Mobile TeleSystems PJSC (MBT) 2008 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Mobile Telesystems Fourth Quarter and Full Year 2008 Financial and Operating Results Conference Call on the eleventh of March, 2009. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Andrei Terebenin. Please go ahead, sir.

Thank you and hello, ladies and gentlemen. Welcome to MTS Conference Call to discuss the Company's Fourth Quarter and Full Year 2008 Financial Operating Results. Before beginning our discussion, I would like to remind everyone that except for historical information, comments made during this call may constitute forward-looking statements, which may involve certain risks.

These statements may relate to one of the following issues-- the strategic development of MTS's business activities, both in Russia and abroad; revenue and/or subscriber growth; syndicated loan facilities and their usage; legal actions or proceedings directed at the Company or its representatives; regulatory changes and the impact of the Company's operations in the markets in which we operate; financial indicators such as operating income before depreciation and amortization; average revenue per user; cash flow projections and-or return on invested capital; technical matters as they pertain to our mobile communication networks, including equipment, licensing or network technologies; capital expenditures and operating expenses; and macroeconomic developments within our markets of operation.

Important factors could cause actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include Company press releases, earnings presentation and MTS Annual Report and Form 20-F, as well as other public filings made by the Company with the United States Securities and Exchange Commission, all of which are available on the Company website at www.mtsgsm.com or that of the United States Securities and Exchange Commission at www.sec.gov.

MTS disavows any obligations to update any previously made forward-looking statements uttered on this conference call or make any adjustments to previously made statements to reflect changes in risks. Copies of the presentation and materials used and referenced in this conference call are available on our website.

I'll turn the call over to Mikhail Shamolin, President and Chief Executive Officer of MTS Group.

Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss MTS Financial Year 2008- Financial and Operating Results. Joining me today on the call are Aleksey Kornya, who is our acting Chief Financial Officer; Andrei Dubovskov, who is Head of Business Unit Ukraine; and Mark Burden, Finance Director of Business Unit Ukraine.

I am certain that the impact on MTS of the extraordinary developments in both the global and the CIS regional economies of the past six months constitute the bulk of your interest today. It is however important that when I'm through our financial year 2008 results, in order to highlight what a clear success 2008 has been for MTS.

These success drivers will ensure that MTS not only survives the global crisis, but emerges stronger when our economies do rebound.

For the group, the revenues grew 24.2% to over $10.2 billion year over year in 2008, as we generated strong profitable growth in each of our markets of operations. In November, during our Q3 disclosure, we iterated our expected 25% growth in US dollars, provided our national currencies remained stable.

From mid-November, we witnessed an over 35% decline in the US dollar value of the Ukrainian hryvnia; while in late December, the Russian ruble declined roughly 7%. Due to our currency translation practices, these singular events were the primary reasons why we could not meet our guidance for 2008.

However, we were successful in delivering on our profitability goal over 50% OIBDA margin for the year, an indication that controlling costs were possible in what is both a volatile economic situation and in an industry that is undergoing potentially profound change.

Currency volatility is a preeminent short-term risk for MTS. It impacts both our clients' consumption patterns, as well as our results through translation policies, not to mention financial and cash-management practices.

As such, we feel it is prudent to address our business unit performance in terms of local currency to demonstrate the true performance of our operations. The materials we produced and circulate to the investment community, the press release, the presentation and our historical financial statements will now feature local currency results as well as the USD translation.

For any information or clarification, please contact our Investor Relations department.

Overall, in Russia our business grew 23% from RUB 157.8 billion to RUB 194.3 billion on the strength of subscriber additions, rising voice usage and greater data adoption. In Q4, the slower MOU growth of 2.3% to 218 minutes can be attributed to seasonal usage factors and higher Q4 additions.

However, we did see weakness in the corporate segments, in particular high-volume products like international roaming and long-distance calling. The continued economic deterioration witnessed by medium and large-sized Russian corporates constitutes a sustained threat to short-term revenues, one which we will elaborate on later in this call.

In Ukraine, revenues grew 5.8% to UAH 8.6 billion for the year, as we continued to drive usage growth. In Q4, revenues did fall nearly 6% compared to Q3. Ukraine is the hardest hit of our markets and the economic downturn clearly influenced our period results.

Considering the markets where Ukraine's prime exports-- of steel and chemicals-- that these markets are down, further deterioration of the Ukrainian economy is possible which likely would impact the hryvnia negatively. Nevertheless, our business is in much better shape to withstand a short-term slowdown.

As we have discussed previously, our efforts in Ukraine to transform our business began in 2006 when we began investing substantially to increase the capacity and quality of our network in order to improve our value proposition to our customers.

By the end of 2008, our perception in the marketplace has shifted from expensive and poor quality to high quality and inexpensive, which is a good value proposition as Ukrainians look to extract greater value from their daily expenditures, especially now throughout the crisis.

During 2008, we were successful in growing usage as MOU increased by 81% compared to last year from 154 to 279 minutes. In the fourth quarter alone, MOU grew Q on Q by 18% to 389 minutes with seasonal holiday promotions contributing to the overall growth.

Q4 ARPU grew 7% year on year to UAH 38, an indicator of higher quality subscribers on our network. The decrease in APPM from AUH 0.12 to AUH 0.10 during the quarter is reflective of the increasing share of on-net calls. Increasing usage has been a key goal of ours and only high usage will create the necessary network effects to attract more active subscribers.

