Strategy

Investing in Growth

In 2007 the Board of Directors approved the principles of the portfolio strategy proposed by the management. These principles call for an increase of the share of privately held businesses in the portfolio. Following this decision of the Board, Sistema initiated several investment projects and M&A transactions in its fast growing businesses of Financial Services, Retail, Media, Healthcare,
and Travel.

Sistema was active in sourcing and taking advantage of new investment opportunities. We acquired control in Indian mobile and fixed-line operator Shyam Telelink with the goal of entering the rapidly growing Indian telecommunications market. Sistema will bring its Russian and CIS telecommunications expertise to transform Shyam Telelink into a leading pan-Indian communications provider.

The Corporation is developing its business relationships with the Russian state and is now seen as a reliable private sector partner capable of providing competitive products and services. The new National Center for Crisis Management that Sistema’s subsidiaries had built for the Russian Ministry of Emergency Situations in 2007 is one example of this partnership’s potential.

Active Management

Sistema is a strategic investor and the controlling shareholder of its core businesses. The Corporation sets targets for them, contributes to the development of their strategies, and monitors the strategy’s implementation.

In 2007 the boards of Sistema’s subsidiaries fixed an updated set of KPIs, the so-called Criteria Base. These KPIs steer the management towards shareholder value, creating growth, and at the same time target mid-term operational indicators, aiming to outperform the competition.

To complement the ambitious goals set before the management, we initiated a review of incentive and remuneration systems. In 2007 the boards of most companies introduced annual bonus programs linked to KPIs, as well as long-term stock option plans.

Adding Value

Sistema’s management believes that growing businesses within a diversified holding creates numerous opportunities to add value to the portfolio of the Corporation. The holding structure in the relatively immature Russian economy helps raise financing at a corporate level on more attractive terms, launch joint projects of businesses and make the best use of cross-selling opportunities, and create and maintain a valuable corporate pool of top managers. Furthermore, as one of the leading Russian companies, Sistema can more effectively represent the interests of its businesses on national and international levels.

In 2007 Sistema raised $500 million in debt financing to develop its Indian project and placed a 6-bn-ruble bond issue in March 2008 on very favorable terms, given the current market environment. We launched the Tochka project, a chain of all-in-one retail stores that offer goods and services from across the Corporation’s areas of operations, including mobile and fixed-line communications, banking, travel services, and multimedia.

At the same time, Sistema made a series of senior level appointments in its businesses that included not only managers taken from the pool of internal candidates, but also those hired from other companies.