered with the central depository because underlying shareholders have no obligation to reveal and such depositaries have no obligation to notify us about such transfers. As a result, we can currently only identify our actual shareholders in a limited number of cases provided for by Russian law, including when requesting our registrar and the central depository to compile a list of shareholders
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of record for the General Shareholders’ Meeting and when shareholders and ADS holders provide voting instructions together with disclosure of information, including ownership information, in accordance with Russian securities regulations.
The purchase, sale or other transfer of shares is accomplished through the registration of the transfer in the shareholder register, or the registration of the transfer with a depositary if shares are held by a depositary. The registrar or depositary may not require any documents in addition to those required by Russian legislation in order to transfer shares in the register. Refusal to register the shares in the name of the transferee or, upon request of the beneficial holder, in the name of a nominee holder, is not allowed, except in certain instances provided for by Russian legislation, and may be challenged in court.
Pursuant to Instructions of the Bank of Russia No. 018-34-3/1202 dated February 28, 2022, professional participants of the securities market engaged in depository activities and maintenance of registers of security holders are instructed to withhold performance of all operations on the withdrawal of securities of Russian issuers from personal accounts and depot accounts opened to foreign legal entities and individuals (with a very limited number of exceptions). Among other things, this effectively means prohibiting foreigners from selling shares of Russian companies. The Instructions will remain in force for six months unless revoked earlier.
However, the Government of the Russian Federation adopted the Decree N 295, dated March 6, 2022, according to which the Government Commission for Monitoring the Implementation of Foreign Investments in the Russian Federation will issue permissions for implementation (execution) by residents of transactions (operations) with such foreign persons.
On March 1, 2022, the President of the Russian Federation signed Decree No. 81 “On additional temporary economic measures to ensure financial stability in Russia”, pursuant to which with effect from March 2, 2022, a special procedure is introduced for residents in order to make certain transactions with foreign persons associated with foreign states (including their controlled persons) that commit unfriendly acts in relation to Russian legal entities and individuals,certain non-residents, including for instance, transactions creating the right of ownership of securities made with persons of foreign states committing unfriendly actscertain non-residents (including their controlled persons). The Government of the Russian Federation adopted the Decree N 295, dated March 6, 2022, according to which the Government Commission for Monitoring the Implementation of Foreign Investments in the Russian Federation will issue permissions for implementation (execution) by residents of transactions (operations) with such foreign persons.
Decrees of the President of the Russian Federation dated March 1, 2022 № 81 and dated September 8, 2022 № 618 introduced restrictions on transactions entailing the ownership of securities as well as establishment, change of ownership or termination of the rights of ownership, as well as other rights that allow determining the management and / or entrepreneurial activity of Russian limited liability companies, if these transactions are concluded with the participation of a certain non-residents. Such transactions are possible only if the permission of the Special governmental Commission is obtained.
In December 2022, the Subcommittee of the Special governmental Commission introduced the terms, which the Special governmental Commission takes into consideration when delivering the permission. These are:
● | existence of an independent assessment of the market value of assets; |
● | sale of assets at a discount of at least 50% of the market value of the relevant assets indicated in the asset valuation report; |
● | establishment of key performance indicators for new shareholders (owners) in the transaction documentation; |
● | availability of installment payments for 1-2 years and (or) an obligation to voluntarily send funds to the federal budget in the amount of at least 10% of the amount of the transaction (operation) being carried out. |
Reserve Fund
Russian legislation requires that each joint stock company establish a reserve fund to be used only to cover the company’s losses, redeem the company’s bonds and repurchase the company’s shares in cases when other funds are not available. Our charter provides for a reserve fund of 15% of our charter capital, funded through mandatory annual transfers of at least 5% of our net profits until the reserve fund has reached the 15% requirement.
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Disclosure of Information
The Central Bank of Russia developed and adopted regulations “On the disclosure of information by issuers of securities” No. 714-P dated March 27, 2020 that arrange substantial changes to the system of disclosure of information. These regulations came into force on October 1, 2021. Regulations require us to make the following periodic disclosure and fillings:
● | disclosing issuer’s report every six and twelve months instead of posting quarterly reports. Pursuant to these new regulations, we do not have to disclose information about bank accounts, branches and representative offices, size and structure of our charter capital in the issuer’s report; |
● | publishing any information (including inside information) concerning material facts and changes in our financial and business activity, including our reorganization, certain changes in the amount of our assets, decisions on share issuances, certain corporate events, such as mandatory or voluntary tender offers, record dates, certain changes in ownership and shareholding, filing of any material claim against us, obtainment or revocation of material licenses, entry into certain transactions, as well as shareholders’ and certain board of directors’ resolutions and certain information regarding our material subsidiaries; |
● | disclosing information on various stages of share placement, issuance and registration through publication of certain data as required by the securities regulations; |
● | disclosing our charter and internal corporate governance documents on our website; |
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● | disclosing our annual report and annual financial statements prepared in accordance with RAS, as well as annual and interim financial statements prepared in accordance with IFRS; |
● | posting on our website a list of our affiliated companies and individuals every six months instead of quarterly basis; |
● | posting on our website a list of inside information; and |
● | other information as required by applicable Russian securities legislation. |
Moreover, according to the new regulations, for the preparation of the issuer'sissuer’s report, we will use IFRS for calculation of financial performance, and the most important information, including operational and financial performance and data about key contractors, will be disclosed on a consolidated basis by group.
However, the Decree of the Government of the Russian Federation dated March 12, 2022 No. 351 (in the edition as of November 24, 2022) allows us not to disclose or disclose in a limited manner certainsome information until December 31, 2022.July 1, 2023.
General Shareholders’ Meetings
Procedure
The powers of a shareholders’ meeting are set forth in the Joint Stock Companies Law and in our charter. In a public joint stock company a shareholders’ meeting may not decide on issues that are not included in the list of its competence by the Joint Stock Companies Law. Among the issues which our shareholders have the power to decide on are:
● | charter amendments; |
● | reorganization or liquidation; |
● | election and removal of members of the board of directors; |
● | determination of the amount of compensation for members of the board of directors; |
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● | determination of the number, par value, class/type of authorized shares and the rights granted by such shares; |
● | changes in our charter capital in certain instances; |
● | appointment and removal of our independent auditor and of the members of our Auditing Commission and Counting Commission if it is obligatory for the company to have the Auditing Commission; |
● | participation in trade or industrial groups, or other associations of commercial entities; |
● | approval of certain internal documents and corporate records; |
● | distribution of profits and losses, including approval of dividends; |
● | redemption by the company of issued shares in cases provided by the Joint Stock Companies Law; and |
● | other matters, as provided for by the Joint Stock Companies Law and our charter. |
Voting at a shareholders’ meeting is generally based on the principle of one vote per share of common stock, with the exception of the election of the board of directors, which is done through cumulative voting. Decisions are generally passed by a
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majority vote of the voting shares present at a shareholders’ meeting. However, Russian law and our charter requires a three-quarters majority vote of the voting shares present at a shareholders’ meeting to approve the following:
● | charter amendments; |
● | reorganization or liquidation; |
● | consent or subsequent approval of major transactions involving assets in excess of 50% of the balance sheet value of the company’s assets calculated under RAS; |
● | the number, par value, and category (type) of authorized shares and the rights granted by such shares; |
● | repurchase by the company of its issued shares; |
● | any issuance of shares or securities convertible into shares of common stock by private subscription; |
● | issuance by open subscription of shares of common stock or securities convertible into common stock, in each case, constituting 25% or more of the number of issued and outstanding shares of common stock; |
● | issuance by private subscription securities convertible into common stock; |
● | increase of the charter capital through issuing additional shares by private subscription; |
● | decrease of the charter capital through reduction of the par value of shares; or |
● | filing of an application for delisting of our shares or securities convertible into shares. |
Moreover, a ninety-five majority vote of the voting shares present at a shareholders’ meeting is required to approve the amendment of the public company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and equity securities convertible into shares (i.e., transformation to a non-public company).
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The quorum requirement for our shareholders’ meetings is met if holders of shares (or their representatives) accounting for more than 50% of the issued voting shares are present. If the 50% quorum requirement is not met, another shareholders’ meeting with the same agenda may (and, in case of an annual shareholders’ meeting must) be scheduled and the quorum requirement is satisfied if holders of shares (or their representatives) accounting for at least 30% of the issued voting shares are present at that meeting.
The annual shareholders’ meeting must be convened by the board of directors between March 1 and June 30 of each year, and the agenda must include the following items:
● | election of the members of the board of directors; |
● | approval of the annual report and the annual financial statements, including the balance sheet and profit and loss statement; |
● | approval of distribution of profits, including approval of dividends, and losses, if any; |
● | appointment of an independent auditor; and |
● | appointment of the members of the auditing commission. |
A shareholder or group of shareholders owning in the aggregate at least 2% of the issued voting shares may introduce proposals for the agenda of the annual shareholders’ meeting and may nominate candidates for the board of directors, counting
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commission and auditing commission. Any agenda proposals or nominations must be provided to the company no later than 100 calendar days after the preceding financial year end.
Extraordinary shareholders’ meetings may be called by the board of directors on its own initiative, or at the request of the auditing commission, the independent auditor or a shareholder or group of shareholders owning in the aggregate at least 10% of the issued voting shares as of the date of the request. The decision to call or reject the call for an extraordinary shareholders’ meeting shall be made by the board of directors within five days from the receipt date of the request and sent to the party that requested the meeting within three days after such a decision was made.
A general meeting of shareholders may be held in a form of a meeting or by absentee ballot. The form of a meeting contemplates the adoption of resolutions by the general meeting of shareholders through the attendance of the shareholders or their authorized representatives for the purpose of discussing and voting on issues of the agenda, provided that if a ballot is mailed to shareholders for participation at a meeting convened in such form, the shareholders may complete and mail the ballot back to the company without personally attending the meeting. A general meeting of the shareholders by absentee ballot contemplates the determination of collecting shareholders’ opinions on issues of the agenda by means of a written poll.
The following issues cannot be decided by a shareholders’ meeting by absentee ballot:
● | election of the members of the board of directors; |
● | election of the auditing commission; |
● | approval of a company’s independent auditor; and |
● | approval of the annual report, the annual financial statements. |
At the same time, the provision establishing these restrictions on holding a general meeting of shareholders in absentia was suspended until the end of 20212022 due to the COVID-19 pandemic (Articles 2 and 3 of Federal Law No. 17-FZ25-FZ dated February 24, 2021)25, 2022).
Moreover, in 2022,2023, general meetings of shareholders, the agenda of which contains the above issues, could also be held in absentia (Article 2 of Federal Law No. 25-FZ dated February 25, 2022 (in the edition as of December 19, 2022).
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Notice and Participation
Pursuant to the Joint Stock Companies Law, persons registered in the register of shareholders and entitled to participate in a general shareholders’ meeting must be notified of the meeting, whether the meeting is to be held in the form of a meeting or by absentee ballot, no less than 21 days (or 30 days if the agenda includes an item on reorganization) prior to the date of the meeting, and such notification shall specify the agenda for the meeting.
However, Article 17 of the Federal Law No. 46-FZ dated March 8, 2022 (in the edition as of December 19, 2022) set new rules for the notice until December 31, 20222023 - shareholders and persons entitled to participate in a general shareholders’ meeting must be notified of the meeting, whether the meeting is to be held in the form of a meeting or by absentee ballot, no less than 35 days prior to the date of the meeting.
Moreover, according to these new provisions, we have to determine the date by which proposals on putting issues on the agenda of the general shareholders’ meeting and proposals on nominating candidates to the Board of Directors and other bodies of the company will be accepted from shareholders, but not less than 27 days prior the date of the general shareholders’ meeting.
However, if it is an extraordinary shareholders’ meeting to elect the board of directors, persons registered in the register of shareholders and entitled to participate in the general shareholder’s meeting must be notified at least 50 days prior to the date of the meeting. Only those items that were set out in the agenda to shareholders may be voted upon at a general shareholders’ meeting.
If a nominal holder of the shares registers in the register of shareholders, then a notification of the shareholders’ meeting shall be sent to the nominal holder. The nominal holder must notify its clients in accordance with Russian legislation or an agreement with the client. The list of persons entitled to participate in a general shareholders’ meeting is to be compiled on the basis of data in our
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shareholders register on the date established by the board of directors, which date may neither be earlier than the 10 days after the date of adoption of the board resolution to hold a general shareholders’ meeting nor more than 25 days before the date of the meeting (or, in the case of an extraordinary shareholders’ meeting to elect the board of directors, not later than 55 days before the date of the meeting).