In Uzbekistan our annual revenues grew by 58% year over year, to exceed $391 million as we continue to grow our subscriber base and develop our network. During the year, we more than doubled our subscriber count by adding over 2.8 million customers to reach nearly 5.7 for the year, with penetration levels at a little over 44%.

Our 3G services are now available in five cities including Tashkent and Samarkand, with the first networks launched at the end of October 2008. Given the country's low fixed-line and broadband penetration, we feel there is a great potential for capturing additional growth.

In Turkmenistan, annual revenue growth of 63% can be attributed primarily to the significant change in the official manat-USD exchange over the course of the year. However, the fundamentals of the business remain strong as organic growth raised our subscriber level to 927,000, bringing our market share to 87%.

Given our commitment to data usage development in all our markets, it is important to note that we launched GPRS-based services in June 2008 and now offer our MTS connect data modems and tariff packages.

Since our early entry into Armenia in September 2007, we have been successfully building on the accomplishments of our VivaCell Subsidiary and increased our subscriber market share from 74% to 79%, which translates to over 2 million subscribers.

Revenues for the year reached AMD 78 billion, quarter on quarter from 2007 revenues grew 8%. Our financial and operating results demonstrate our ability to stimulate usage and grow our business profitably. As in Russia and Uzbekistan, we are looking to build out the 3G network in the country with a commercial launch in 2009. In fact, the launch has (inaudible) already.

And let me have now Aleksey Kornya to discuss with you the group's financial performance.

Thank you, Mikhail. Despite pressure from currency and changes in our currency mix, MTS again delivered on its stated goal of a 50% margin, as OIBDA rose 22% or to $5.1 billion for the year. In comparison to both Q4 2007 and Q3 2008, OIBDA developed as expected.

Currency fluctuations exert pressure on our margins as roughly [10%] to 15% of expenses for the group, are in foreign or non-local currency.

In Q4 we began to revisit and renegotiate whatever contracts remained in foreign currency to mitigate any potential currency depreciation. Likewise, we recently adjusted roaming rates to account for currency fluctuations for certain customer segments.

However, overall flow in revenue growth brought about by currency volatility and economic uncertainty means that we'll lose scale effect on our short-term growth, both which will greatly impact group profitability.

We continue to examine a variety of solutions to save costs in medium and long-term profitability of the group. These involve both organizational change and capital investment projects that will allow us to realize significant cost optimization in the future. Renegotiation of contracts for line rental and service development and use of proprietary transport networks in our markets of operation, initiatives that could save us up to $100 million through 2011.

Further, call center consolidation and shifting stuff into less expensive regions which will allow us to realize lower labor and office rental costs. Through the optimization of our network services and IT infrastructure, including more centralized planning and acceleration of our efforts to more broadly introduce the remote (inaudible) station and equipment and the reexamination of outsourcing and out-staffing. These and other initiatives may yield saving in time of up to 150 basis points on our OIBDA margin.

In sum, we are carefully examining all sorts of solutions and we feel the organization is in as good a position as any in the event of the market economic situations for the (inaudible).

Looking at the bottom line, net income fell for the year 7% from $2.1 billion to $1.9 billion. The obvious cause for significant decline in earnings is due to non-cash FOREX losses in the amount of $563 million, primarily due to the decline in the value of the ruble versus the United States dollar.

As we have discussed earlier, we did set out in 2007 to create natural hedges with our debt position; for example, swapping one euro bond with the ruble-denominated one in the first half of 2008. However, the dramatic decline in the ruble-dollar values exposes the fact that roughly 80% of our debt is in US dollars or euros.

With the ruble further weakening in Q1, we caution that this negative trend will continue until the ruble stabilizes.

Nevertheless, the group generated significant cash flow in 2008 as free cash flow came in at $2.1 billion for the year and net cash flow from operations rose 32% for the year to $4.4 billion. However, with increasing pressure from the global economic slowdown and pressures in the competitive environment, there is a significant risk that cash flow will slow in 2009.

Overall, our debt levels remain manageable with debt totaling $4 billion at the end of Q4. For the period, we added two major ruble placements totaling RUB 20 billion and we entered into a EUR 300 million loan agreement at the end of December; all of which we were down on the favorable markets rates.

With over $1 billion in cash at the end of the period, we are in strong financial shape to meet our obligations for the year, including over $700 million related to our April 2006 syndicated loan due by May of this year. It is important to note as well that total debt in 2010 is roughly $1.7 billion, due to put auctions related to our ruble bonds, something we must remember, as we execute on our financial management strategy.

For the period last 12 months, net debt to OIBDA fell from 0.7 to 0.6. With our cash flows pressured by currency depreciation and potential slowdown in our business, as well as our addition of nearly $1.2 billion of new debt in Q4, we anticipate that this will-- this ratio will rise in the coming year.

We cannot rule out any further return to capital or debt markets as well, considering the volatility and uncertainty in our markets.

Accumulating cash is a key priority for MTS in order to not only meet our obligation in investment needs, but also negate the risk of further currency depreciation.

In sum, the group is in as good strong position as can be expected, given the external constraints due to the financial climate and its impact on our clients' businesses. We are focused now on cash flow maximization to see to our business and financial needs, but we do see [there is activity] among our relationship lenders and other banks if we should have the need to return to credit markets in the coming quarters.

