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Rostelecom Investor Presentation Investor Meetings, April 200

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Investor Meetings, April 2006. Rostelecom Investor Presentation. Certain statements in this presentation are “forward-looking statements” within the meaning of the U.S. federal securities laws and are intended to be covered by the safe harbors created thereby. - PowerPoint PPT Presentation

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Page 1: Rostelecom  Investor Presentation

Rostelecom Investor Presentation

Investor Meetings, April 2006

Page 2: Rostelecom  Investor Presentation

2

Certain statements in this presentation are “forward-looking statements” within the meaning of the U.S. federal securities laws and are intended to be covered by the safe harbors created thereby.

These forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by these forward-looking statements.

These risks include the risk of changes the Company’s operations and business prospects, the general financial and economic circumstances, relating to regulation of the Russian telecommunications industry and the Russian legislation; the competition and other risks.

For a more detailed discussion of these and other factors, see the Company’s Annual Report on Form 20-F for its most recently completed fiscal year and the Company’s other public filings with The U.S. Securities and Exchange Commission. Many of these factors are beyond the Company’s ability to control or predict. Given these and other uncertainties, the Company cautions not to place undue reliance on any of the forward-looking statements contained herein or otherwise.

The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as maybe required under applicable the U.S. federal securities laws.

Page 3: Rostelecom  Investor Presentation

3

International operators

12%

Russian operators

62%Other5%

Moscow subscribers

21%

Outgoing ILD

23%

DLD45%

Incoming ILD

10%

Other22%

Rostelecom at a Glance

Key FactsKey Facts Revenue Breakdown

Rostelecom owns and operates nationwide digital trunk network

In all Russian regions Rostelecom provides fixed-line DLD and ILD services to end-customers

Rostelecom acts as a “carriers’ carrier” in the Russian market, interconnecting local public operators’ networks into a single national network

51% of voting shares owned by the state controlled holding company Svyazinvest

Shares traded on NYSE, LSE, RTS, MICEX

Market capitalization: USD 3.12 billion

Revenue breakdown by service*

Revenue breakdown by customer segment*

* In accordance with 2005 FY RAS results

Page 4: Rostelecom  Investor Presentation

4

Strong Position for Growth as Russia’s National Long-Distance Operator

Traffic growth in Russian telecom market continues

Russian telecommunications market grew by an impressive 38% in 2004 and is likely to grow by further 30% in 20051)

Unique nationwide infrastructure gives Rostelecom enduring competitive advantage

4-year modernization and capacity expansion program to support top-line growth

Rostelecom’s top-line growth strategy is yielding results

2005 FY non-consolidated revenue increased 7.5% (RAS)

Consolidated revenue increased 9.7% in H1 2005 (IFRS)

Opportunities for direct access to end-users throughout Russia from Jan. 1, 2006

Corporate restructuring and efficiency programs clearly paying off

OIBDA margin2) stable at 36.4% in H12005 (IFRS)

Steady headcount reduction underpins increasing productivity

Financial strength supports strategic aims

S&P long-term credit upgrade to “BB-” with stable outlook in March 2005

1) According to the Ministry of Information Technologies and Communications

2) OIBDA is a non-U.S. GAAP financial measure, which the Company defines as operating income before depreciation, amortization and loss on disposal of PP&E

Page 5: Rostelecom  Investor Presentation

5

Nationwide Network Underpins Rostelecom’s Competitive Market Position

Developed trunk network underlies the Company’s competitive advantages

Competitive transit rates

Most reliable traffic transmission route in Russia

High service recognition from local and international operators

Low Repair & Maintenance expenses

Most extensive and sophisticated network infrastructure among Russian operators

Rostelecom has built the most advantageous technological position for providing long-distance services under the new regulatory requirements

almost 200,000 km in length points of presence across entire Russian Federation points of presence in London, Stockholm and Frankfurt

93% digitalized in channel-kilometers 100% digitalized in switching capacity

Page 6: Rostelecom  Investor Presentation

6

Continued Traffic Growth on Rostelecom’s Network

7,136

8,220

6,179

3,915

4,960

9,094

9,347

3,500

4,500

5,500

6,500

7,500

8,500

9,500

1999 2000 2001 2002 2003 2004 2005F

Rostelecom’s domestic long-distance (DLD) traffic dynamics

DLD traffic growth of 3-7% p.a.