The right to participate in a general meeting of shareholders may be exercised by a shareholder as follows:
● | by personally participating in the discussion of agenda items and voting thereon; |
● | by sending an authorized representative to participate in the discussion of agenda items and to vote thereon; |
● | by submitting a written ballot reflecting the shareholders’ voting on the agenda items; |
● | by delegating the right to submit such written ballot to an authorized representative; or |
● | by sending information on their willingness to the nominee holder for further transfer to the registrar in accordance with the requirements of the Russian securities law. |
The decision of the Board of Directors to convene the General meeting of shareholders may provide for the possibility to fill the electronic voting ballots online at website on the Internet.
Board of Directors
Our Board of Directors is elected through cumulative voting. Under cumulative voting, each shareholder may cast an aggregate number of votes equal to the number of shares held by such shareholder multiplied by the number of persons to be elected to our Board of Directors, and the shareholder may give all such votes to one candidate or spread them between two or more candidates. Before the expiration of their term, the directors may be removed as a group at any time without cause by a majority vote of a shareholders’ meeting.
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The Joint Stock Companies Law requires at least a three-member board of directors for joint stock companies, a five-member board of directors for allpublic joint stock companies, at least a seven-member board of directors for a joint stock company with more than 1,000 holders of voting shares, and at least a nine-member board of directors for a joint stock company with more than 10,000 holders of voting shares. Only natural persons (as opposed to legal entities) are entitled to sit on the board. Members of the board of directors are not required to be shareholders of the company. The actual number of directors is determined by the company’s charter or a decision of the shareholders’ meeting. Our charter provides that our Board of Directors consists of at least sevennine members, which number may be increased pursuant to a decision of the general meeting of shareholders. In 2021,Our Board of Directors was formed at the annual General Meeting of Shareholders consisting of 9 members.
The Joint Stock Companies Law requires for the quorum of the board of directors’s meeting half of the elected directors. The retirement of one of our director and decrease in the number of members of our Board of Directors consisteddon’t effect on the Board’s quorum since five of nine members. Currently, our Boardthe elected directors are needed to attend the Board’s meeting to meet this quorum requirement.
Furthermore, according to the Federal Law No. 519-FZ dated December 19, 2022, board of Directorsdirectors is considered to meet the above-mentioned quorum requirement till December 31, 2023 even if someone is resigned and the number of board’s members drops below half of elected directors. However, if retirement cases occur, board of directors should not consists of eight members4.less than three members.
4 One of our directors resigned as a Member of the Board of Directors of MTS.
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The Joint Stock Companies Law prohibits a board of directors from acting on issues that fall within the competence of the general shareholders’ meeting. Our Board of Directors has the power to perform the general management of the company, and to decide, among others, the following issues:
● | determination of our business priorities; |
● | approval of our annual plans, including financial plans; |
● | capital participation, change of share and termination of capital participation in the commercial organizations (except in certain circumstances specified in our charter when these issues fall within the competence of the General |
● | convening annual and extraordinary shareholders’ meetings, except in certain circumstances specified in the Joint Stock Companies Law; |
● | approval of the agenda for the shareholders’ meeting and determination of the record date for shareholders entitled to participate in a shareholders’ meeting; |
● | placement of our bonds and other securities in cases specified in the Joint Stock Companies Law; |
● | determination of the price of our property and of our securities to be placed or repurchased, as provided for by the Joint Stock Companies Law; |
● | repurchase of our shares, bonds and other securities in certain cases provided for by the Joint Stock Companies Law; |
● | appointment and removal of our President and determination of the number of the members of our Management Board and their election; |
● | formation of the Board of Directors committees; |
● | determination of principles and approaches to risk management, internal control and audit within the company; |
● | transfer of powers of the company’s CEO to a managing organization of an individual manager; |
● | recommendations on the amount of the dividend and the payment procedure thereof; |
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● | recommendations on the amount of remuneration and compensation to be paid to the members of our Auditing Commission and on the fees payable for the services of an independent auditor; |
● | use of our reserve fund and other funds; |
● | approval of our internal documents, except for those documents whose approval falls within the competence of our shareholders or the president; |
● | consent or subsequent approval of major and interested party transactions in certain cases provided for by the Joint Stock Companies Law; |
● | increasing our charter capital by issuing additional shares within the limits of the authorized charter capital, except in certain circumstances specified in our charter; |
● | approval of our share registrar and the terms of the agreement with it; and |
● | other issues, as provided for by the Joint Stock Companies Law and our charter. |
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Our charter generally requires a majority vote of the directors present for an action to pass, with the exception of actions for which Russian legislation requires a unanimous vote or a majority vote of the disinterested and independent directors, as described therein. A board meeting is considered duly assembled and legally competent to act when a majority of elected directors is present.
According to our charter, an exception provides for the competence of the Board of Directors on the participation in the capital of commercial organizations: the decision on participation in "startups"“startups” can be made by the Management Board if: (i) the amount of the transaction is no more than U.S. dollars 2,5, 000, 000 (calculated at the exchange rate between the the ruble and the U.S. dollar quoted by the CBR for the date the decision is made), and (ii) the overall size of the acquired or sold share, taking into account the share that MTS already possess, is less than 50% of the charter capital of the “startup”. The criteria to determine whether the organization is a “startup” are defined by the decision of Board of Directors.
In the past, matters within the competence of our Board of Directors included all transactions on participation in the capital of companies, regardless of the size of the transaction or the size of the acquired or sold share. Since our digital transformation and development of a digital ecosystem actively involves innovative products created by external startups in the ecosystem, and recognizing that the speed of decision-making to invest in a startup is critical, the transfer of competence on investment and management of a portfolio of startups will allow to increase the speed of the decision-making by our level of management when working with startups, and will allow us to increase capitalization through minority investments in startups.
Our internal regulation “On the Board of Directors of Mobile TeleSystems Public Joint Stock Company” (the “Regulation”) was approved by the extraordinary shareholders’ meetingannual General Meeting of Shareholders on September 30, 2021.June 22, 2022. In accordance with clause 2.2.2 of the Regulation, the members of the Board of Directors have the right to:
● | receive information regarding our operations; |
● | propose issues to be discussed by the Board of Directors; |
● | review the minutes of the Board of Directors meetings; |
● | request to include in the minutes of the meetings their personal opinion concerning issues on the agenda and decisions made with respect thereto; |
● | receive a remuneration and/or compensation of expenses related to the execution of their duties as members of the Board of Directors in accordance with decisions of the general shareholders’ meeting; and |
● | be present at the general shareholders’ meeting and answer questions regarding our operations. |
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In accordance with clause 2.3.2 of the Regulation, the members of the Board of Directors must:
● | be loyal to the Company; |
● | execute their duties in a confident and scrupulous manner; |
● | act within their rights and duties in accordance with the goals and objectives of the Board of Directors; |
● | not distribute confidential information concerning us and protect such information from unlawful and improper use and publishing, and not use such confidential information in their own or third parties’ commercial purposes; |
● | participate in the work of the Board of Directors; |
● | participate in the voting process during the Board of Directors meetings; |
● | complete the tasks assigned by the Board of Directors; |
● | evaluate the risks and consequences of the decisions made; |
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● | inform us on a timely basis about their participation in the management of other companies and changes in such participation; |
● | restrain from voting on issues of personal interest; |
● | inform the Board of Directors about future deals in which they may have a personal interest; |
● | disclose information about the holding, disposal or acquisition of our shares and other securities; |
● | restrain from actions, which could lead to a conflict between their personal and our interests; and |
● | perform other responsibilities as provided by our charter and the Regulation. |
Interested Party Transactions
Under the Joint Stock Companies Law, certain transactions are defined as “interested party transactions.” Such transactions include transactions involving a member of the board of directors, the company’s CEO, a member of the company’s management board), any person controlling the company, or any person who is able to give binding instructions to the company, if that person and/or that person’s spouse, parents, children, adoptive parents or children, full and half brothers or sisters and/or their controlled entities, is/are:
● | a party to, or beneficiary of, a transaction with the company, whether directly or as a representative or intermediary; |
● | controlling persons of a legal entity that is a party to, or beneficiary of, a transaction with the company, whether directly or as a representative or intermediary; or |
● | a member of any governing body of a company that is a party to, or beneficiary of, a transaction with the company, whether directly or as a representative or intermediary, or a member of any governing body of a management organization of such a company. |
Pursuant to the Joint Stock Companies Law a “controlling person” is deemed to be a person (i) directly or indirectly controlling over 50% of the voting shares in another legal entity (on the basis of an instruction, a shareholders’ agreement or other agreements); or (ii) having the right to appoint the sole executive body or more than half of the governing body of a controlled entity. A controlled entity is understood to be a legal entity directly or indirectly controlled by the controlling entity.
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Pursuant to the changes to the Joint Stock Companies Law, which entered into force on January 1, 2017, transactions defined as “interested party transactions” do not require a mandatory prior approval by disinterested directors or shareholders of the company. However, a company shall notify members of a board of directors, management board or shareholders (if all members of the board of directors are deemed interested or a board of directors is not formed in a company) of a contemplated interested party transaction not later than 15 days prior to execution of such transaction, and the company’s sole executive body, members of its board of directors and management board or a shareholder (group of shareholders) owning at least 1% of the company’s voting shares may request consent for such interested party transaction.
In public joint stock companies consent or subsequent approval of the transaction shall be granted (if requested by the sole director, a member of the management board, a member of the board of directors or a shareholder owning at least 1% of the company’s voting shares)shares3) by a majority of disinterested directors of the company which within one year prior to the decision:
(1) | did not act as persons performing functions of the sole executive body, including its executive manager, members of the company’s management board or members of the management bodies of the company’s managing organization; |
(2) | did not have spouses, parents, children, adoptive parents and adopted children, full and half brothers and sisters acting as members of the company’s management bodies, members of the management bodies of the company’s managing organization or of its executive manager; and |
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(3) | did not control the company or the company’s managing organization (including its executive manager) or were not entitled to issue instructions binding on the company (collectively, “independent directors”). |
Consent or subsequent approval by a majority of shareholders who are not interested in the transaction and are not controlled by interested persons shall be granted if:
● | the value of such transaction or a number of interrelated transactions is 10% or more of the balance sheet value of the company’s assets determined under RAS; |
● | the transaction or a number of interrelated transactions involves a sale of common shares, in an amount exceeding 2% of the company’s issued common stock, or preference shares, in an amount exceeding 2% of the company’s issued stock, unless the charter of a company provides for a lesser amount of shares; |
● | the number of directors who are not interested in the transaction is not sufficient to constitute a quorum; or |
● | the number of directors who are not interested in the transaction and meet the requirements established by clause 3, Article 83 of the Federal Law “On Joint Stock Companies” becomes less than two, unless the charter of a company provides for a higher quorum for a board of directors meeting on this issue. |
3However, until December 31, 2023 only shareholders holding alone or with other holders at least 5% of voting shares have the right to file such a claim, according to article 3 of the Federal Law No. 55-FZ dated March 14, 2022 in the edition as of December 19, 2022
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Consent or subsequent approval of interested party transactions is not required nor can be requested in the following instances:
● | the transactions are concluded in the ordinary course of business, provided that the company has concluded similar transactions with disinterested parties on substantially similar terms over a long time; |
● | the company has only one shareholder that simultaneously performs the functions of the company’s CEO; |
● | all shareholders owning voting shares of the company are deemed interested in such transactions and there are no other persons interested in such transactions; |
● | the transactions constitute the issuance of shares or securities convertible into shares, including by way of subscription; |
● | the transactions constitute the issuance of bonds by public subscription or repurchase of bonds; |
● | the transactions arise from the repurchase, whether mandatory or not, by the company of its issued shares; |
● | the transactions constitute transfer of assets within the framework of reorganization, in particular under merger and accession agreements; or |
● | the transactions are mandatory for the company pursuant to Russian law and must be concluded on the basis of fixed prices and tariffs adopted by a competent state body; |
● | the transactions are public agreements which terms are similar to other public agreements executed by the company; |
● | the transactions constitute the agreements set out by certain provisions of the Federal Law of the Russian Federation No. 35 “On Electricity Power” dated 26 March 2003; |
● | the transactions concluded on the same terms as preliminary contracts previously approved as interested party transactions; |
● | the transactions concluded in an open tender, if such tender terms were previously approved by the Board of Directors; |
● | the value of the transaction or the subject matter under the transaction does not exceed 0.1% of the company’s balance sheet assets calculated according to RAS and it also does not exceed the threshold set out by the CBR for these purposes. |
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Major Transactions
The Joint Stock Companies Law defines a “major transaction” as a transaction, or a number of interrelated transactions entered into beyond the ordinary course of business connected with the direct or indirect acquisition or disposal, or a possibility of disposal (whether directly or indirectly) of property (including intellectual property) having a value of 25% or more of the balance sheet value of the assets of a company determined under RAS, as well as in other cases provided by the Joint Stock Company Law.