This flexibility will prove beneficial to MTS and its shareholders when it comes to meeting the competitive and financial challenges that arise in our markets.

Thank you, Aleksey. Looking ahead to 2009, we see both opportunities and challenges in our core markets. The economic volatility will impact MTS more than other operations in our markets. On the other hand, the group's primary products, its overall efficiency and financial strength; give us the reason to believe that we can be opportunistic in a stressed environment and take measures that ensure medium and long-term growth.

MTS has long been associated with leadership and quality. These two attributes have enabled us to grow our share of the corporate segment to over 50% in our core markets. Just as corporates drive down growth in good times, this segment will continue to be the most affected by the regional economic weakness.

Anticipating this decline, we began in September to approach corporates in order to offer products that allow employees whose phone service has been limited through cutbacks or layoffs to continue using their SIM cards with all the benefits of their corporate calling circle.

Our outreach was a success. The churn of laid-off customers was insignificant and we in fact gained 500,000 more corporate postpaid customers through this process. However, corporates and high-value customers are key consumers of high value products like international roaming and long-distance calling. As corporates have cut back on travel and other activities, we have and will continue to see less spending on premium services. This holds true for high value customers who use prepaid contracts, another segment in which we have leadership.

On a positive note, these customers have proven loyal, and the consumption of these services is largely inelastic to price and we have revalued tariffs [on] such services. To compensate for a potential decrease in revenue from these subscribers, we need to increase our activity in the mass market segments. This drives our [cap expanding philosophy] in 2009.

For the year, we envision spending of roughly $1.5 billion, though the final amount is dependent upon currency issues, vendor terms and operating factors. We have $700 million in carryover CapEx from 2008, relating to 2G coverage increase, marketing projects like CRM and other key initiatives.

Our 2008 spend should give us sufficient capacity to handle any growth in 2009. In addition, we'll need to spend around $350 million in maintenance CapEx and the balance of $450 million will be devoted to strategic investments in 3G and further development of our distribution network.

One segment which we feel is not sensitive to the current economic situation is data usage. Since 2006, we have seen impressive growth in both content and traffic. Total data revenues rose 36% year over year in Q4 in Russia. Data now is like voice was 10 years ago; single-digit penetration that will grow so long as we continue to improve the scope and quality of our HSPA-enabled network.

We launched operations in 14 cities in 2008 and expect to double that in 2009. We have also deployed our network in Moscow and are confident that upon resolution of outstanding frequency issues, by the end of the year we will launch first in the metros and indoors; then followed by full city coverage.

Further investments will no doubt accelerate penetration of data usage, support our brand and further differentiate MTS from our competitors.

Another mass market area and key compliment to our business is retail. A number of factors necessitate that we invest in distribution. The acquisition of Euroset, Russia's largest dealer, by our key competitor in early Q4; the evolution of our markets from multi to mono-brand distribution and the fact that the dealer networks are the most stressed part of the customer value chain; our approach to retail is to simultaneously build organically through optimization of our current network and inorganically through the acquisition of small, relatively inefficient retail chains.

Evidence of this is our February acquisition of Telefon.ru, a mid-market retailers with over 500 stores throughout Russia's regions; bringing MTS mono-brand network to over 2,200 stores in Russia.

We are also optimizing existing store fronts, rolling out the retail concept store we developed in 2008 to other locations and securing locations in heavily trafficked areas like malls and urban retail centers.

The quality of distribution is likewise important, which is why we have concluded a management agreement with individuals associated with Svyaznoy, the number-two sales channel in Russia and the market's most profitable.

Svyaznoy management will oversee our MTS brand distribution, applying its years of experience in the market systems it has developed to effectively manage inventories with the goal of enhancing our custom experience with MTS.

In addition, we're also realizing the fruits of our Vodafone partnership; as their retail team has been a great resource for both idea generation and implementation.

What is evident to us, however, is that the era of inexpensive subscriber additions is passing. The economic situation has already closed or driven consolidations among numerous retailers and with fewer active dealers, we foresee a rise in subscriber acquisition costs.

Higher costs make it more important that the new additions are quality additions, which is why we feel investments are necessary in proprietary mono-brand channels that attract more loyal and high value customers.

Growth in the mass market; our rationale for investments in distribution naturally leads to the question of pricing. Our relative financial strength gives us latitude in adjusting our prices. As we have demonstrated when we adjusted roaming rates, we can be cautiously opportunistic in introducing pricing changes to our advantage over time.

One of our primary focuses is to increase the lifetime customer value, but the same competitive drivers remain in the market-- multiple operators with different financial and operating goals, varying competitive positions, differences in network reach and the need to attract more active subscribers.

Overall, we do not think it is prudent to continue our guidance practice with revenue and margin for 2009. We are working on the multiple scenarios based on different budgets and growth models, to reflect the periodic developments in our markets, yet at this time can give no firm forecast for the group.

My colleagues and I are certain that once the economic situation stabilizes, the course we now navigate, coupled with the underlying strengths of our organization, will lead to greater medium and long-term growth and efficiency.

Investments we make now will certainly provide greater revenue growth in both our core and complementary businesses. Likewise, investments in the quality of our operations will increase our active subscriber base and lead to more efficient marketing expenditures, thereby lowering churn and optimizing dealer commissions.

In sum, the changes in our market and economic volatility can provide opportunities for value-assertive actions and we are confident that MTS is headed in the right direction. Thank you for your time. Now I am happy to open the call to your questions.