1,323

1,235

928

944

1,541

1,082

1,769

1,207

973929

897

1,449

869

1,693

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1999 2000 2001 2002 2003 2004 2005F

ILD outgoing ILD incoming

Rostelecom’s international long-distance (ILD) traffic dynamics

Mln min Mln min

Incoming ILD traffic growth at 15-20% p.a., outgoing ILD – at 10-15% p.a.

Page 7: Rostelecom  Investor Presentation

7

Rostelecom’s Top-Line Growth Strategy Is Yielding Results

Total revenue (IFRS), RUR mln

Incoming ILD from international operators

27,8

53

28,8

23 31,3

94

31,2

67

27,8

53

37,3

18

2002 2003 2004

RevenueRevenue excl. effect of new settlement system

12.3%

19.4%

8.9%

3.5%

9,448 10,287

3,1663,384

2,0101,950

3,139

4,189

H1 2004 H1 2005

+ 8.9%

-6.4%

+ 3.1%

+ 33.5%

DLD and outgoing ILD from Russian

operators

DLD and outgoing ILD from subscribers

Other operations

Revenue (IFRS) by segment, RUR mln

17,921

19,652

9.7%

Page 8: Rostelecom  Investor Presentation

8

Change in Rostelecom’s Market Status: Getting Direct Access to End-Users throughout Russia

End-users market

Direct long-distance service provider in Moscow• Provider of DLD and ILD services to MGTS’

subscribers only• Provider of channel capacity to Russian

corporate clients

Direct long-distance service provider in all Russian regions• Provider of DLD and ILD services to subscribers

of local network operators throughout Russia• Provider of channel capacity to Russian

corporate clients

Russian

operators

market

Nationwide carrier’s carrier and capacity provider

• Primarily provider of DLD and outgoing ILD traffic transit service to operators

• Provider of channel capacity to operators

Nationwide carrier’s carrier and capacity provider

• Primarily provider of channel capacity to operators

• Provider of traffic transit services

International

operators’

market

Provider of incoming ILD traffic transit, non-switched international traffic transit and

channel capacity

Other markets

Provider of equipment servicing, intelligent network services etc.

Rostelecom’s market presence until 2006: primarily wholesale operator

Rostelecom’s market presence from 2006: major Russian LD retail operator

Page 9: Rostelecom  Investor Presentation

9

Evolving Rostelecom’s Business Model to Seize Opportunities in Liberalized Market Environment

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2000 2001 2002 2003 2004 2005F 2006F

Traffic transit from international operators

Direct traffic from subscribers

LD traffic transit from Russian operators

Until 2006 – primarily wholesale

LD operator

From 2006 – primarily retail

LD operator

Main contributor to top-line

LD traffic transit services to operators

LD calls provision to subscribers of local network operators

Revenue recognition

Transit and termination rate from operators

The whole amount of end-user tariff in Moscow

The whole amount of end-user tariff across Russia

Billing and

customer service

• B2B (in-house)

• B2C in Moscow (in-house)

• B2B (in-house)

• B2C in Moscow (in-house)

• B2C (outsourced in regions)

Rostelecom traffic volume by customer segment

New interaction system – expanded customer base and change in traffic split

Page 10: Rostelecom  Investor Presentation

10

New Settlement System Effects on Rostelecom’s Profit & Loss Statement

Upward effect on revenues

Rostelecom recognizes as revenue the total amount of the end-user tariff

Changes in revenue composition: decrease in revenues from local operators and increase in revenues from subscribers

Upward effect on operating expenses

Rostelecom’s payments to local operators increase:

• initiation charge

• termination charge paid for incoming ILD traffic termination• additional service charges to local operators

Additional tax expense in the form of the Universal Service Fund tax (1.2% of revenues, collected from subscribers for LD services)