Consent or subsequent approval of major transactions is not required nor can be requested in the following instances:
● | the company has only one shareholder that simultaneously performs the functions of the company’s CEO; |
● | the transactions involving the placement of common stock, or securities convertible into common stock or transactions involving services provided in connection with such placements; |
● | the transactions constitute transfer of assets within the framework of reorganization, in particular under merger and accession agreements; |
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● | the transactions to be executed by the company pursuant to the federal laws and/or other regulations of the Russian Federation and priced in accordance with the regulations of the Russian government or other federal bodies authorized by the Russian government; |
● | the transactions are public agreements which terms are similar to other public agreements executed by the company; |
● | the transactions arising from a mandatory tender offer to purchase company’s issued shares or securities convertible to shares; |
● | the transactions concluded on the same terms as the preliminary contracts previously approved as major transactions. |
Major transactions involving assets having a value ranging from 25% to 50% of the balance sheet value of the assets of a company determined under RAS require unanimous approval by all members of the board of directors or, failing to receive such approval, a simple majority vote of a shareholders’ meeting.
Major transactions involving assets having a value in excess of 50% of the balance sheet value of the assets of a company determined under RAS require a three-quarters majority vote of a shareholders’shareholders, participating in the meeting.
Change in Control
Anti-takeover Protection
Russian legislation requires the following:
● | A person intending to acquire more than 30% of a public joint stock company’s ordinary shares and voting preferred shares (including, for such purposes, shares already owned by such person and its affiliates), will be entitled to make a public tender offer to other holders of such shares or securities convertible into such shares (the |
● | A person that has acquired more than 30% of a public joint stock company’s ordinary shares and voting preferred shares (including, for such purposes, shares already owned by such person and its affiliates) will, except in certain limited circumstances, be required to make, within 35 days of acquiring such shares, a public tender offer for other shares of the same class (the |
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of the shares until the date the offer was sent to the company, the person making the offer and its affiliates will be able to register for quorum purposes and vote only 30% of the company’s ordinary shares and voting preferred shares (regardless of the size of their actual holdings). These rules also apply to acquisitions resulting in a person or a group of persons owning more than 50% and 75% of a company’s issued ordinary shares and voting preferred shares. |
● | A person that as a result of an offer described in either of the preceding paragraphs becomes (individually or with its affiliates) the owner of more than 95% of the company’s ordinary shares and voting preferred shares, must buy out the remaining shares of the company as well as other securities convertible into such shares upon request of the holders of such shares or other securities, and may require such holders to sell such shares and other securities, at the price determined in the manner described in the preceding paragraph but not less than (i) the price of the preceding acquisition of the company’s relevant securities under an offer described in either of the preceding paragraphs as a result of which the offeror and its affiliates acquired over 95% of the company’s ordinary shares and voting preferred shares; or (ii) the highest price at which after the expiration date of an offer described in either of the preceding paragraphs the offeror or its affiliates purchased or undertook to purchase the relevant securities. |
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● | An offer of the kind described in either of the preceding three paragraphs must be accompanied by a bank guarantee of payment. If the company is publicly traded, prior notice of the offer must be filed with the CBR; otherwise, notice must be filed with the CBR no later than the date of the offer. The CBR may order amendments to the terms of the offer (including price) in order to bring them into compliance with the rules. |
● | Once such an offer has been made, competing offers for the same securities can be made by third parties and, in certain circumstances, acceptance of the initial offer may be withdrawn by the security holders who choose to accept such competing offer. From the making of such an offer until 20 days after its expiry (which period may in certain cases exceed 100 days) the company’s shareholders’ meeting will have the sole power to make decisions on charter capital increase, issuance of securities, approval of interested party and certain major transactions, and on certain other significant matters. |
The above rules may be supplemented through CBR rulemaking, which may result in a wider, narrower or more specific interpretation of these rules by the government and judicial authorities, as well as by market participants.
Approval of the FAS
Pursuant to the Federal Law on Competition, until January 5, 2016, the FAS had to approve in advance acquisitions of voting shares in a company involving (1) companies with a combined value of assets or combined annual revenues calculated under RAS exceeding a certain threshold, or (2) companies included in a register of business entities having more than a 35% share of a certain commodity market or otherwise occupying a dominant position on the market, and which would result in acquisition by a person (or a group of affiliates) of more than 25%, 50% or 75% of voting shares of a joint stock company, or a participation interest according 1/3, 50%, 2/3 of voting rights in a limited liability company, or in a transfer between such companies of assets or rights to assets, the value of which exceeds a certain amount.
According to the amendments made by the Federal law No. 275-FZ dated October 5, 2015 starting from January 5, 2016 the regulations in relation to the abovementioned register were repealed and only the combined value of assets or combined annual revenues of the companies involved in the transaction is taken in account. See also “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we are found to have a dominant position in the markets where we operate and are determined to have abused this position and/or concluded anti-competitive agreements, or found to have committed concerted actions, the FAS may be entitled to impose fines as well as regulate our subscriber tariffs and impose certain restrictions on our operations.”operations”
Furthermore, according to the Federal Law No. 46-FZ dated March 8, 2022 (in the edition as of December 19, 2022) in 2023, without prior approval of the FAS, transactions are made with shares:
● | specified in Part 1 of Article 28 of the Federal Law on Competition in Respect of a Commercial organization, if the value of assets of the object of economic concentration and its group of persons is more than 800 million rubles, but less than 2 billion rubles; |
● | specified in Part 1 of Article 29 of the Federal Law on Competition in Relation to financial organizations. |
However, it is necessary to post-notify the FAS about such transactions.
Strategic Industries Law
Pursuant to the Strategic Foreign Investment Law, investments resulting in a foreign entity or a group of entities receiving control over a company with strategic importance for the national defense and security of the Russian Federation (a “strategic company”) or acquisition of fixed production assets of a strategic company having value of at least 25% of its assets calculated under RAS require prior approval from the state authorities. The procedure for issuing such consent involves a special governmental commission on control of foreign investments, which was established by the Resolution of the Government of Russia dated July 6, 2008 as the body responsible for granting such consents, and the FAS, which is authorized to process applications for consent from foreign investors. For the purposes of the Strategic Foreign Investment Law “control” means an ability to determine, directly or
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indirectly, decisions taken by a strategic company, whether through voting at the general shareholders’ (participants’) meeting of the strategic company, participating in the board of directors or management bodies of the strategic company, or acting as the external management organization of the strategic company, or otherwise. As a result, “control” will generally be deemed to exist if an entity or a group of entities acquires more than 50% of the shares (or participation interest in share capital) of a strategic company, or if through a contract or securities with voting rights it is able to appoint more than 50% of the members of the board of directors or of the management board of a strategic company.
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Furthermore, if a foreign entity or group of entities holding securities of a strategic company or other entity that exercises control over this company becomes a direct or indirect holder of voting shares in an amount that is considered to give it direct or indirect control over this company in accordance with the Strategic Foreign Investment Law due to a change in allocation of voting shares pursuant to the procedures provided by Russian law (e.g., as a result of a buy-back of its shares by the relevant company), then such entity or group of entities will have to apply for state approval of its control within three months after it received such control.
Moreover, the Russian prime minister, who acts as President of the Commission, is entitled to impose an obligation of prior approval in regard of any transaction involving a Russian enterprise, regardless of whether such enterprise operates within a “strategic” industry or not. The decision of the Commission President has to be sent to the investor by the FAS within three business days. Upon receipt the investor will need to file the necessary application with the FAS to obtain approval. Failure to comply will result in penalties set out by the legislation.
In addition, foreign investors are required to notify the FAS about any transactions undertaken by them resulting in the acquisition of 5% or more of the charter capital of a strategic company and other transactions or other actions preapproved in accordance with the Strategic Foreign Investment Law.
See also “Item 3. Key Information—D. Risk Factors—Legal Risks and Uncertainties—The Strategic Foreign Investment Law imposes certain restrictions on us and our existing and potential foreign shareholders, which could have a material adverse effect on our business, financial condition, results of operations and prospects.”
Disclosure of Ownership
Under Russian law, a person acquiring, directly or indirectly, 5% or more of our voting shares is required to notify us and the CBR of, and we must then publicly disclose, such acquisition, as well as any subsequent acquisitions or disposals resulting in the crossing of 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% or 95% thresholds of our voting shares by such person.
A holder of more than 5% of our voting shares is required to file with us and the CBR information about its controlling shareholder (if any) or notify us and the CBR about the absence of any such controlling shareholders.
Our subsidiaries are required to notify us and the CBR about the acquisition of our common shares. We are required to publicly disclose the acquisition of our voting shares by our subsidiaries.
Notification of Foreign Ownership
Legal entities and individual entrepreneurs who acquire shares in Russian joint stock companies are required to notify the Russian tax authorities (in case the share of direct participation exceeds 10%) within one month following such acquisition.
C. | Material Contracts |
As of December 31, 20212022 we were not party to any contracts considered material to our financial results or operations except for loan agreement with MTS International Funding Limited relating to the issued loan participation notes and ruble bonds issued. For more information, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
D. | Exchange Controls |
The Federal Law on Currency Regulation and Currency Control which came into effect on June 18, 2004 sets forth certain restrictions on settlements between residents of Russia with respect to operations involving foreign securities (including ADSs), including requirements for settlement in Russian rubles.
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Repatriation of Export Proceeds
Russian companies must repatriate 100% of their receivables from the export of goods and services (with a limited number of exceptions concerning, in particular, certain types of secured financing, Ruble-nominated transactions etc.). Pursuant to the February 28 Decree, Russian residents that participate in foreign economic activities shall sell 80%
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Restrictions on the remittance of dividends, interest or other payments to non-residents
The Federal Law on Foreign Investments in the Russian Federation of July 9, 1999 specifically guarantees foreign investors the right to repatriate their earnings from Russian investments. However, the evolving Russian exchange control regime may materially affect your ability to do so.
Currently, ruble dividends on common shares may be converted into U.S. dollars without restriction. However, the ability to convert rubles into U.S. dollars is also subject to the availability of U.S. dollars in Russia’s currency markets. Although there is an existing market within Russia for the conversion of rubles into U.S. dollars, including the interbank currency exchange and over-the-counter and currency futures markets, the further development of this market is uncertain.
Certain non-residents several restrictions that are in affect are also disclosed in “Item 10. Additional Information – Dividends”.
E. | Taxation |
Certain Russian Tax Consequences
The following discussion describes the material Russian corporate income tax and personal income tax consequences to you if you are a U.S. holder of ADSs, or ordinary shares received upon conversion of ADSs, and a resident of the United States for purposes of the United States—Russia income tax treaty and are fully eligible for benefits under the United States—Russia income tax treaty. Subject to certain provisions of the United States—Russia income tax treaty relating to limitations on benefits, a U.S. resident under the treaty is generally defined as a person liable, under the laws of the United States, to U.S. tax (other than taxes with respect to only of income from sources in the United States or capital situated therein) by reason of your domicile, residence, citizenship, place of incorporation, or any other similar criterion (and, for income derived by a partnership, trust or estate, residence is determined in accordance with the residence of the person liable to tax with respect to such income). The treaty provides for a procedure to resolve matters where a resident of the United States qualifies as a Russian tax resident under Russian domestic rules. The treaty also provides for the non-application of treaty benefits to certain types of entities.
Additionally, the benefits under the United States—Russia income tax treaty discussed in this document generally are not available to U.S. persons who hold ADSs, or ordinary shares received upon conversion of ADSs, in connection with the conduct of a business in the Russian Federation through a permanent establishment as defined in the United States—Russia income tax treaty. Subject to certain exceptions, a U.S. person’s permanent establishment under the United States—Russia income tax treaty is a fixed place of business through which such person carries on business activities in the Russian Federation (generally including, but not limited to, a place of management, a branch, an office and a factory). Under certain circumstances, a U.S. person may be deemed to have a permanent establishment in the Russian Federation as a result of activities carried on in the Russian Federation through agents of the U.S. person. This summary does not address the treatment of holders described in this paragraph.