Thank you, sir. (Operator Instructions)

And the first question comes from Ivan Kim. Please go ahead.

Hi. I have a couple of questions. The first one is regarding to your tariff policy and what it will be contingent upon-- as I understand, you said you would be reluctant to increase the tariffs. But even the revenue protection is more important versus market share gains here. And what probably will be the potential implications of no tariff increase since the tariff increased by your competitors?

And the second thing now on the cost side please; just various things, did you reduce the advertising budgets? Have you officially frozen salaries? Are you cutting personnel? Are you kind of trying and probably already did negotiate the dealer commissions down? What has happened to your run rates, etc.? Thank you.

Thank you. First on the tariff portion; I think it is to a large extent a myth to assume that direct increase of price will lead to direct increase in revenue; simply because the ruble incomes of our customers have been not going up, have been going down in most cases due to increase in unemployment rates or partial employment. And therefore, a direct and sharp increase in price will, in our view, lead to a decrease in traffic and therefore we will have an empty network without specific and a significant effect on revenue; and at the end will lead to significant churn and this churn will happen not within a 12-month period, but within a 3-month period, especially on the back of the fact that we have competition in Russia starting with MegaFon and ending with companies like Tele2, SMARTS and local companies of Svyaznoy which have no intention of raising prices and therefore a sharp increase in prices will in our view, lead to a short-term increase in revenues, not very significant; followed by the loss of revenue because of churn.

Therefore our tariff policy will be very diligent and segment-based. We of course are adjusting tariffs, in where we believe it will not lead to a significant churn, such as roaming for instance. We are rebalancing off-net and on-net to improve our profitability. Our general strategy is to provide cheaper on-net calls to our subscriber base which both offers people opportunity to talk cheaper, while maintaining relatively good profitability for us; at the same time increasing loyalty of these consumers.

For instance in Ukraine, we've seen a dramatic reduction in churn in Q4 because of that very policy. So we don't believe that across the board tariff prices will lead inevitably to significant upward revenue impact and we have to be very careful with what we do with tariffs-- in still a very competitive Russian market, on the backbone of our consumers, decreasing their personal incomes.

Of course, if the government imposes the changes and we see that the amount of rubles in the system increases, the inflation increases, the ruble incomes of people increase; then of course we'll follow with price adjustments. But we have to be very careful now.

As far as our ruble advertising budget, we-- and then salaries and so forth; of course we've taken a number of measures to control our costs. We did freeze all salaries for all the employees and the salaries are denominated in rubles. Therefore, obviously dollar-wise, the budget decreased.

We put a freeze on hiring. So essentially since we have metro churn, our headcount is slowly decreasing. We have a program to optimize our organizational structure, flatten out the management structure, centralize certain functions; and we are en route with implementing this program.

We have not dramatically reduced the advertizing budget but we renegotiated the prices for both ATL and BTL and we increased the volume of advertizing as compared to last year, as a partial response to the acquisition of a major distribution chain by one of our competitors.

And we have a cost reduction program overall which is supposed to reduce our overall cost this year by over $200 million.

Thank you.

Thank you. And the next question comes from Herve Drouet. Please go ahead.

Yes, good afternoon. My first question is regarding CapEx. I think in one of your slides you're guiding CapEx for '09 to be in the range of $1.5 billion and then you give a breakdown in terms of maintenance, infrastructure, capacity-- it's $350 million $450 million. And then there is something you called ongoing project that you carryover for the amount of $700 million. My first question is regarding these last bits. I just wanted to understand what is under those ongoing projects and also if in kind of a worst-case scenario, do you think the $700 million can be reduced if needed?

The second question is regarding maybe again the tariff; I mean in the past yourself and some of your competitors pegged tariffs to US dollar. And I was wondering-- either-- is it still a possibility to peg it back to the US dollar and have it--- the tariff more in line with your [capital] structure or could it be now some legal constraint to peg back the tariff to US dollar? Thank you.

Alright, first on CapEx; if you remember our CapEx guidance and initial CapEx estimate for 2008, it was at the level of $2.5 billion. So if we were to spend CapEx as we had planned to, given that we count CapEx by cash payments, not by obligations; we would have spent $2.5 billion. But because we of course found ourselves in a highly volatile economic situation in Q4 of 2008, we took efforts to renegotiate payment terms and transfer roughly $300 million out of this $2.5 billion of payments into 2009 for the work done in 2008.

On top of that, obviously we have $400 million of cash payments which were originally planned to be done in 2009 for the work done in 2008. This is the way the payment structure typically works. We have some negotiated lag between the time we get the work done and the time we pay.

So essentially if things would go as normal, we would have CapEx of $2.5 billion in 2008 and carryover of $400 [billion] in 2009. However, now we have carryover of $700 million, and if your question is whether we can reduce that, the answer is we cannot reduce that because these are commitments which have been already taken and the work which has already been done. We can of course restructure part of it and pay again later, but I think at this point, we paid most of the $700 million already.

Okay. Thank you. That's very clear.

On tariffs, of course we can translate tariffs into the US dollar or any currency basically we want to make as a reference currency. I don't think that we have any legal obligations besides the fact that we have to advertise our prices in rubles, so if we are to attach ruble prices to the US dollar, we would have to change our advertising every quarter to reflect changing prices.