Effect on margins Negative effect on EBITDA margin

Page 11: Rostelecom  Investor Presentation

11

Operators Market: Sharp Increase in Revenue from Leased Line Services Driven by Booming Demand

Strong growth in demand and competitive prices boost revenues from leased line services

2,402 2,767 4,638 6,046

2002 2003 2004 2005

Unique scale and capacity of Rostelecom’s nationwide network

Strong growth in demand for leased line services across Russia

Further expansion of flexible multiplexers network

High quality of service and brand awareness

Rostelecom enjoys strong position in the leased line market

Sustained growth in revenues

Revenue from leased line services

RUR mln

+15%

+68%

+30%

Page 12: Rostelecom  Investor Presentation

12

International Market: Stable Revenues on the Back of Healthy Traffic Growth

Strong relationships with international operators underpin Rostelecom’s leading position in the international market

Active cooperation with international operators

Incoming ILD settlement rates revision

Strong growth in traffic and positive revenue dynamics

4,250 3,871 4,041 4,0826,018

1,693

1,449

1,207

973

869

2001 2002 2003 2004 2005F

Revenue, RUR mln

Traffic, mln min

Traffic and revenue from international operators

Page 13: Rostelecom  Investor Presentation

13

Value Added Services: Enhancing Competitiveness by Catering to Corporate Customers’ New Needs

Rostelecom – competitive player in the VAS market

Surge in INS revenues26 48 142 430

2002 2003 2004 2005F

RUR mln

+196%

+85%

Revenue from Intelligent Network Services

+202%

Effective promotion of existing Intelligent Network Services (INS):

• Free-phone (8-800-200; 8-800-100)

• Televoting (8-803-200)

• Prepaid card

Active development of new services:

• 8-802/8-805/8-806/8-809 services to be launched

Page 14: Rostelecom  Investor Presentation

14

Entry into Europe–Asia Transit Market WillStrengthen Competitive Potential in the Medium Term

Opportunities

Europe-Asia traffic is expected to

continue its 20 to 30% annual growth

trend

Existing undersea lines of competitors

will not be able to accommodate

growing capacity needs

Competitors’ undersea lines have certain

drawbacks, including limited capacity,

large length, poor quality & reliability

Rostelecom strengths

Rostelecom’s high-technology terrestrial countrywide network represents the shortest traffic transit route between Europe and Asia

We offer better quality and reliability of routing along with competitive pricing

• Capacity expansion of Rostelecom’s network to Chinese border underway

• Organization of point of presence in New York underway

Flexible solutions to customers needs - protocol insensitive technology enables to carry any

combination of voice, data, video and IP applications

Great potential of further development of TEA:

Page 15: Rostelecom  Investor Presentation

15

Steady Efficiency Gains and Profit Performance Strengthen Rostelecom’s Financial Position

1) Adjusted to the new settlement system

2,820739 4,298398

2.900.76 0.41

4.42

2002 2003 2004 H1 2005Net profit, RUR mln EPS, RUR

Net profit and earnings per share

11,436 11,651 12,720 7,152

36%34%37%41%

2002 2003 2004 H1 2005OIBDA, USD mln OIBDA margin, %

2)2)

2) Decline in OIBDA margin is due to the introduction of the new settlement system

OIBDA and OIBDA margin

2,185 3,1411,898 5,005

2002 2003 2004 H1 2005

Operating profit, RUR million

29,222 27,152 25,968 25,153 24,315

546

702 690771

808

H1 2003 H2 2003 H1 2004 H2 2004 H1 2005

Average headcountRevenue/employee, RUR'000

1)

Revenue per employee

Page 16: Rostelecom  Investor Presentation

16

Strong Balance Sheet and Steady Positive NOCF Generation Underlie Financial Flexibility