Treaty benefits may be potentially available to U.S. tax residents that are not subject to limitations on treaty benefits under the treaty, do not operate through a permanent establishment in Russia and are foreign legal entities (i.e., a legal entity or organization in each case not organized under Russian law) or individuals not considered Russian tax residents under Russian law. Under current Russian law, the Russian tax residency for entities is generally determined based on the place of management of this entity; for individuals is generally determined based on the number of days a person spends in Russia in a 12-month rolling period. Law specifies that an individual present in Russia for an aggregate period of 183 days in any consecutive 12-month period will be considered as a tax resident. Since tax year in Russia is a calendar year the final tax residency status of an individual taxpayer shall still be defined for a whole calendar year by counting the days spent in Russia within that relevant calendar year. Accordingly, to be considered a Russian tax resident, the taxpayer should spend at least 183 days in Russia in a calendar year. The following discussion is based on:
● | Russian tax legislation; and |
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● | the United States—Russia income tax treaty (and judicial and administrative interpretations thereof by the Russian authorities). |
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All of the foregoing tax consequences are based on information in effect as of the date of this document and are subject to change, possibly on a retroactive basis, after the date of this document. This discussion is also based, in part, on representations of the depositary, and assumes that each obligation in the deposit agreement and any related agreements will be performed in accordance with its terms. The discussion with respect to Russian legislation is based on our understanding of current Russian law and Russian tax rules, which are subject to frequent change and varying interpretations.
The following discussion is not intended as tax advice to any particular investor. It is also not a complete analysis or listing of all potential Russian corporate income and personal income tax consequences to you of ownership of ADSs, or ordinary shares received upon conversion of ADSs. We urge you to consult your own tax adviser regarding the specific Russian tax consequences of the ownership and disposition of ADSs, or ordinary shares received upon conversion of ADSs, under your own particular factual circumstances.
Specific uncertainties associated with the tax treatment of ADS holders
The Russian tax rules in relation to ADS holders (that would affect U.S. holders) are characterized by significant uncertainties and limited interpretive guidance. Recent amendments to the tax rules have clarified the status of the ADS holders as beneficial owners of the income from the underlying shares by establishing that the custodian holding the depositary account with the shares underlying the ADSs acts as the tax agent and determines amounts of the withholding tax based on the information about the ADS holders and their tax residency status as provided by the depositary. However, the application of the baseline tax rate for ADS holders and any double tax treaty relief is available only if the tax treaty residence of the holder is provided to the custodian along with the other information prescribed by the Russian Tax Code. In relation to ADS holders such information is to be provided by the ADS holders to the depositary, who relays it to the custodian, who acts as the tax agent and withholds the taxes when making transferring the dividends to the depositary. It is currently unclear how the depositary will collect the necessary information from ADS holders. Thus, while a U.S. holder may technically be entitled to benefit from the provisions of the United States—Russia income tax treaty, in practice such relief may be difficult or impossible to obtain.
Russian tax law and procedures are also not well developed, and local tax inspectors have considerable autonomy and oftenmay interpret tax rules without regard to the rule of law. Both the substantive provisions of Russian tax law and the interpretation and application of those provisions by the Russian tax authorities may be subject to more rapid and unpredictable change than in jurisdictions with more developed capital markets.
Taxation of Dividends
Dividends paid to U.S. holders generally will be subject to Russian withholding tax at a 15% rate. The tax burden may be reduced to 5% or 10% under the United States—Russia income tax treaty for eligible U.S. holders; a 5% rate may potentially apply for U.S. holders who are legal entities owning 10% or more of the company’s voting shares, and a 10% rate applies to dividends paid to eligible U.S. holders in other cases, including dividend payments to individuals and legal entities owning less than 10% of the company’s voting shares. These reduced tax rates may apply if the information required by the Russian Tax Code, is presented to the tax agent fully and in time; otherwise, the tax agent is required to use the baseline tax rate established by the Russian Tax Code, or the tax rate set by the applicable tax treaty, not taking into account the percentage of share in Charter Capital, the amount of investment, or term of ownership, whichever is appropriate. See also “—United States—Russia Income Tax Treaty Procedures.”
From a practical perspective, it may have not been possible for the depositary to collect the necessary information from all ADS holders and submit the relevant information to the custodian. Therefore, with respect to legal entities or organizations who are U.S. holders, the custodian may be obligated to withhold income tax at a rate of 15% from dividend payments made to the depositary, unless the information on the ADS holder (including the amount of ADSs and shares held and holder’s tax residency) is provided to the depositary and thereafter to the custodian within 7 days of the date on which the shareholders entitled to dividend payout are determined according the relevant decision of the general shareholders meeting. The same amendments described above under “Specific“Specific uncertainties associated with the tax treatment of ADS holders”holders” have also introduced an expedited refund process whereby the information regarding the ADSs not provided to the custodian can be submitted within 25 days of the date of the payment of the dividends to the depositary in order for the custodian to refund the difference between the increased 15% tax rate used and the tax rate the respective ADS holders are entitled to according to their tax residency, however this process is new and not tested and it is unclear how it will work in practice. Although non residentnon-resident holders of ADSs may apply for a refund of a portion of the tax withheld under an
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applicable tax treaty, the procedure to do so may be time consuming and no assurance can be given that the Russian tax authorities will grant a refund. See “—United States—Russia Income Tax Treaty Procedures.”
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If the appropriate information is not provided to the depositary for transfer to the custodian in a timely manner, the custodian may have to withhold tax at the 15% rate, and U.S. holders that are legal entities qualifying for a reduced rate under the United States—Russia income tax treaty then may file claims for a refund within three years with the Russian tax authorities.
With respect to individuals who are U.S. holders of ADSs and who are Russian tax non-residents, the custodian may also be obligated to withhold income tax at the rate of 15% from dividend payments made to the depositary. Reduced tax rates may apply if the information required by the Russian Tax Code is presented to the tax agent fully and in time; otherwise, the tax agent is required to use the baseline tax rate established by the Russian Tax Code, or tax rate set by the applicable tax treaty, not taking into account the percentage of share in Charter Capital, the amount of investment, or term of ownership, whichever is appropriate. Where withholding of personal income tax is not performed, individuals who are U.S. holders of ADSs will then be required to submit an annual personal tax return to the Russian tax authorities and pay Russian income tax at a rate of 15% as under Russian law an individual should report on his or her tax liabilities in case the relevant tax was due but not withheld by a tax agent from the relevant payment. When submitting the tax return, individuals who are U.S. holders may claim an application of the reduced rates of withholding tax established by the relevant treaty, provided that the procedures described in “—United States—Russia Income Tax Treaty Procedures” are complied with. Obtaining the respective approvals from the tax authorities may be time-consuming and burdensome.
For individuals claiming treaty relief, the documents substantiating the right for treaty benefits should be submitted to the Russian tax authorities within one year after the end of the year to which these benefits relate. In practice, where withholding is performed, the tax authorities may refuse to refund or credit any portion of the 15% tax withheld from payment of dividends to the depositary and, therefore, it is possible that individuals who are U.S. holders may be subject to up to a 15% effective tax rate (general tax rate for Russian tax non-residents) on their share of dividends.
Taxation of Capital Gains
Legal entities and Organizations
Income received by a foreign company from the sale, exchange or other disposal (assuming that such income is not related to a permanent establishment of a foreign company in Russia) of shares (participation interest) in an organization in which over 50% of the assets consist of immovable property located in Russia, as well as financial instruments derived from such shares, is treated as income derived from a source in the Russian Federation and is subject to withholding tax at a rate of 20%. However, gains arising from the disposition of the securities which are traded on an organized stock exchange are not treated as Russian-source income, and should not be subject to taxation in Russia.
The amount of such income is typically determined as the sales price of shares (participation interest). However, if documentary support for the acquisition cost of the shares (participation interest) is available, the tax may instead be assessed on the basis of the difference between the sales price and the acquisition cost (including other related costs) if documentary evidence of such costs is submitted to the tax agent. The Russian Tax Code also establishes special rules for calculating the tax base for the purposes of transactions with securities. However, an exemption applies if immovable property located in Russia constitutes more than 50% of our assets and the securities are traded on a foreign stock exchange. The determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an on-going basis and the relevant Russian legislation and regulations in this respect are not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia does not currently and will not constitute more than 50% of our assets as at the date of the sale of ADSs, or ordinary shares received upon conversion of ADSs, by non-residents.
Where the ADSs, or ordinary shares received upon conversion of ADSs, are sold by legal entities or organizations to persons other than a Russian company or a foreign company or an organization with a registered permanent establishment in Russia, even if the resulting capital gain is considered taxable in Russia, there is currently no mechanism under which the purchaser will be able to withhold the tax and remit it to the Russian budget.
Under the United States—Russia income tax treaty, capital gains from the sale of shares and/or ADSs, or ordinary shares received upon conversion of ADSs, by eligible U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (the term “fixed assets” is used in the Russian version of the treaty) were to consist of immovable property located in Russia.
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Individuals
The taxation of the income of tax non-resident individuals depends on whether this income is received from Russian or non-Russian sources. Russian tax law considers the place of sale as an indicator of source. Accordingly, the sale of securities outside of Russia by individuals who are non-resident holders should not be considered Russian source income and, therefore, should not be taxable in Russia. However, Russian tax law gives no clear indication as to how the place of sale of securities should be defined in this respect. Therefore, the Russian tax authorities may have a certain amount of flexibility in concluding whether a transaction is in Russia or out of Russia.
The sale, exchange or other disposal of the shares and ADSs, or ordinary shares received upon conversion of ADSs, by non-resident individual holders in Russia will be considered Russian source income and will be subject to tax at a rate of 30% on the difference between the sales price and the acquisition costs of such securities, as well as other documented expenses, such as depositary expenses and broker fees, among others, defined by the tax rules.
Under Russian law, the acquisition costs and related expenses can be deducted at the source of payment if the sale was made by a non-resident holder through a licensed Russian broker, trust manager or other person that carries out operations under agency or commission agreements, or other agreements in favor of a taxpayer. Such party (as defined above) should also act as a tax agent and withhold the applicable tax. Such tax agent will be required to report to the Russian tax authorities the amount of income realized by the non-resident individual and tax withheld upon the sale of the securities.
Otherwise, if the sale is made to individuals but not through a tax agent, generally no withholding needs to be made and the non-resident holder will have an obligation to file a tax return, report his income realized and apply for a deduction of acquisition expenses (which includes filing of support documentation). Although Russian tax law imposes tax agent responsibility only on professional trustees, brokers or dealers, in practice, the tax authorities may require Russian legal entities and organizations or foreign companies with any registered presence in Russia that are not professional trustees, dealers or brokers to act as tax agents and withhold the applicable tax when purchasing securities from non-resident individuals.
Under the United States—Russia income tax treaty, capital gains from the sale of the ADSs, or ordinary shares received upon conversion of ADSs, by eligible U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (the term “fixed assets” is used in the Russian version of the United States—Russia Tax Treaty) were to consist of immovable property located in Russia. If this 50% threshold is not met, individuals who are U.S. holders may seek to obtain the benefit of the United States—Russia income tax treaty in relation to capital gains resulting from the sale, exchange or other disposition of the ADSs, or ordinary shares received upon conversion of ADSs.
In order to apply the provisions of the United States – Russia income tax treaty, the individual holders should receive clearance from the Russian tax authorities as described below. See “—United States—Russia Income Tax Treaty Procedures” below.
United States—Russia Income Tax Treaty Procedures
The Russian Tax Code does not contain a requirement that a non-resident holder that is a legal entity or organization must obtain tax treaty clearance from the Russian tax authorities prior to receiving any income in order to qualify for benefits under an applicable tax treaty. However, a non-resident legal entity or organization seeking to obtain relief from or reduction of Russian withholding tax under a tax treaty must provide to a Russian company or foreign company or organization acting through its Russian registered presence, which is a tax agent (i.e., the entity paying income to a non-resident) a confirmation of its tax treaty residence that complies with the applicable requirements and a Russian translation attached to it in advance of receiving the relevant income. The tax residency confirmation needs to be renewed on an annual basis and provided to the payer of income before the first payment of income in each calendar year. Starting from 2017, in order to benefit from the tax treaty the recipient of passive income has to provide a confirmation that it is the beneficial owner of this income.
A U.S. holder may obtain the appropriate certification by mailing completed forms, together with the holder’s name, taxpayer identification number, the tax period for which certification is required, and other applicable information, to the United States Internal Revenue Service. The procedures for obtaining certification are described in greater detail in the instructions to Internal Revenue Service Form 8802. As obtaining the required certification from the Internal Revenue Service may take at least six to eight weeks, U.S. holders should apply for such certification as soon as possible.