But the bottom line in this decision is not whether we can or cannot attach prices to the dollars. The question is whether we would get the desired economic effect.

The consumption of mobile services of course became a necessity for most of the population. But of course it's not as important and not as necessary as your typical bread and butter. And if you have massive unemployment and you have reduction in people's incomes, you will not see a raise in their mobile spend just because you increase prices. You will see reduction in minutes and you will very likely see an empty network with basically less revenue and less cost and still a certain amount of fixed costs.

And not to forget that we do have aggressive competition in Russia. We have on average four to five competitors in every region. And so far the market is not in the position that it is raising prices dramatically. So we're going with the policy of what I call- smart marketing, price adjustments in the segments where we believe we can afford to do that without losing our market share and losing our customer base. And we maintain a fairly modest price policy at the moment.

Okay. Thank you very much.

And on the price, just to add, I think if you're watching the media for instance; one of our competitors is launching now a cheap offer in Moscow which is significantly cheaper than their current tariffs. It is being presented as a quasi MVNO, but in practical reality it is fully controlled by the operator. It's just a cheaper tariff. So the competition goes on.

Okay. Alright; thank you.

Thank you. And our next question comes from William Kirby. Please go ahead.

Thanks. In your income statement for the fourth quarter, the cost of handsets and accessories seems to have risen quite fast. What was the cause of that and given what you mentioned about future subscriber acquisition costs, are we likely to see further big rises in this line?

Yes. Thank you for the question. The increase in handset costs in Q4 was associated with the start of sales of iPhone. We have discussed that in the previous conference call. We signed an agreement with Apple to distribute iPhones in Russia. And since that was a direct agreement with MTS, as well as same agreements MegaFon and Beeline have signed; we purchase phones on MTS and then sell them from MTS and therefore we have an increase in revenue, but also an increase in cost.

And going further of course given that we have adopted the strategy of developing our own retail channel, we will be consolidating this retail business and essentially both the income and the cost of buying and selling phones will be on our balance sheet.

Okay. Are there any plans to subsidize other high-end handsets or is it just the iPhone that you're going to--

No. We're not subsidizing in any handset at this point. It is not our policy and we have no plans for subsidizing handsets. But the clear accounting impact of buying 10,000 phones and selling 10,000 phones is now on our balance sheet, because the margin of this operation is very small.

Okay, great. Thank you.

The next question comes from Alex Wright. Please go ahead.

Yes, thank you. I have two questions, please; one on bad debt and the other on data revenues. On bad debt, it's not surprising that we've seen that cost increasing over the last couple of quarters. Do you continue to see that increase going into the first quarter of this year and do you see it purely as a function of the economic cycle or is there any structural reason for bad debt to continue to increase? That's the first question.

And then relating to data revenues; as you pointed out, the data revenue growth overall clearly has remained healthy relative to the voice part of the business. Can you just talk at all about the potential impact on gross margins? Do you see a significantly different gross margin overall on data revenues and is that something we can see having an impact going forward?

Okay, Aleksey Kornya will answer the first question.

As for cost of the debt, obviously those debts which were attracted in the fourth quarter were at the higher cost than our debt on the balance by that period, because the financial situation changed and the periods of cheap money ended up some (inaudible) over the last year. However, this had a relatively small effect on overall cost of our debt portfolio and we do not see change in the cost of debt when we compare Q1 propositions with Q4, so we can say that as for our current situation the prices for money are stabilizing.

Sorry. My question was relating more to the provisions for bad debt, which have gone up over the last couple of quarters from about 1% to 2% of revenues.

Okay. As for bad debt, yes, we-- due to changes in macroeconomic environment and the overall environment, we took a quite conservative position and increased our bad debt provisions.

But do you see that continuing to get worse at the moment or do you think that we've really hit the peak in this cycle?

No. We do not see, moreover there is one (inaudible) in the fourth quarter with provision to a particular dealer, and we do not see this trend going further in 2009.

Okay, thank you very much.

Talk about data revenue and the question on the gross margin; the gross margin on data is not changing substantially. It's between sort of 75% to 77%; and so far it stays there.

(Inaudible) overall gross margin?

Pardon me?

It's pretty similar to the overall gross margin then, you wouldn't [expect to] see any significant impact from an increase in data contribution?

No. The answer is no. With data services growing, that will not have a big effect on the overall margin.

Okay, that's fine. Thank you very much.

You're welcome.

Thank you. And the next question comes from Denise Molina. Please go ahead.

Thank you. Just two questions; first on the usage trends that you've seen so far this year, I'm just wondering if you've seen sort of a seasonally weak January and if you could give us any comment on that and what you've seen in February, particularly the split on retail versus corporate.

And second on that slide nine, the CapEx side; if you could give us a breakout of the 2009 sort of maintenance-- what was that and the other [bit], that would be great, thanks.

On the usage-- thank you for the question. On the usage, what we have seen happening in Q4 is that the usage of high margin products such as roaming and international intercity has gone down dramatically, mainly because of the decrease in the overall economic activity.

And we think that in Q1 it's flattening out and we will not see a substantial further decrease because what's-- the industry has taken its major hit in sort of Q4 beginning of Q1; and we think that at this point, it's more or less stabilizing.

