34. Related party transaction

(a) The Government as a shareholder

As indicated in Note 1, the Government of the Russian Federation controls the Company by indirect holding of 51.03% of the Company’s ordinary shares through “Vnesheconombank” and Federal Agency of State properties management. It is a matter of the Government policy to retain a controlling stake in sectors of the economy, such as telecommunications, that it views as strategic.

(b) Interest of the Government in the telecommunications sector in the Russian Federation and the protection of that interest

Effective telecommunications and data transmission are of great importance to Russia for various reasons, including economic, social, strategic and national security considerations. The Government has exercised and may be expected to exercise significant influence over the operations of the telecommunications sector and consequently, the Group. The Government, acting through the Federal Tariff Service and the Federal Telecommunications Agency, has the general authority to regulate certain tariffs. In addition to the regulation of tariffs, the telecommunication legislation requires the Group and other operators to make certain revenue–based payments to the Universal service fund, which is controlled by the Federal Telecommunications Agency. Moreover, the Ministry of Telecom and Mass Communications of the Russian Federation has control over the licensing of providers of telecommunications services.

(c) Associates

The Group is also involved in various telecommunication services with entities in which it has investments, including associates over which it exerts significant influence. A summary of these transactions is as follows:

  2013 2012 2011
Revenue 141 167 160
Purchase of telecommunication services  (103)  (105)  (136)
Purchase of other services  (47)  (85)

The amounts of receivables and payables due from these entities were as follows:

  2013 2012 2011
Accounts receivable 20 72 24
Allowance for doubtful receivables  (3)  (9)  (2)
Accounts payable and accrued expenses  (16)  (19)  (19)

(d) Non–state pension fund “Telecom–Soyuz”

The Group has centralized pension agreements with a non–state pension fund “Telecom–Soyuz” (refer to Note 19). In addition to the state pension, the Company provides the employees with a non–state pension and other employee benefits through defined benefit and defined contribution plans.

The total amount of contributions to non–state pension fund paid by the Group in 2013 amounted to 1,226 (2012: 1,269; 2011: 1,680). The fund retains 3% of every pension contribution to cover its administrative costs.

(e) Transactions with other government–related entities

In January 2009, OJSC Rostelecom in partnership with mobile operator OAO Megafon won a tender for sponsorship of the XXII Winter Olympic Games and the XI Winter Paralympic Games 2014 in Sochi in a category “Telecommunications”. According to the agreement with the Organisation committee of XXII Winter Olympic Games and the XI Winter Paralympic Games 2014 in Sochi the sponsorship contribution amounts to USD 260 million and should be contributed by each sponsor in the amount of USD 130 million. Half of this amount shall be paid in cash and the other half shall be contributed in free services. In return, each partner will obtain exclusive rights to use the Olympic logo in its advertising and other activity. There is a joint responsibility of the Group and Megafon in respect of non-cash contributions. The total charge of sponsorship contribution to profit and loss for the year ended 31 December 2013 amounted to 993 (2012: 609, 2011: 463).

The Group considers this transaction as a transaction with a related party because the Group treats the Organisation committee as a government–related entity. The reason for this is that the federal government was one of the founders of the Organisation committee and government executives are on the Oversight Board of this Organisation.

The Group received loans from government–related banks OJSC Sberbank, OJSC Bank VTB, OJSC Sviaz–bank, OJSC Gazprombank and others. The outstanding balances from these banks amounted to 161,730 as at 31 December 2013 (2012: 176,868; 2011: 127,096). Interest rate of these loans veries from 7,01% to 10,75%. Maturity of these loans veries from 1 to 5 years.

During year ended 31 December 2013 the Group obtained loans from these banks in amount of 380,360 (2012: 449,094; 2011: 218,733, made repayments in amount of 408,473 (2012: 412,286, 2011: 183,399). Interest expense accrued on those loans during year ended 31 December 2013 amounted to 12,975 (2012: 12,964, 2011: 8,011).

The Group has collectively but not individually significant transactions with other government–related entities including but not limited to providing telecommunication services, consuming services having both production and miscellaneous nature, depositing and borrowing money. All these transactions are carried out in the course of normal day–to–day business operations on the terms comparable to those with other entities which are not government–related. Management assesses these transactions as not particular material except for placing deposits and purchase and sales of investments in promissory notes of government–related banks.

Proceeds from sales of government–related banks promissory notes for the year ended 31 December 2013 amounted to nil (2012: 1,044; 2011: 1,766), purchases of the same kind of investments comprised nil (2012: 1,000; 2011: 712). Related income recognized in profit and loss in respect of government–related banks promissory notes amounted to nil for the year ended 31 December 2013 (2012: 44, 2011: 66).

The amount of funds placed on deposits with government–related banks for the year ended 31 December 2013 is 1,405 (2012: 2,748; 2011: 3,018) with related income recognised in profit and loss of 52 (2012: 101; 2011: 30) and amounts repaid back to the Company’s account of 2,061 (2012: 3,132; 2011: 1,270).

(f) Remuneration of key management personnel

The key management personnel for the purpose of these consolidated financial statements comprises Management Board’s members, the Board of Directors’ members and Vice–Presidents.

Remuneration to the key management personnel for the year ended 31 December 2013 amounted to 750. Remuneration includes salaries, bonuses, payments for participation in the work of management bodies and other short–term benefits.

Short–term benefits accrued to the key management personnel for the year ended 31 December 2012 amounted to 522 (2011: 432).

The remuneration amounts are stated exclusive of social taxes.

Also in June 2011 the Company introduced a long–term motivation programme for executives and senior employees of the Company. The amount of employee benefits related to the programme and attributed to the Management Board’s members, the Board of Directors’ members and Vice–Presidents for the year ended 31 December 2013 is nil (2012: nil; 2011: 467).

In 2013 the Group made a contribution of 1,117 to the non–state pension fund (2012: 1,967; 2011: nil) for its key management personnel. The plans provide for payment of retirement benefits starting date employee complies with terms of acting non–state pension program.