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In accordance with the Russian Tax Code, to rely on tax treaty benefits, a non-resident holder who is an individual must present to the tax authorities an official document confirming his residency in the home country issued by the competent authorities in his/her country of residence and also other supporting documentation including a statement confirming the income received and the tax paid in the home country, also confirmed by the relevant foreign tax authorities, duly translated and apostilled or pass through a consular legalization. Technically, such a requirement means that an individual cannot rely on the tax treaty until he or she pays the tax in the jurisdiction of his or her residence. Therefore, advance relief from or reduction of withholding taxes for individuals will generally be impossible as it is very unlikely that the supporting documentation for the treaty relief can be provided to the tax authorities and approval from the latter obtained before any payments are made to individuals. A non-resident holder which is an individual may apply for treaty-based benefits and claim tax refund within three years following the end of the tax period in which the relevant income was received and the tax was withheld.
If a non-resident holder which is a legal entity or organization does not obtain double tax treaty relief at the time that income or gains are realized and tax is withheld by a Russian tax agent, the non-resident holder may apply for a refund within three years from the end of the tax period (a calendar year) in which the tax was withheld. To process a claim for a refund, the Russian tax authorities require (i) apostilled or legalized confirmation of the tax treaty residence of the non-resident at the time the income was paid, (ii) an application for the refund of the tax withheld in a format provided by the Russian tax authorities and (iii) copies of the relevant contracts under which the foreign entity received income, as well as payment documents confirming the payment of the tax withheld to the Russian budget (Form 1012DT for dividends and interest and Form 1011DT for other income are designed by the Russian tax authorities to combine requirements (i) and (ii) specified above). The Russian tax authorities may require a Russian translation of the above documents if they are prepared in a foreign language. The refund of the tax withheld should be granted within one month of the filing of the above set of documents with the Russian tax authorities. However, procedures for processing such claims have not been clearly established and there is significant uncertainty regarding the availability and timing of such refunds.
Recent amendments to the Russian Tax Code have established additional requirements to the reimbursement procedure referred to above, identifying further documents that need to be provided to the tax authorities. These include: 1) a document confirming the rights of the ADS or ordinary share holder to the ADS, or ordinary shares received upon conversion of ADSs, as of the date on which the shareholders entitled to the dividend payout are set according to the relevant decision of the General shareholders meeting, 2) a document evidencing the actual amount of income received by the ADS or ordinary share holder, 3) a document with information about the custodian that transferred the dividend amounts to the depositary, and 4) documents confirming the ADS or ordinary share holder’s compliance with the requirements of the Tax Code and/or the relevant income tax treaty provisions necessary for application of a reduced rate. The above requirements refer not only to ADS and ordinary shares, but also to securities in general. In addition to the documents listed above, tax authorities may require more information and documents. Decision on refund is to be taken by the tax authorities within six months. The procedures referred to above are new and no assurance can be given that the custodian will be able to apply the respective double tax treaties when paying dividends to non-resident holders or that ADS holders would be successful in receiving relevant tax refunds.
Neither the depositary nor us has or will have any obligation to assist an ADS or ordinary share holder with the completion and filing of any tax forms.
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Certain United States Federal Income Tax Consequences
The following is a general description of certain material United States federal income tax consequences that apply to you if you are, for United States federal income tax purposes, a beneficial owner of ADSs, or ordinary shares received upon conversion of ADSs, that is an individual who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia, an estate the income of which is subject to United States federal income tax regardless of its source, or a trust, if a United States court can exercise primary supervision over the administration of the trust and one or more United States persons can control all substantial trust decisions, or if the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person (in each case, a “U.S. Holder”). This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the Internal Revenue Service (“IRS”), and the Convention Between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect To Taxes on Income and Capital, in force as of December 16, 1993 (the “United States—Russia income tax treaty”), all as publicly available and in effect as of the date of this document. These authorities are subject to differing interpretations and may change, possibly retroactively, resulting in United States federal income tax consequences different from those discussed below. No ruling has been or will be sought from the IRS with respect to the matters discussed below, and there can be no assurance that the IRS will not take a contrary position regarding the tax consequences of the acquisition, ownership or disposition of ADSs, or ordinary shares received upon conversion of ADSs, or that any such contrary position would not be sustained by a court. If an entity or arrangement treated as a partnership for United States federal income tax purposes is an owner of ADSs, or ordinary shares received upon conversion of ADSs, the United States federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Accordingly, entities or arrangements treated as partnerships for United States federal income tax purposes that hold ADSs, or ordinary shares received upon conversion of ADSs, and partners in such partnerships are urged to consult their tax advisors regarding the specific United States federal income tax consequences to them. The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations such as:
● | an insurance company; |
● | a tax-exempt organization; |
● | a financial institution; |
● | a person subject to the alternative minimum tax; |
● | a person who is a broker-dealer in securities or a trader subject to a mark-to-market election; |
● | a S corporation; |
● | a partnership, a pass-through entity or arrangement, a person holding ADSs through a partnership or other pass-through entity or arrangement; |
● | an expatriate subject to Section 877 of the Code; |
● | a holder that is not a U.S. Holder; |
● | an investor that has a functional currency other than the U.S. dollar; |
● | a regulated investment company; |
● | a real estate investment trust; |
● | an owner, directly, indirectly or by attribution, of ADSs (alone or together with shares) representing 10% or more of the outstanding shares of our stock (by vote or value); or |
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● | an owner holding ADSs, or ordinary shares received upon conversion of ADSs, as part of a hedge, straddle, synthetic security or conversion transaction. |
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In addition, this summary is limited to U.S. Holders holding ADSs, or ordinary shares received upon conversion of ADSs, as “capital assets” within the meaning of Section 1221 of the Code and whose functional currency is the U.S. dollar. The discussion below does not address the effect of the Medicare contribution tax on “net investment income” or of any United States state or local tax law or any non-U.S. tax law. This discussion also does not address any tax consequences relating to the direct ownership of common stock.
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with their terms. For purposes of applying United States federal income tax law, we believe, and the following discussion assumes, that a holder of an ADS should be treated as the owner of the underlying shares of common stock represented by that ADS, although this matter is not free from doubt.
The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the shares underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the underlying shares. Accordingly, the analysis of the creditability of Russian withholding taxes described below and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders (discussed below) could be affected by actions taken by intermediaries in the chain of ownership between the holder of ADSs and our company if as a result of such actions the holders of ADSs are not properly treated as beneficial owners of underlying shares and future actions that may be taken by the U.S. Treasury. The remainder of this discussion assumes that a holder of an ADS will be treated as the beneficial owner of the underlying shares of common stock represented by such ADS for United States federal income tax purposes.
Taxation of Distributions on ADSs, or ordinary shares received upon conversion of ADSs
Subject to the passive foreign investment company rules described below, for United States federal income tax purposes, the gross amount of a distribution, including any amount withheld in respect of Russian taxes, paid by us with respect to ADSs, or ordinary shares received upon conversion of ADSs, will be treated as a taxable foreign source dividend on the date of actual or constructive receipt by the depositary to the extent of our current and accumulated earnings and profits, computed in accordance with United States federal income tax principles. If you are a non corporatenon-corporate U.S. Holder such dividends may be “qualified dividend income” that is taxed at the lower applicable capital gains rate provided that certain conditions are satisfied, including (1) certain holding period requirements are satisfied, (2) either (a) our ADSs, or ordinary shares received upon conversion of ADSs, are readily tradable on an established securities market in the United States (such as the New York Stock Exchange) or (b) we are eligible for the benefits of the United States—Russia income tax treaty, and (3) we are not, for the taxable year in which the dividend was paid, or in the preceding taxable year, a “passive foreign investment company” (as discussed below). Our ADSs, and ordinary shares received upon conversion of ADSs, are not currently readily tradable on an established securities market in the United States. We believe, however, that we are eligible for the benefits of the United States—Russia income tax treaty.treaty, and as a result that dividends may be “qualified dividend income.” Distributions with respect to ADSs, or ordinary shares received upon conversion of ADSs, in excess of our current and accumulated earnings and profits (computed in accordance with United States federal income tax principles) will be applied against and will reduce your tax basis in such ADSs, or ordinary shares received upon conversion of ADSs, and, to the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such ADSs, or ordinary shares received upon conversion of ADSs. You should be aware that we do not intend to calculate our earnings and profits in accordance with United States federal income tax principles and, unless we make such calculations, you should assume that any distributions with respect to ADSs, or ordinary shares received upon conversion of ADSs, generally will be treated as a dividend, even if such distributions would otherwise be treated as a return of capital or as capital gain pursuant to the rules described above. If you are a corporation, you will not be allowed a deduction for dividends received in respect of distributions on ADSs, or ordinary shares received upon conversion of ADSs, which is generally available for dividends paid by U.S. corporations. U.S. Holders are strongly urged to consult their tax advisors as to the United States federal income tax treatment of any distribution received with respect to ADSs, or ordinary shares received upon conversion of ADSs.
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The amount of any distribution paid in rubles will equal the U.S. dollar value of such rubles, calculated using the exchange rate in effect on the date of actual or constructive receipt by the depositary, regardless of whether the payment is actually converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange rate fluctuations during the period from the date of receipt by the depositary to the date the rubles are converted into U.S. dollars will be treated as ordinary income or loss from sources within the United States for foreign tax credit limitation purposes. Additionally, you may be required to recognize foreign currency gain or loss on the receipt of a refund of Russian withholding tax pursuant to the United States—Russia income tax treaty to the extent the U.S. dollar value of the refunded rubles differs from the U.S. dollar value of that amount of rubles on the date of receipt of the underlying distribution.
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Russian withholding tax at the rate applicable to you (taking into account any entitlement to a reduced rate under the United States—Russia income tax treaty) should be treated as a foreign income tax that, subject to generally applicable limitations and conditions, may be eligible for credit against your United States federal income tax liability or, at your election, may be deducted in computing taxable income. If Russian tax is withheld at a rate in excess of the rate applicable to you, you may not be entitled to a foreign tax credit (or deduction) for the excess amount, even though the procedures for claiming refunds for such Russian taxes and the practical likelihood that refunds will be made available in a timely fashion are uncertain (as described above under “Certain Russian Tax Consequences”). If the dividends are qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will generally be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends.
The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For United States foreign tax credit purposes, a dividend distribution with respect to the ADSs will be treated as foreign source “passive category income.” The rules relating to the determination of the foreign tax credit, or deduction in lieu of the foreign tax credit, are complex and you should consult your tax advisors with respect to those rules.
Taxation on Sale or Other Taxable Disposition of ADSs, or ordinary shares received upon conversion of ADSs
Subject to the passive foreign investment company rules described below, the sale or other taxable disposition of ADSs will generally result in the recognition of gain or loss in an amount equal to the difference between the amount realized on the sale or other taxable disposition and your adjusted basis in such ADSs, or ordinary shares received upon conversion of ADSs. That gain or loss will be capital gain or loss and will be long-term capital gain or loss if you have held the ADSs, or ordinary shares received upon conversion of ADSs, for more than one year. If you are a non-corporate U.S. Holder, such recognized long-term capital gain is generally subject to a reduced rate of United States federal income tax. Limitations may apply to your ability to offset capital losses against ordinary income.
Gain or loss recognized on the sale of ADSs, or ordinary shares received upon conversion of ADSs, will generally be treated as U.S. source income or loss for United States foreign tax credit purposes. The use of any foreign tax credits relating to any Russian taxes imposed upon such sale may be limited. You are strongly urged to consult your tax advisors as to the availability of tax credits for any Russian taxes imposed on the sale of ADSs, or ordinary shares received upon conversion of ADSs.
Passive Foreign Investment Company Considerations
A non-U.S. corporation generally will be a passive foreign investment company (a “PFIC”), in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to applicable “look-through” rules, either (i) at least 75% of its gross income is “passive income” or (ii) at least 50% of the average value of its total assets is attributable to assets which produce passive income or are held for the production of passive income.
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We do not believe that we were a PFIC for the year ended December 31, 2020, for the year ended December 31, 2021, or for the year ended December 31, 2021.2022. However, our possible status as a PFIC must be determined annually and requires a factual determination that depends on, among other things, the nature and composition of our income, assets and activities for the entire taxable year. Moreover, the value of our total assets for PFIC purposes is generally determined based on the market price of our ADSs, or ordinary shares received upon conversion of ADSs, which is subject to potentially significant fluctuation. Therefore, our possible status as a PFIC may be subject to change. Thus there can be no assurance that we will not be treated as a PFIC in our current taxable year or in the future. If we were to be treated as a PFIC, U.S. Holders generally would be required to pay additional taxes on certain distributions and gains on sales or other dispositions (including pledges) of the ADSs, or ordinary shares received upon conversion of ADSs, at tax rates that may be higher than those otherwise applicable. You should consult your tax advisors regarding the possible application of the PFIC rules to your investment in the ADSs, or ordinary shares received upon conversion of ADSs.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs, or ordinary shares received upon conversion of ADSs, and proceeds from the sale or exchange of ADSs, or ordinary shares received upon conversion of ADSs, may be subject to information reporting to the IRS and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes other required certifications or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on IRS Form W-9. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
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Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your United States federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.