In the mass market, what we have seen happening in Q4 is that people have started to try to optimize their mobile spend; not by reducing MOUs but by choosing less expensive directions of communication such as using on-net calls more than off-net calls. And because in our tariff structure we have a number of quite attractive tariff plans promoting on-net usage versus the off-net; we saw migration of customers to those on-net tariffs, especially on the tariffs which have low on-net within the given tariff, such as tariff plan RED for instance, that we have.

In other words, we didn't see that people deliberately cut their budgets and started spending less on mobile, but we see them trying to optimize their spend while maintaining usage.

In Q1, the same trend sort of continues and we believe it will not change until we have more or less a stable situation with unemployment in the country. As you know, the unemployment has increased in Russia, although not dramatically. But there is a lot of hidden unemployment when people still work one or two days and get at least part of a salary, and therefore keep themselves afloat with their budgets. And I think the policy of the government is to support that kind of situation, especially more in cities where population is completely dependent on the existence of a single plant. And obviously budget employers-- they have not-- I think they even received some pay raise in rubles this year and of course there is not big unemployment in the budget sector, so to speak.

In other words, if we don't see unemployment dramatically increasing and the overall situation worsening, we don't see that there will be a further decline in the mass market while the corporate and heavy customer segments have stabilized.

If however again, the ruble devalues and we see increased unemployment, we expect a potential decline in the mass market.

And the CapEx breakdown of maintenance cost; I think we have this figure. Maintenance investment is $350 million in 2009 and this is largely replacement of old equipment, payments for new versions of software on switches and base stations and some leftovers that we have to do in terms of transport network and some other things which we have to complete.

Okay. Can I just follow up on the usage? So effectively you are getting a decline in APTMs because customers are moving down to lower tariffs. Is the-- in the first quarter that you've seen so far, is the decline in APTM more than what have been seeing in prior quarters? Do you think that you're effectively moving down at the same rate?

You're talking about the first quarter?

The first quarter, yes, in terms -- because if customers are choosing lower rate tariffs and they're effectively moving down the average price per minute; so I'm just wondering if that rate of change in the first quarter is more or less than what you've been seeing in the past few quarters.

Well first quarter is very much in line with what we've seen in the fourth quarter. Of course the decrease in fourth quarter as compared to third quarter has been more significant than in the first quarter as compared to fourth quarter, even though we're not guiding and not disclosing the numbers for the first quarter yet.

But clearly the impact on APTM has been not only customers choosing less expensive calls, but majorly less traffic on the most expensive and the most profitable products such as roaming and international, because that's also part of APTM.

Okay, great. Thank you very much.

And the next question comes from (inaudible). Please go ahead.

Hi (inaudible). Can you quickly remind us what is the dividend policy; how easy it is to change and what will be the management's suggestion of the dividend for the last year?

The official dividend policy which has been adapted by the Board and which was followed for the last two years has been 50% of net income to be distributed as dividends. And we have not had a discussion about dividend policy this year, yet. I believe we're going to have a Board meeting followed by the Shareholder's meeting this spring; at which point we will disclose whether there will be any changes to a dividend policy.

Okay. Can I have two more follow up questions? One is-- can you give us guidance for FX loss for Q1, assuming the local currencies remain where they are today roughly?

You can assume from the figures-- so Q4 what would be the FOREX for Q1; and then the Q1 yet is not ended.

Okay. And the last question; is there any intra-group loans to the majority shareholder provided by MTS?

No.

Okay. Thank you.

And the next question comes from Alexander Balakhin. Please go ahead.

Hi. This is Alexander Balakhin from Goldman Sachs. Two questions if I may; first is on the dynamics of Ukrainian margins which dropped in the fourth quarter. Is this one off related to a fixed move or we should expect the margins to stay at this 40% or low 40s in the medium term?

And my second question is on the competitive dynamics evolution in Russia and obviously you compete with VimpelCom and MegaFon but also there are small operators which may support and suffer from the current financial conditions, operators like SMARTS or TELE2. Do you see that these niche operators are discontinuing their aggressive pricing promotions and what is the implication from their behavior on the competitive environment?

Let me take the second question first and then I will refer the first one to Mark Burden. The competition in Russia remains quite aggressive I would say. And we do see continued price promotions coming first of all from TELE2. TELE2 has been quite aggressive in our markets for the last three years. They have been continuously expanding their foothold. They even now continue to invest and they don't seem to show any slowdown and they're still aggressive in gaining market share.

During the crisis, especially the market segment, is becoming very, very sensitive to price. I mean the Russian market has always been sensitive to price but in the crisis situation, even more so. Therefore, we have to be very careful with our customer base and loyalty of our customers going through the crisis.

We believe that our goal should be to come out with the largest amount of customers out of the crisis, because we believe there are multiple ways to monetize the customer base once we are able to retain it and increase its loyalty. That's why we're so cautious in our price increases, even though we realize that we need to be very diligent in that given the overall market economics and the need to justify the CapEx and support the debt obligations.

Please Mark--

Thank you for the question. Basically the impact of the crisis was obviously heavily felt in Ukraine in Q4 and Q4 is normally seasonally a weaker EBITDA margin for our business. And the combination of those two put pressure overall on our EBITDA margin, there were some changes in the mix, revenue mix which also influenced the margin.

We don't give guidance on margin going forward at this point. But I can say that we are looking and have already taken steps in terms of margin, initiatives that are already outlined in the speeches going forward, and some additional initiatives specific to our operations in Ukraine.

Okay. Thank you.

And the next question comes from [Igor Danilenko]. Please go ahead.