3.67.2

10.0

27.3

4.1 5.0

12.7

26.022.1

38.3

2000 2001 2002 2003 2004

Preferred sharesOrdinary shares

Dividends, USD million

5,713 2,075 7,754 5,917

2002 2003 2004 H1 2005

Net operating cash flow, RUR million

1,088

1,046

570 140

553

126

207

1,2871,1071,2101,932

127

31/12/2003 30/06/2004 31/12/2004 30/06/2005

more then two years1-2 yearsCurrent

Interest bearing loans, RUR million

Cur

rent

loan

s as

a %

of

cas

h an

d ca

sh

equi

vale

nts

88% 19%33%76%

Debt down 17.5%

Page 17: Rostelecom  Investor Presentation

17

Capital Expenditure Program to Enhance Rostelecom’s Competitive Advantages

233

82 80

108

156

230-250

60-80

2000 2001 2002 2003 2004 2005F 2006F 2007F 2008F

USD mln

Investment priorities

Capacity expansion

Implementation of unified billing system

Construction of new fiber-optic lines

Secondary network modernization,

development of new services

Page 18: Rostelecom  Investor Presentation

18

Today’s Priorities Focus on Competitive Strength and Efficiency

Traditional LD voice transit services to end-users

Advanced technological solutions for corporate clients

Further operationalefficiency enhancement

Further growth in traffic in the Russian market through active marketing efforts

Strengthening competitive position in Moscow

Active promotion of Europe-Asia traffic transit service

Strengthening leadership in the international market

Further trunk network modernization and expansion

Disposal of underperforming and non-core assets

Business processes and organizational structure optimization

Management’s key goal – to secure Rostelecom’s competitive position

in the liberalized market

Operators market

Active promotion and launch of new intelligent network services

Expansion of multi-service network

Page 19: Rostelecom  Investor Presentation

19

A P P E N D I X

Page 20: Rostelecom  Investor Presentation

20

Main Effect of the New Settlement System – Direct Revenue Recognition from End-Users

Old DLD settlement system

RTO #1:LD call

initiation

RTO #1:LD call

initiation

RTO #2:LD call

termination

RTO #2:LD call

termination

Long-distance operator

Long-distance operator

End-user tariff

Transit rate + Termination

charge

End-user

Termination charge

Termination charge

New DLD settlement system

End-user

RTO #1:LD call

initiation

RTO #1:LD call

initiation

RTO #2LD call :

termination

RTO #2LD call :

termination

Long-distance

operator #1

Long-distance

operator #1

Long-distance

operator #2

Long-distance

operator #2

End-user tariff

End-user tariff

Initiation charge

Termination charge

Initiation charge

Page 21: Rostelecom  Investor Presentation

21

On January 1, 2006 Rostelecom Started Operating Under the New ILD Settlement System

Old settlement system

End-user

RTO(ILD call

initiation)

RTO(ILD call

initiation)

International operator(ILD call

termination)

International operator(ILD call

termination)RostelecomRostelecom

End-user tariff

50% of end-user tariff

Termination charge

International LD services to Russian end-users

International operator

International operator RostelecomRostelecom

International transit and

termination rate

RTO(ILD call

termination)

RTO(ILD call

termination)(no payments)

Incoming ILD traffic termination

Page 22: Rostelecom  Investor Presentation

22

On January 1, 2006 Rostelecom Started Operating Under the New ILD Settlement System

New settlement system

RostelecomRostelecom

End-user tariff

End-userTermination

charge

RTO:ILD call

initiation

RTO:ILD call

initiation

International operator(ILD call

termination)

International operator(ILD call

termination)

Initiation charge

International LD services to Russian end-users

RTO(ILD call

termination)

RTO(ILD call

termination)

Termination chargeInternational

operatorInternational

operator RostelecomRostelecom

International transit and

termination rate

Incoming ILD traffic termination

Page 23: Rostelecom  Investor Presentation

23

H1 2005 IFRS Financial Highlights: Robust Increasein Profits on Top-line Growth and Efficiency Gains

RUR mln H1 2005 H1 2004 Change, %

Local operators 12,285 10,732 14.5

Subscribers 4,112 4,368 -5.9

Foreign operators 2,302 2,204 4.4

Other 953 617 54.5

Total revenue 19,652 17,921 9.7

Operating expenses before depreciation and loss on disposal of PP&E (12,500) (11,379) 9.9