Foreign Financial Asset Reporting
Individual U.S. Holders that own “specified foreign financial assets” with an aggregate value in excess of U.S.$50,000 on the last day of the taxable year or U.S.$75,000 at any time during the taxable year are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on objective criteria. U.S. Holders who fail to report the required information could be subject to substantial penalties. In addition, the statute of limitations for assessment of tax would be suspended, in whole or part. Prospective investors are encouraged to consult with their own tax advisors regarding the possible application of these rules, including the application of the rules to their particular circumstances.
F. | Dividends and Paying Agents |
Not applicable.
G. | Statement by Experts |
Not applicable.
H. | Documents on Display |
The documents that are exhibits to or incorporated by reference in this document can be obtained from the SEC website at www.sec.gov. Our electronic filings are available at the SEC website www.sec.gov. Information about MTS is also available on the Internet at www.ir.mts.ru Information included in our website does not form part of this document.
I. | Subsidiary Information |
Not applicable.
155
Item 11. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates and foreign currency exchange rates. We are subject to market risk deriving from changes in interest rates, which may affect the cost of our financing. Foreign exchange risks exist to the extent our revenues, costs and debt obligations are denominated in currencies other than the functional currency in the countries of our operations.
Interest Rate Risk
We are exposed to variability in cash flow primarily related to our variable interest rate debt and exposed to fair value risk related to our fixed rate notes. As of December 31, 2021,2022, RUB 193,950251,336 million, or 41.87%51.70% of our total indebtedness, excluding lease obligations, was variable interest rate debt, while RUB 269,307234,804 million, or 58.13%48.30% of our total indebtedness, excluding lease obligations, was fixed interest rate debt.
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The table below presents principal cash flows and related weighted average interest rates for indebtedness by contractual maturity dates as of December 31, 2021.2022.
Contractual Maturity Date as of December 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Annual |
|
| | | | | | | | | | | | | | | | | | interest rate | |
| | | | | | | | | | | | | | | | | | (Actual | |
| | | | | | | | | | | | | | | | | | interest rate at | |
| | | | | | | | | | | | | | | | | | December 31, |
|
Indebtedness |
| Currency |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| Thereafter |
| Total |
| 2021) |
|
| | (amounts in millions of RUB) | | ||||||||||||||||
Variable debt | | | | | | | | | | | | | | | | | | | |
VTB | | RUB | | — | | — | | 25,000 | | 30,000 | | — | | — | | 55,000 | | 9.00 | % |
VTB | | RUB | | — | | — | | — | | 45,000 | | — | | — | | 45,000 | | 9.75 | % |
VTB | | RUB | | — | | — | | — | | 15,000 | | 15,000 | | — | | 30,000 | | 9.15 | % |
Sberbank | | RUB | | — | | — | | 30,000 | | — | | — | | — | | 30,000 | | 9.55 | % |
Sberbank | | RUB | | 10,000 | | 10,000 | | — | | — | | — | | — | | 20,000 | | 9.69 | % |
Sberbank | | RUB | | 10,000 | | — | | — | | — | | — | | — | | 10,000 | | 9.63 | % |
VEB | | RUB | | — | | — | | 754 | | 1,256 | | — | | — | | 2,010 | | 3.27 | % |
ZTV | | RUB | | 1,940 | | — | | — | | — | | — | | — | | 1,940 | | 8.50 | % |
Total variable debt |
| |
| 21,940 |
| 10,000 |
| 55,754 |
| 91,256 |
| 15,000 |
| — |
| 193,950 |
|
| |
Weighted average interest rate |
| | | 9.32 | % | 9.29 | % | 9.27 | % | 9.29 | % | 9.15 | % | — | | 7.72 | % |
| |
Fixed‑rate notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
MTS International Notes due 2023 |
| USD |
| — |
| 33,309 |
| — |
| — |
| — |
| — |
| 33,309 |
| 5.00 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 15,000 |
| — |
| — |
| — |
| — |
| — |
| 15,000 |
| 7.70 | % |
MTS PJSC Notes due 2025 |
| RUB |
| — |
| — |
| — |
| 15,000 |
| — |
| — |
| 15,000 |
| 8.00 | % |
MTS PJSC Notes due 2023 |
| RUB |
| — |
| 15,000 |
| — |
| — |
| — |
| — |
| 15,000 |
| 6.85 | % |
MTS PJSC Notes due 2027 |
| RUB |
| — |
| — |
| — |
| — |
| — |
| 15,000 |
| 15,000 |
| 6.60 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 10,000 |
| — |
| — |
| — |
| — |
| — |
| 10,000 |
| 9.00 | % |
MTS PJSC Notes due 2025 |
| RUB |
| — |
| — |
| — |
| 10,000 |
| — |
| — |
| 10,000 |
| 7.25 | % |
MTS PJSC Notes due 2024 |
| RUB |
| — |
| — |
| 10,000 |
| — |
| — |
| — |
| 10,000 |
| 8.70 | % |
MTS PJSC Notes due 2026 |
| RUB |
| — |
| — |
| — |
| — |
| 10,000 |
| — |
| 10,000 |
| 7.90 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 10,000 |
| — |
| — |
| — |
| — |
| — |
| 10,000 |
| 6.45 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 10,000 |
| — |
| — |
| — |
| — |
| — |
| 10,000 |
| 5.50 | % |
MTS PJSC Notes due 2023 |
| RUB |
| — |
| 9,930 |
| — |
| — |
| — |
| — |
| 9,930 |
| 6.50 | % |
MTS PJSC Notes due 2024 |
| RUB |
| — |
| — |
| 7,500 |
| — |
| — |
| — |
| 7,500 |
| 8.60 | % |
MTS PJSC Notes due 2027 |
| RUB |
| — |
| — |
| — |
| — |
| — |
| 7,000 |
| 7,000 |
| 6.60 | % |
MTS PJSC Notes due 2022 |
| RUB |
| 5,000 |
| — |
| — |
| — |
| — |
| — |
| 5,000 |
| 8.40 | % |
MTS PJSC Notes due 2026 |
| RUB |
| — |
| — |
| — |
| — |
| 5,000 |
| — |
| 5,000 |
| 6.60 | % |
MTS PJSC Notes due 2024 |
| RUB |
| — |
| — |
| 4,350 |
| — |
| — |
| — |
| 4,350 |
| 6.50 | % |
MTS PJSC Notes due 2031 |
| RUB |
| — |
| — |
| — |
| — |
| 78 |
| — |
| 78 |
| 6.25 | % |
MTS PJSC Notes due 2022 (V series) |
| RUB |
| 12 |
| — |
| — |
| — |
| — |
| — |
| 12 |
| 0.25 | % |
Fixed‑rate bank loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sberbank |
| RUB |
| 39,000 |
| 31,000 |
| 5,000 |
| — |
| — |
| — |
| 75,000 |
| 5.99 | % |
Ekvant |
| RUB |
| 37 |
| 36 |
| 28 |
| — |
| — |
| — |
| 101 |
| 0.00 | % |
Maind Kraft |
| RUB |
| 59 |
| — |
| — |
| — |
| — |
| — |
| 59 |
| 5.10 | % |
NVision Group |
| RUB |
| 18 |
| 6 |
| 4 |
| — |
| — |
| — |
| 28 |
| 8.70 | % |
Naksay AO | | RUB | | 10 | | 5 | | — | | — | | — | | — | | 15 | | 8.86 | % |
Cisco |
| RUB |
| 152 |
| 80 |
| — |
| — |
| — |
| — |
| 232 |
| 6.38 | % |
Cisco |
| RUB |
| 291 |
| 307 |
| — |
| — |
| — |
| — |
| 598 |
| 5.38 | % |
Cisco |
| RUB |
| 48 |
| 51 |
| 26 |
| — |
| — |
| — |
| 125 |
| 5.75 | % |
Cisco |
| RUB |
| 84 |
| 91 |
| 97 |
| — |
| — |
| — |
| 272 |
| 7.05 | % |
Cisco |
| RUB |
| 102 |
| 110 |
| 119 |
| — |
| — |
| — |
| 331 |
| 7.70 | % |
Cisco |
| RUB |
| 169 |
| 184 |
| — |
| — |
| — |
| — |
| 353 |
| 8.75 | % |
Vinnikom Tech | | RUB | | 6 | | 6 | | — | | — | | — | | — | | 12 | | 8.25 | % |
Total fixed debt1 |
| |
| 89,988 |
| 90,116 |
| 27,125 |
| 25,000 |
| 15,078 |
| 22,000 |
| 269,307 |
|
| |
Weighted average interest rate |
| | | 6.66 | % | 6.62 | % | 7.42 | % | 7.25 | % | 6.95 | % | 6.60 | % | 6.92 | % |
| |
| | | | | | | | | | | | | |
Indebtedness |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| Thereafter |
| Total |
|
| | | | | | | | | | | | | |
Total variable debt |
| 36,441 |
| 56,313 |
| 144,562 |
| 15,000 |
| — |
| 252,316 |
|
Weighted average interest rate |
| 8.54 | % | 8.50 | % | 8.61 | % | 8.15 | % | — | | 5.63 | % |
Total fixed debt1 |
| 82,042 |
| 61,195 |
| 35,000 |
| 34,978 |
| — |
| 235,215 |
|
Weighted average interest rate |
| 7.46 | % | 8.29 | % | 8.48 | % | 8.26 | % | — | | 6.52 | % |
(1)Totals may add up differently due to rounding
We would have experienced an additional interest expense of approximately RUB 2,157 million on an annual basis as a result of a hypothetical increase in variable rates by 1% over the current rate as of December 31, 2022. Since a linear dependence is applicable, a hypothetical increase in variable rate by each additional 1% would have caused a same additional interest expense of approximately RUB 2,157 million on an annual basis. The rates of EUR and USD as of December 31, 2022 were used in these calculations. We would have experienced an additional interest expense of approximately RUB 1,523 million on an annual basis as a result of a hypothetical increase in variable rates by 1% over the current rate as of December 31, 2021. Since a linear dependence is applicable, a hypothetical increase in variable rate by each additional 1% would have caused a same additional interest expense of approximately RUB 1,523 million on an annual basis. The rates of EUR and USD as of December 31, 2021 were used in these calculations. We would have experienced an additional interest expense of approximately RUB 1,166 million on an annual basis as a
206
result of a hypothetical increase in variable rates by 1% over the current rate as of December 31, 2020. The rates of EUR and USD as of December 31, 2020 were used in calculations. The increase in an additional interest expense on an annual basis as a result of a hypothetical increase in variable rates by 1% as of December 31, 20212022 as compared to December 31, 20202021 is mainly related to the increase in total variable debt.
The fair value of our publicly traded fixed-rate notes as of December 31, 2021,2022, ranged from 91.80%91.48% to 103.89%108.1% of the notional amount. As of December 31, 2021,2022, the difference between the carrying value and the fair value of other fixed rate debt, including lease obligations, was immaterial. For details of our fixed-rate debt, refer to Note 2423 of our audited consolidated financial statements. The fair value of variable rate debt approximates its carrying value.
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We use derivative financial instruments to reduce our exposure to adverse fluctuations in interest rates. We primarily focus on reducing risk caused by the fluctuations in interest rates for our variable-rate long-term debt. According to our policy, we have entered into several cross-currency interest rate swap agreements. Most of these contracts assume periodical exchanges of interest payments or both principal and interest payments from ruble-denominated amounts to U.S. dollar-denominated amounts, to be exchanged at specified rates. The rates were determined with reference to the market spot rates upon issuance. These contracts also include an interest rate swap of a variable U.S. dollar-denominated interest rate to a fixed ruble-denominated interest rate. All of our cross-currency interest rate swaps agreements mature in 2023 and 2024.