Yes, hello. Thank you. I have two questions. First on your kind of initial comment in the opening of this conference call on the amount of expenses and FX contracts; I would like to clarify-- does that include your depreciation or is that kind of fixed in dollars and if you could just give a little bit more color on how it looks right now in terms of flexibility of your expenses in currency in ruble terms?

And the second question is basically about your recent retail deal with Euroset where if I calculate kind of the --where acquisition costs they have been -- they seem quite expensive compared to previous deals; if you could comment on that? Thank you.

On OpEx-- as far as I understand the question related to Russia. Our Russian OpEx is 95% or 97% denominated in rubles and therefore we don't expect any substantial effect from the exchange rate changes. However, of course, if our revenues don't grow this year with the same or similar pace as they were growing in previous years, while at the same time we have inflation in the market of 13% or 15%; that would inevitably put pressure on our margin, simply because it would not have the scale effect that it had the previous years.

On Euroset, I'm not sure exactly which deal you're talking about, if you can clarify that--

It was on Kommersant yesterday, essentially your contract--

We do not have such a deal. I would lead to Kommersant to be responsible for the sources. We don't have such a deal.

You haven't signed a contract that stipulates some kind of long-term acquisitions of clients with Euroset?

No. We don't have such a deal and of course Euroset has published, according to the requirement of Federal Anti-Monopoly committee, the conditions to all operators under which Euroset will be selling contracts. Those conditions roughly amount to $24 per subscriber which is slightly more that what we're paying in the past. I wouldn't say that this is something completely out of the ordinary, given that overall the competition for retail has increased in Russia and of course the acquisition of customers is increasing because the number of retail outlets is going down, retail-- independent retail is going out of business and the remaining retail is trying to increase its profitability or rather decrease its unprofitability by squeezing more money out of the operators.

So I wouldn't say that $24 that Euroset is willing to take for the subscriber is something out of the regular market conditions now. But at the same time, we don't have such an agreement.

Thank you.

And the next question comes from Jean-Charles Lemardeley. Please go ahead. Mr. Lemardeley, your line is now open. Please go ahead with your question.

Yes, sorry (inaudible).

Jean-Charles-- sorry, we're having a great deal of trouble hearing you. Can you please ask your question again or try to cover your handset?

Yes. Is this better? Can you hear me better?

That's fine.

So just again on the first quarter revenues; the comments you're making with both the corporate revenues and the mass market would suggest that maybe the sequential comparison in revenues would be better than from first quarter to fourth quarter; would that be a fair conclusion?

Is that what you've observed? I realize that seasonality is adverse in the first quarter but again, is it something that you've observed so far?

The other question would be on-- in Uzbekistan you price in dollar over there? That's what it says on your presentation. What's your cost base like? Is it largely local? Do you have a favorable [mismatch] there between revenues and costs? And have you seen any impact from-- or how dependent is Uzbekistan on worker remittances from Russia and how much just do you see that there?

Okay. On Q1, I don't really think that we're in a position to guide results for Q1 at this point. All I can say is that we don't see any dramatic changes in Q1 as compared to Q4. So the crisis of course has taken its toll, but I wouldn't say that this toll has been disastrous. I think we've taken the biggest hit already in the corporate segment, the heavy segment. And the mass segment still remains relatively resilient and we believe it will remain resilient as long as the market economic situation in Russia does not worsen much beyond what it has worsened already.

In Uzbekistan our functional currency there is US dollars, so basically everything is in US dollars.

You're pricing is (inaudible) in dollars? Is that what it means?

Yes.

And what about your main cash for any expenses over there; are they largely dollarized as well or are they local-currency driven?

Once again, expenses yes; expenses also in dollars. The salaries are in local currency I believe in Uzbekistan, but we can check that.

Alright; and what about dependent on worker remittances?

Most of the expenses in Uzbekistan are linked to US dollars and all revenues are linked to US dollars (inaudible). So functional currency is the US dollar for Uzbekistan; that is why we're reporting in US dollars for Uzbekistan. This is the only country where we have functional currency in US dollars.

Alright; and what about the worker remittances or the dependence of the Uzbeki economy on worker remittances from Russia?

We haven't seen any dramatic decline in that so far. Our revenue still continued to be quite resilient, given that the penetration level in Uzbekistan is still quite low and we're the market leader. We are I think withstanding the crisis due to the fact that penetration is still increasing.

Okay. And just finally; you mentioned your roaming revenues and long-distance revenue as being high margin; so do they have gross margins that exceed the overall business?

Well, we've been able to hold the margin pretty high in Q4 despite the decline in roaming revenues. I think the biggest effect on the margins is going to come not from changes in roaming, but from overall inflation on the backbone of much lower growth in top line.

Okay. I would have expected roaming to be actually lower gross margin than--the international roaming particularly; but that's not the case. You think it's a high gross margin revenue stream?

Well, there are two parts of the roaming. The guest roaming is the high marginal service and the roaming of your own subscribers is the low marginal service due to the fact that there is a high portion of international interconnect.

And which roaming has declined most?

All roaming of all subscribers.

So that's a relatively low margin-- the low margin portion has decline more?

Right.

Okay. Thank you.

And the next question comes from Nadeja Golubeva. Please go ahead.

Now, good afternoon. This is Nadeja Golubeva from (inaudible). First of all, I want to ask you to give us the approximate rating size of Telefon.ru and its EBITDA margin so that we can guess on what will be the margin dilution as you consolidate this company?