OIBDA 7,152 6,542 9.3

Depreciation 3,649 3,649 0.0

Loss on sale of property, plant end equipment (362) (73) 395.9

Total operating expenses (16,511) (15,101) 9.3

Operating profit 3,141 2,820 11.4

Gain from associates 26 74 -64.9

Net result from financial activities 563 294 91.5

Profit before tax 3,730 3,188 17.0

Income tax expense (910) (777) 17.1

Profit for the period 2,820 2,411 17.0

Earnings per share 2.90 2.48 16.9

Page 24: Rostelecom  Investor Presentation

24

Condensed Consolidated Balance Sheet

RUR mln Jun. 30, 2005 Dec. 31, 2004 Change, %

Non-current assets 47,301 48,788 -3.0

Current assets 20,217 15,632 29.3

Accounts receivable, net 6,329 5,613 27.0

Short-term investments 6,302 8,150 -32.5

Cash and cash equivalents 6,802 1,255 442.0

Total assets 67,518 64,420 4.8

Total equity 51,598 50,838 1.5

Non-current liabilities 6,034 7,316 -17.5

Interest bearing loans, net of current portion 267 777 -65.6

Deferred tax liability 5,530 5,954 -7.1

Current liabilities 9,886 6,266 57.8

Accounts payable and accrued expenses 5,313 3,299 61.0

Current portion of interest bearing loans 1,287 1,107 16.3

Total liabilities 15,920 13,582 17.2

Total equity and liabilities 67,518 64,420 4.8

Page 25: Rostelecom  Investor Presentation

25

Solid 2005 FY Performance under RAS Contributes to Rostelecom’s Strong Financial Position

2005 2004 Change, %

Million minutes

Domestic long-distance traffic 9,347 9,094 2.8

Outgoing international traffic 1,769 1,541 14.8

Incoming international traffic 1,693 1,449 16.8

RUR million

Revenue 40,292 37, 471 7.5

Operating expenses (28,331) (25,550) 10.9

incl. depreciation (2,627) (2,063) 27.3

EBITDA 14,588 13,983 4.3

Operating profit 11,961 11,920 0.3

Results from other operating activities 902 (1,214) n/a

Results from other non-sales activities (704) (926) -23.9

Profit before tax 12,159 9,781 24.3

Profit tax 3,132 2,559 22.4

Extraordinary items 1 (1) n/a

Net profit 9,028 7,221 25.0

Page 26: Rostelecom  Investor Presentation

26

Rostelecom - Investment Profile

“BB-” credit rating from S&P, outlook stable

Corporate Governance Code and Code of Ethics in place

IFRS reporting

Listings:

NYSE, RTS, MICEX

Free float:

62% (49% ORD and 100% PREF)

Market capitalization:

USD 3.12 bn

Recent stock price (10/04/2006):

ORD: USD 3.49 (52 WK HI/LO: USD 3.86 / 1.96)

PREF: USD 2.30 (52 WK HI/LO: USD 2.61 / 1.40)

ADR: USD 20.83 (52 WK HI/LO: USD 22.70 / 11.67)

2004 Dividend yield:

2.5% (ORD) / 6.5% (PREF)

Dividend policy

PREF: 10% of the full financial year net profit under RAS

ORD: recommended by the Board of Directors

Page 27: Rostelecom  Investor Presentation

27

Contact Information

Investor & Public Relations

Anton KlimenkoDirectorTel. + 7 495 973 9920Fax + 7 495 973 9977E-mail: [email protected]

Company Headquarters

14, 1st Tverskaya-Yamskaya StreetMoscow, 125047 RussiaTel. + 7 495 972 8283Fax + 7 495 787 2850E-mail: [email protected]

www.rt.ru/en

Corporate Secretary

Olga Mokhoreva

Tel. + 7 495 973 9921Fax + 7 495 787 2850E-mail: [email protected]

ADR Program Administration

JPMorganTel. + 1 800 428 4237

(Free Phone in the US)Tel. + 1 781 575 4328 E-mail: [email protected]

www.adr.com