The table below presents a summary of our cross-currency interest rate swap agreements:
| | | | | | | | | | | | |
| | | | | | Mark to | | | | | | Mark to |
| | | | | | Market Value | | | | | | Market Value |
| | | | Notional | | as of | | | | Notional | | as of |
| | | | amount (at | | December 31, | | | | amount (at | | December 31, |
Type of derivative |
| Maturity |
| inception) |
| 2021 |
| Maturity |
| inception) |
| 2022 |
| | | | (amounts in millions of Rubles) | | | | (amounts in millions of Rubles) | ||||
Cross‑currency Interest Rate Swap Agreements | |
| |
| |
| ||||||
Swap agreements with Sberbank to pay a fixed rates of 8.29% to 8.3125% and receive a variable interest rate of 6m LIBOR | | June 2024 | | 4,410 | | 424 | ||||||
Swap agreements with Rosbank to pay a fixed rates of 7.924% to 8.2965% and receive a variable interest rate of 6m LIBOR | | June 2024 | | 8,499 | | 912 | ||||||
Swap agreements with VTB bank to pay a variable Central Bank key rate (not less than 7%) + (−0.02%)−0.575% and receive a fixed interest rate of 5% | | May 2023 | | 20,841 | | 3,291 | ||||||
Cross-currency Interest Rate Swap Agreements | |
| |
| |
| ||||||
Swap agreements to pay a fixed rates of 8.29% to 8.3125% and receive a variable interest rate of 6m LIBOR | | June 2024 | | 4,410 | | 201 | ||||||
Swap agreements to pay a fixed rates of 7.924% to 8.2965% and receive a variable interest rate of 6m LIBOR | | June 2024 | | 8,499 | | 518 | ||||||
Swap agreements to pay a variable Central Bank key rate + (+0.03%) and receive a fixed interest rate of 8.3% | | August 2024 | | 10,000 | | 14 | ||||||
Swap agreements to pay a variable Central Bank key rate + (−0.05%) and receive a fixed interest rate of 8.4% | | December 2024 | | 15,000 | | 28 |
Foreign Currency Risk
The following tables show, for the periods indicated, certain information regarding the exchange rate between the ruble and the U.S. dollar, based on data published by the CBR. These rates may differ from the actual rates used in preparation of our financial statements and other financial information provided herein.
| | | | | | | | | | | | | | | | |
| | Rubles per U.S. dollar | | Rubles per U.S. dollar | ||||||||||||
Years ended December 31, |
| High |
| Low |
| Average(1) |
| Period End |
| High |
| Low |
| Average(1) |
| Period End |
2017 |
| 60.75 |
| 55.85 |
| 58.10 |
| 57.60 | ||||||||
2018 |
| 69.97 |
| 55.67 |
| 62.71 |
| 69.47 | | 69.97 |
| 55.67 |
| 62.71 |
| 69.47 |
2019 |
| 69.47 |
| 61.72 |
| 64.74 |
| 61.91 | | 69.47 |
| 61.72 |
| 64.74 |
| 61.91 |
2020 |
| 80.88 |
| 60.95 |
| 72.15 |
| 73.88 | | 80.88 |
| 60.95 |
| 72.15 |
| 73.88 |
2021 |
| 77.77 |
| 69.55 |
| 73.65 |
| 74.29 | | 77.77 |
| 69.55 |
| 73.65 |
| 74.29 |
2022 | | 120.38 |
| 51.16 |
| 68.55 |
| 70.34 |
(1) | The average of the exchange rates on the last business day of each full month during the relevant period. |
| | | | |
| | Rubles per | ||
| | U.S. dollar | ||
|
| High |
| Low |
July 2022 | | 63.14 | | 52.51 |
August 2022 | | 62.05 |
| 59.13 |
September 2022 | | 61.18 |
| 57.41 |
October 2022 | | 63.76 |
| 55.30 |
November 2022 | | 62.10 |
| 60.22 |
December 2022 | | 72.13 |
| 60.88 |
January 2023 | | 70.30 |
| 67.57 |
February 2023 | | 75.43 |
| 70.04 |
March 2023 |
| 77.24 |
| 74.89 |
Source: CBR.
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| | | | |
| | Rubles per | ||
| | U.S. dollar | ||
|
| High |
| Low |
July 2021 | | 75.20 | | 72.72 |
August 2021 |
| 74.36 |
| 72.79 |
September 2021 |
| 73.44 |
| 72.43 |
October 2021 |
| 72.92 |
| 69.55 |
November 2021 |
| 75.59 |
| 70.52 |
December 2021 |
| 74.89 |
| 73.19 |
January 2022 |
| 78.95 |
| 74.29 |
February 2022 |
| 86.93 |
| 74.72 |
March 2022(1) |
| 120.38 |
| 84.09 |
Source: CBR.
The exchange rate between the ruble and the U.S. dollar quoted by the CBR for March 31, 20222023 was 84.0977.09 rubles per U.S. dollar.
We have exposure to fluctuations in the value of the U.S. dollar relative to the Russian ruble and Armenian dram which are the functional currencies in our countries of operation. As a result, we may face translation losses, increased debt service payments and increased capital expenditures and operating costs should these currencies depreciate against the U.S. dollar.
A significant part of our capital expenditures, borrowings and certain operating costs (roaming expenses, cost of customer equipment and other costs) are either denominated in U.S. dollars or tightly linked to the U.S. dollar exchange rate, and our U.S. dollar-denominated debt represents our primary future risk of exchange loss in U.S. dollar terms. A decline in the value of the ruble or dram versus the U.S. dollar would result in currency remeasurement losses as the amount of these currencies required to repay U.S. dollar-denominated debt increases. In addition, if any of the ruble or dram declines against the U.S. dollar and tariffs cannot be maintained for competitive or other reasons, our revenues and operating margins could be materially adversely affected and we could have difficulty repaying or refinancing our U.S. dollar-denominated indebtedness and financing our capital expenditures and operating costs.
A portion of our capital expenditures, borrowings and certain operating costs (roaming expenses, costs of customer equipment and other costs) are also denominated in euros. We currently do not hedge against the risk of decline in the ruble or dram against the euro because settlements denominated in euros are not significant.
We would experience a currency exchange loss of RUB 1,7137,259 million on our U.S. dollar denominated net monetary assets as a result of a hypothetical 30.0% increase in the ruble/manat/dram/sum to U.S. dollar exchange rate at December 31, 2021.2022. We would experience a currency exchange loss of RUB 2,024 1,930 million in the fair value of our euro denominated net monetary assets as a result of a hypothetical 30.0% increase in the ruble/manat/dram to euro exchange rate at December 31, 2021.2022. Since a linear dependence is applicable, an additional hypothetical 30.0% increase in the ruble/manat/dram/sum to U.S. dollar or euro exchange rate at December 31, 20212022 would have caused additional currency exchange loss as stated above. We are unable to estimate future loss of earnings as a result of such changes. The change of a currency exchange gain on our U.S. dollar denominated net monetary assets as a result of a hypothetical 30.0% increase in the ruble/manat/dram/sum to U.S. dollar exchange rate at December 31, 20202021 into a loss at December 31, 20212022 mainly relates to a change in our net monetary assets.
Item 12. Description of Securities Other Than Equity Securities
(Only Items 12.D.3-4 are applicable.)
D. | American Depositary Shares |
We completed our initial public offering on July 6, 2000, and listed our shares of common stock, represented by ADSs on the New York Stock Exchange (the “NYSE”) under the symbol “MBT.” Each ADS represents two underlying shares of our common stock. Prior to May 3, 2010, each ADS represented five shares of our common stock.
On February, 28, 2022 trading in the Company’s ADSs on the NYSE was suspended.
In April 2022, Russian Federal Law No. 114-FZ dated April 16, 2022 (the “Delisting Law”) came into force which required Russian companies to terminate their depositary receipt programmes unless granted an exemption by the Russian Government Commission on Monitoring Foreign Investment. MTS submitted an application for such exemption, and in May 2022 received permission to maintain ADR Program until July 12, 2022.
In June 2022, MTS informed JPMorgan Chase Bank, N.A., the depositary under the existing MTS ADR program, of its intention to terminate the Deposit Agreement, effective as of July 13, 2022.
In August 2022, MTS received confirmation from the NYSE that the Company’s ADSs had been delisted from the NYSE effective August 8, 2022. The existing ADSs could be converted into MTS’ ordinary shares at the ratio of 1:2. The guaranteed period for depositary receipts conversion was completed on January 12, 2023 (inclusive).
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The Depositary has agreed to reimburse to us or pay on our behalf certain reasonable expenses related to our ADS program and incurred by us in connection with the program (such as NYSE listing fees, legal and accounting fees incurred with preparation of Form 20-F and ongoing SEC compliance and listing requirements, investor relations expenses, among others). The amounts the Depositary reimbursed or paid are not perforce related to the fees collected by the depositary from ADS holders.
As part of its service to us, the Depositary has agreed to waive fees for the standard costs associated with the administration of our ADS program, associated operating expenses and investor relations advice estimated to total $0.2 million.
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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
(a) | Disclosure Controls and Procedures. |
As of the end of the period covered by this Annual Report on Form 20- F, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective, as of December 31, 2021,2022, to provide reasonable assurance that the information required to be disclosed in filings and submissions under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions about required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
(b) | Management’s annual report on internal control over financial reporting. |
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and includes those policies and procedures that:
● | Pertain to the maintenance of records that in reasonable details accurately and fairly reflect the transactions and dispositions of our assets; |
● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our Board of Directors; |
● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 20212022 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework (2013).
210159
As a result of management’s evaluation of our internal control over financial reporting, management concludes that internal control over financial reporting as of December 31, 20212022 was effective.
The effectiveness of our internal control over financial reporting as of December 31, 20212022 has been audited and assessed as effective by independent registered public accounting firm Deloitte & Touche CIS,AO “Business Solutions and Technologies”, who has also audited and reported on our consolidated financial statements.
There were no changes in our internal control over financial reporting during the year ended December 31, 20212022 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
(c) | Attestation Report of Independent Registered Public Accounting Firm. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Mobile TeleSystems PJSC
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Mobile TeleSystems PJSC and its subsidiaries (the “Group”) as of December 31, 2021,2022, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,2022, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021,2022, of the Group and our report dated March 1, 20222023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ AO Deloitte & Touche CIS“Business Solutions and Technologies”
Moscow, Russia
March 1, 20222023
(d) | Changes in internal control over financial reporting. |
Management has evaluated, with the participation of our CEO and CFO, whether any changes in our internal control over financial reporting that occurred during the period covered by this annual report have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, management has concluded that no such changes have occurred.
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that Thomas Holtrop, and Nadia Shouraboura and Regina von Flemming are “audit committee financial experts” as defined in Item 16A of Form 20-F.20 F. Mr. Holtrop is “independent” as defined in Rule 10A-310A 3 under the Exchange Act and current New York Stock Exchange listing rules applicable to us. For a description of Mr. Holtrop’s,Mrs Shouraboura and Mrs Nadia Shouraboura’s experience,Regina von Flemming experience’s, please see “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Key Biographies.”
Item 16B. Code of Business Conduct and Ethics
MTS strives to comply with applicable legal requirements and leading international practices, and therefore periodically updates its compliance policies and procedures. As one of fundamental documents of the Company, the Code of Business Conduct and Ethics (hereinafter referred to as the Code) was significantly updated in 20214 and has undergone changes. As of the publication date, the edition as of October 20, 2022 is disclosed on our website. Since 2021, there were no significant changes.
The provisions of the Code apply to all employees and directors of MTS (regardless of position, duties, length of service and place of work), including all subsidiaries, affiliates and joint ventures. The Company also strives to ensure compliance with the Code by affiliated companies, in respect of which MTS does not exercise control, as well as by partners and counterparties.
4As of the publication date, the edition as of October 20, 2022 is disclosed on our website. Since 2021, there were no significant changes.
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The content of the Code covers the following main topics relevant to all groups of MTS stakeholders:
1. | MTS Values and Principles (introduction on behalf of the Management Board of MTS). |
MTS business strategy is based, among other things, on building stable value relationships with customers and other stakeholders, in connection with which the Code formulates the principles and values that guide the Company in achieving its goals.
2. |
The Code contains ways to get advice if there are questions about the topics covered in the Code, doubts about whether a situation is regulated by the Code or whether it is a violation thereof.
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3. | Responsible business practice (ethics of making business decisions in MTS). |
The Code cannot describe all kinds of situations regulated by the Code, however, the Code offers a kind of universal algorithm for making business decisions by persons to whom the Code applies.
4.Compliance with laws (anti-corruption legislation, internal labor regulations, information security |
The Code is a unified regulatory and ethical standard of regulation within the MTS Groupdata protection, insider, intellectual property protection, asset protection and includes various regulatory requirements applicable to the Company's activities. In terms of compliance with legal requirements, the Company's Code contains, at a minimum, references to policies and procedures governing certain business processes relevant to the entire MTS ecosystem.
5. | Principles of sustainable development (quality of life and service, innovation) |
The company adheres to the principles of sustainable development: it conducts business ethically, takes responsibility for the consequences of its decisions and its activities, as well as for the impact of these consequences on society.
