Letter from the President

Dear Shareholders,

For Rostelecom, 2013 was a year marked by important events. These events are laying the foundation for a new stage in our Company’s history, which spans more than 130 years, from the moment when the first telephone stations were launched in Russia.

In October 2013, the Company completed the process of consolidating its businesses through its merger with OJSC Svyazinvest. Rostelecom started consolidating its businesses back in 2002, when it began to merge local telecommunications companies with interregional companies. The formation of a united national telecommunications operator as Rostelecom has now become, lays the groundwork for the Company to fully realise the economic benefits of the business’ scale.

Rostelecom has defined its strategic vision for the coming years, which is to transform the combined Rostelecom into a modern, dynamic and world-class company. The main components of the strategy will reinforce the technical leadership of our network infrastructure, they will ensure our customer service meets international best practice and we will develop a differentiated product range based on unique bundles and content offerings. The strategy is also focused on delivering organisational improvements and achieving maximum operating efficiency.

We are also very pleased to have reached a joint venture agreement with Tele2 Russia at the end of 2013. Together, the integrated assets compliment each other in terms of geographical reach, and they combine Tele2 Russia’s successful operational model and Rostelecom’s extensive portfolio of frequencies. By possessing a stake in a large and fast-growing mobile operator, the deal will allow Rostelecom to significantly strengthen its presence in the rapidly developing mobile data market.

We are proud of our role as a technical partner of the 2014 Olympic Games in Sochi, which enabled us to demonstrate why Rostelecom is home to the best engineering practices in the Russian telecommunications industry. We started to prepare for this international event in 2009 and the main work was completed in 2013. The TV signal for the Games was transmitted via optical fibre for the first time in the history of the Olympic Games. We built all the telecommunications infrastructure required for the games, including the media centres, and we set up channels to transmit signal across the world with a total capacity of 140Gb/second.

We continue to actively upgrade and extend our network infrastructure across the country. The network capacity of IP / MPLS data transfer was expanded by 7.2 Tb/s in 2013. We also established a programme to upgrade our last mile copper networks to fibre optic. In accordance with this plan, 33 million Russian households will be able to access the internet at speeds of 1 Gb/s by 2016. A plan to bridge the digital gap was also developed, which involved laying fibre optic lines in small settlements using resources from the universal services fund.

Our team’s efforts to strengthen Rostelecom’s market position in key segments have enabled us to achieve stable operating and financial results in 2013. The number of broadband customers rose by 8% and reached 10.6 million by the end of 2013. Growth in the number of subscribers connected by the fibre optic network was more pronounced, increasing by 30% to 4 million subscribers and making up 38% of the total subscriber base. The number of pay-TV subscribers grew by 9% to 7.5 million. Subscribers of IPTV – one of the most popular and fast-growing segments – rose by 38% and reached 2.2 million.

In 2013, the Company devoted a lot of time to improving its packages and offering to the market. The functionality of services was improved and the range of services on offer was broadened by introducing new, unique services. We launched “Fast”, a separate line of fibre optic tariffs, which reflects current market trends and guarantees high-speed broadband internet access. As part of our pay-TV packages, our customers now have the option to subscribe to the “Amedia Premium HD” add-on package. We have also launched our own promotional channel, “All TV”, and we have made improvements to the list of digital and HD channels available to our customers. We have also significantly improved the functionality of our IPTV service. We now offer 3D support, a system to monitor bandwidth connection, karaoke, subscriber content, the opportunity to purchase TV series and many other services. In addition to that, the launch of the Zabava app on Android and SmartTV LG enabled us to broaden our OTT product range and increase the number of channels for OTT products from 89 to 131. In 2013, an integrated members’ area became available for our customers across Russia, and a loyalty scheme was introduced in December 2013 for mass segment customers, to enable subscribers to collect points on the services they use and to then redeem them on additional Rostelecom services.

The Company realised more than RUB 16 billion of savings between April and December last year, by improving the efficiency of procurement procedures and optimising relationships with vendors and suppliers. By participating in an AT-Kearny’s global study, which benchmarked operating costs, we obtained a detailed picture of the main areas where improvements to operating efficiency could be made. There is substantial potential to make additional improvements, which we will realise by gradually moving through each of these areas.

Rostelecom continues to evolve, moving away from the traditional operator model to become a modern service provider and Russia’s leading telecommunications company. In making this transition, our main objectives are to increase revenue by offering high-quality and modern services, ensure maximum operating efficiency and ultimately to create additional value for all our shareholders.

Sergey Kalugin
President and CEO of Rostelecom