6. | Reporting violations, prohibition of |
In the new version of the Code, the Company has made changes in terms of feedback and the operation of a hotline: the number of channels for appeals has been increased; all appeals are registered by an external independent provider; the possibility of submitting anonymous messages is available. At the same time, the Company strongly supports the culture of open dialogue and guarantees protection from retalitation to persons in case of a conscientious report of a problem or violation.
In order to ensure the effectiveness of the Code, the Company uses a language that is simple and understandable to all stakeholders, an interactive format, provides easy access to the Code, other compliance policies and procedures of the Company on its open resources (internal and external), and also conducts periodic training in accordance with the requirements of the Code.
A copy of our Code of Business Conduct and Ethics is available on our website at http://ir.mts.ru/.
Item 16C. Principal Accountant Fees and Services
AO Deloitte & Touche CISBusiness Solutions and Technologies (PCAOB ID No. 1341) has served as our Independent Registered Public Accounting Firm for the fiscal years ended December 31, 20212022 and 20202021 for which audited financial statements appear in this Annual Report on Form 20-F. The following table presents the aggregate fees billed for professional services and other services by AO Deloitte & Touche CISBusiness Solutions and Technologies and its affiliates in 20212022 and 2020,2021, respectively.
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| | Year ended | ||
| | December 31, | ||
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| 2021 |
| 2020 |
| | (in thousands of | ||
| | Russian rubles) | ||
Audit Fees | | 179,845 | | 155,895 |
Audit‑Related Fees |
| 1,500 |
| 2,450 |
Tax Fees |
| — |
| 840 |
All Other Fees |
| 3,300 |
| 3,490 |
Total |
| 184,645 |
| 162,675 |
Audit Fees
The Audit Fees for the years ended December 31, 2021 and 2020 were for the reviews and integrated audits of our consolidated financial statements prepared in accordance with IFRS, reviews and audits of the financial statements of our public subsidiaries prepared in accordance with IFRS, statutory audits.
Audit-Related Fees
The Audit-Related Fees for the years ended December 31, 2021 and 2020 primarily relate to agreed-upon procedures engagement.
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Tax Fees
The Tax Fees for the year ended December 31, 2020 include the fees principally related to tax compliance services.
Audit Fees
The Audit Fees for the years ended December 31, 2022 and 2021 were for the reviews and integrated audits of our consolidated financial statements prepared in accordance with IFRS, reviews and audits of the financial statements of our public subsidiaries prepared in accordance with IFRS, statutory audits.
Audit-Related Fees
The Audit-Related Fees for the years ended December 31, 2022 and 2021 primarily relate to agreed-upon procedures engagement.
All Other Fees
All Other Fees for the year ended December 31, 2022 primarily relate to agreed-upon procedures engagement on non-financial information, advisory and training services; for the year ended December 31, 2021 – to advisory and training services.
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Audit Committee Pre-Approval Policies and Procedures
The Sarbanes-Oxley Act of 2002 required us to implement a pre-approval process for all engagements with our independent public accountants. In compliance with Sarbanes-Oxley requirements pertaining to auditor independence, our Audit Committee pre-approves the engagement terms and fees of AO Business Solutions and Technologies and its affiliates for all audit and non-audit services, including tax services. Our Audit Committee pre-approved the engagement terms and fees of AO Business Solutions and Technologies and its affiliates for all services performed for the fiscal year ended December 31, 2022. No services of any kind were approved pursuant to a waiver permitted pursuant to 17 CFR 210.2-01(c)(7)(C)(1).
Item 16D. Exemption from the Listing Standards for Audit Committees
Not Applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no share repurchases during the year ended December 31, 2022
See also “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Not applicable.
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ordinary shares (including ordinary shares represented by ADSs) repurchased in 2021. No shares have been repurchased in January, February, and August-November.
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| | | | | Shares repurchased |
| | Total number of shares | | | | under publicly |
Month | | repurchased |
| Average Price |
| announced plans |
March |
| 633,266 | | 316 | | — |
April |
| 6,096,878 | | 318 | | 6,096,878 |
May |
| 25,761,793 | | 325 | | 15,955,872 |
June | | 15,455,605 | | 334 | | 15,455,605 |
July | | 7,893,566 | | 342 | | 7,893,566 |
December | | 9,467,502 | | 327 | | — |
Total |
| 65,308,610 | | | | 45,401,921 |
See also “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
We are a company organized under the laws of the Russian Federation and qualify as a foreign private issuer as such term is defined in Rule 3b-4 of the Exchange Act. In accordance with the NYSE corporate governance rules, listed companies that are foreign private issuers are permitted in some circumstances to follow home country practice in lieu of the provisions of the corporate governance rules contained in Section 303A of the NYSE Listed Company Manual that are applicable to U.S. companies. In addition, foreign private issuers listed on the NYSE must disclose any significant ways in which their corporate governance practices differ from those followed by U.S. companies listed on the NYSE. With regard to our corporate governance practices, these differences can be summarized as follows:
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We do not currently have a nominating/corporate governance committee. We have a committee on corporate governance and environmental & social responsibility comprising of directors and members of management that is responsible for developing and implementing standards related to environmental, societal, and governance factors (ESG), including making recommendations to the Board of Directors on developing our strategy in the area of corporate governance. This committee is also responsible for conducting annual performance evaluations of the Board of Directors.
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We also have a remuneration and nomination committee comprising of four independent directors. This committee functions pursuant to bylaws approved by the Board of Directors specifying the committee’s purpose, duties and responsibilities. The committee is primarily responsible for recommending appointments to key managerial positions, developing a set of requirements and criteria for directors and management executives and developing a remuneration structure and compensation levels for the Board of Directors and management executives (including the CEO).
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We may in the future decide to use other foreign private issuer exemptions with respect to some or all of the other New York Stock listing rules. Following our home country governance practices may provide less protection than is accorded to investors under the New York Stock Exchange listing rules applicable to domestic issuers. We are required under the New York Stock Exchange listing rules to disclose any significant differences between the corporate governance practices that we follow under Russian law and applicable listing standards and those followed by U.S. domestic companies under New York Stock Exchange listing standards. This disclosure is posted on our website (http://ir.mts.ru/).
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PART III
Item 17. Financial Statements
See instead Item 18.
Item 18. Financial Statements
The following financial statements, together with the report of AO Deloitte & Touche CIS,“BUSINESS SOLUTIONS AND TECHNOLOGIES”, are filed as part of this annual report on Form 20-F.
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CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2022, 2021 | | |
Consolidated statements of financial position as of December 31, | |
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Item 19. Exhibits
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Exhibits No. |
| Description |
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1.1 | | Charter of Mobile TeleSystems PJSC, restated version No. |
1.2 | | Amendments and Additions to the Charter of Mobile TeleSystems PJSC (Version No. 15), as approved by Extraordinary Meeting of Shareholders of Mobile TeleSystems PJSC held on February 15, 2021 (English translation): https:// |
1.3 | | Amendments and Additions to the Charter of Mobile TeleSystems PJSC (Version No. 15), as approved by Extraordinary Meeting of Shareholders of Mobile TeleSystems PJSC held on February 15, 2021 (English translation): https:// |
1.4 | | Amendments and Additions to the Charter of Mobile TeleSystems PJSC (Version No. 15), as approved by Extraordinary Meeting of Shareholders of Mobile TeleSystems PJSC held on February 15, 2021 (English translation): https:// |
2.1 | | Deposit Agreement, dated as of July 6, 2000, by and among, MTS, Morgan Guaranty Trust Company of New York (as depositary), and holders of ADRs is incorporated herein by reference to Exhibit 2.1 to the Annual Report filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000, on Form 20-F. |
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8.1 | | List of Subsidiaries of Mobile TeleSystems Public Joint Stock Company. |
11.1 | | Code of Business Conduct and Ethics of Mobile TeleSystems PJSC approved by the Board of Directors of Mobile TeleSystems PJSC on |
12.1 | | |
12.2 | | |
13.1 | | |
13.2 | | |
101 | | The following financial information formatted in Extensive Business Reporting Language (XBRL): (i) Consolidated statements of financial position as of December 31, |
104 | | Cover Page Interactive Data File formatted as Inline XBRL and contained in Exhibit 101. |
256166
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| | ||
Date: April | MOBILE TELESYSTEMS PUBLIC JOINT STOCK COMPANY | ||
| By: | /s/ Vyacheslav K. Nikolaev | |
| | Name: | Vyacheslav K. Nikolaev |
| | Title: | Chief Executive Officer |
257167
PJSC MOBILE
TELESYSTEMS
AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 2022, 2021 2020 and
for the Years Ended December 31, 2021,2022,
20202021 and 20192020
F-1
PJSC MOBILE TELESYSTEMS AND SUBSIDIARIES
TABLE OF CONTENTS
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CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2022, 2021 | | |
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS | |
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RECONCILIATION OF LIABILITIES ARISING FROM FINANCIAL ACTIVITIES | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMAUDITOR’S REPORT
To the Shareholders and the Board of Directors of Mobile TeleSystems PJSC
Opinion on the Consolidated Financial Statements
We have audited the accompanyingconsolidated financial statements of Mobile TeleSystems PJSC and its subsidiaries (the “Group”), which comprise the consolidated statements of financial position of Mobile TeleSystems PJSCas at 31 December 2022 and subsidiaries (the “Group”) as of December 31, 2021, and 2020, the related consolidated statements of profit or loss, consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2021,2022, and notes to the related notes (collectively referred to as the “consolidatedconsolidated financial statements”). statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as ofat 31 December 31,2022 and 2021, and 2020,its consolidated financial performance and the results of its operations and itsconsolidated cash flows for each of the three years in the period ended December 31, 2021,2022 in conformityaccordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.(“IFRSs”).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Group’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2022 expressed an unqualified opinion on the Group’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements
We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the responsibilityAuditor’s Responsibilities for the Audit of the Group’s management. Our responsibility is to express an opinion on the Group’s consolidated financial statements based onConsolidated Financial Statements section of our audits.report. We are a public accounting firm registered with the PCAOB and are required to be independent with respect toof the Group in accordance with the U.S. federal securities lawsAuditor’s Independence Rules and the applicable rules and regulationsAuditor’s Professional Ethics Code, that are relevant to our audit of the Securitiesfinancial statements in the Russian Federation together with the ethical requirements of the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the “IESBA Code”), and Exchange Commission and the PCAOB.
We conductedwe have fulfilled our auditsother ethical responsibilities in accordance with these requirements and the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.IESBA Code. We believe that our auditsthe audit evidence we have obtained is sufficient and appropriate to provide a reasonable basis for our opinion.
CriticalKey Audit Matters
The critical
Key audit matters communicated below are those matters arising from the current-periodthat, in our professional judgment, were of most significance in our audit of the consolidated financial statements thatof the current period. These matters were communicated or required to be communicated toaddressed in the context of our audit committee and that (1) relate to accounts or disclosures that are material toof the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and in forming our opinion thereon, and we aredo not by communicating the critical audit matters below, providingprovide a separate opinionsopinion on the critical audit matters or on the accounts or disclosures to which they relate.these matters.
Revenue Recognition — Refer to Note 7 to the consolidated financial statements
Critical Audit Matter Description
The Group's revenue from telecommunication services consists of a significant volume of low-value transactions, sourced from multiple systems, databases, and other tools, including billing systems. The processing and recording of revenue is highly automated and is based on established tariff plans.
We identified the revenue recognition for telecommunications services as a critical audit matter due to the complexity of information systems involved in the revenue recognition process and the risks associated with recognition and measurement of revenue, arising from the diversity and constant evolution of tariff plans, marketing offers and discounts provided to customers. The auditing of
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revenue required an increased extent of audit effort, including the need for us to involve professionals with expertise in information technology (IT) to identify, test, and evaluate the Group’s systems, software applications, and automated controls.
How the Critical Audit Matter Was Addressed in the Audit
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Why the matter was determined to be a key audit matter | | How the matter was addressed in the audit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue recognition The Group's revenue from telecommunication services consists of a significant volume of low-value transactions, sourced from multiple systems, databases, and other tools, including billing systems. The processing and recording of revenue is highly automated and is based on established tariff plans. We identified this matter as a key audit matter due to the complexity of information systems involved in the revenue recognition process and the risks associated with recognition and measurement of revenue, arising from the diversity and constant evolution of tariff plans, marketing offers and discounts provided to customers. The auditing of revenue required an increased extent of audit effort, including the need for us to involve professionals with expertise in information technology (IT) to identify, test, and evaluate the Group’s systems, software applications, and automated controls. See Note 6 to the consolidated financial statements. | | Our audit procedures related to the Group’s revenue recognition for telecommunication services included the following, among others:
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