And then I had a number of more questions. So I wanted to ask you whether the FOREX loss was tax deductible in full the fourth quarter because I saw a material decrease of tax charge and also if you'll possibly comment on this subscriber deposit decrease which was down to 12% in fourth quarter from 18% previously in the third quarter; so the reason is obvious, but my question is whether you see further decreasing in spread deposits in the first quarter and whether you anticipate this to continue?

And finally, if it's possible; you mentioned that there is a certain portion of fixed costs and so I'm wondering whether you can tell us how big it is.

Aleksey Kornya will answer this question.

Excuse me-- as for financial results of Telefon.ru; we are not disclosing those results. You will see them integrated. Obviously this is a lower marginal business with a low net profit margin and this will have a proper effect on our financials.

I should add that overall revenue of Telefon.ru last year has been I think around $700 million with a margin of approximately 5%.

The EBITDA margin?

Yes.

Okay, thank you.

And yes, most of our FOREX loss is deductible in the fourth quarter so you saw this respective increase in our provisions for tax-- total tax provisions.

So we can expect that the FOREX losses will be all fully tax deductible in first quarter as well, correct?

Right.

Okay.

And what was the next question?

Also I wanted to ask you about the decrease of the subscribers' deposits as a percentage of revenues. It was 12% in the fourth quarter versus 18% in the third quarter. So it's obvious people are keeping close money on their deposits but will we see further decreases continuing in the first quarter or not? And so can you elaborate on where you see this level?

Well, I think it's just technical and seasonal effect and nothing particular happened with regard to these changes.

I would add that this is largely due to seasonality because deposits in Q3 obviously include deposits for roaming. When people go travel, they deposit more money on their accounts than they do in Q4.

Okay. But last year we didn't see such a sharp drop off in the fourth quarter--(inaudible).

Obviously people, since people started to think about their budgets much more than they did before the crisis, they keep less money in their accounts, even though they spend nearly the same.

But you don't see this (inaudible) volume?

I think the reason for changes is FOREX effect, because obviously the figures you're looking at in US dollars and those deposits are in rubles. That will obviously have a decrease on those deposits due to FOREX effect.

But I'm looking at dollar P&L and the balance--- okay. So turning now to my last question, how big is the portion of your fixed cost in total, approximately?

Well, there is a portion which is clearly variable which constitutes approximately 30% of our costs. The rest is either fixed or so-called semi-fixed-- a fixed variable portion. For example, a rental for base stations and similar costs, they are-- depends on the scale and the size of the business but they're not that scaled by the size of revenues and traffic. That is why I would say that clearly variable is 30% to 35% of our costs and the rest is more or less fixed.

Okay. Thank you very much. During this call (inaudible) could you give us some guess about how much of your total revenues is derived from co-called heavy customers which as you mentioned were hit in the fourth quarter and now these stations are stabilized?

That depends on how you look at this. If you only look at the corporate customers, it's around 18% of our customer base or of our revenues, I should say. If you include the so-called heavy customer base which are not on corporate contracts but nevertheless are sort of as we call them HMPC high wealth private customers; that would substitute up to sort of 30% to 35% of our overall revenue.

Okay. But are seeing that situation in the corporate or heavy segment-- has stabilized more or less, after the drop in fourth quarter? Do you mean this 18% or 30%-35%?

30%.

Okay. Thank you very much.

You're welcome.

Thank you. (Operator Instructions)

And the next question comes from (inaudible). Please go ahead.

Good afternoon, everyone. A quick question; could you please give us the breakdown of quarterly maturities of your total debt due in 2009? And in relation to this, how do you expect to repay this debt-- from what sources-- whether using your cash or which portion is to be refinanced?

And also whether you bought any of your debt back on the market and I'm talking about your domestic bonds and Eurobonds and if you could disclose any amounts, that would be great. Thank you.

Aleksey Kornya.

Okay, thank you. Out of $1.1 billion to be repaid in 2009, the majority comes to the second quarter. It's a syndicate loan. It's approximately $700 million. The rest is syndicated in bank loans, also all of them dominated in US dollars or euros.

But could you give us the-- which ones are-- quarter by quarter basically.

Okay. Approximately $120 million in the first quarter, $700 million in the second quarter, $120 million in the third quarter and about $200-something million in the fourth quarter.

And do you have any put options on your debt kicking in, in 2009?

Not in 2009.

And as to the sources of financing these maturities?

With regard to refinancing, we explore different options. Those which relate to small repayments we'll repay in cash. And as for syndicate, we explore different options and we'll take what we consider the most beneficial for us at the current time. We are capable to repay it in cash. There is no problem with that. But if there will be favorable conditions for refinancing, we will explore this as well.

We are going to be capable of supporting our obligations, even with the ruble-dollar exchange rate of 54 or 55. We have a stable cash flow and reserves in further reducing CapEx and of course dividend policy.

And in terms of debt buyback?

At this point we are not planning specific buyback because we are not-- we cannot be confident as to what the exchange rate is going to be and therefore given that we have different debt maturities, we're looking to accumulate the cash position which will help us be more confident and have more flexibility throughout the crisis until it ends.

And to add, at the current levels, where Eurobonds are traded, we think that this is not worth buying back. But we are considering the opportunity for possibly accelerated loan repayments or just having a strong cash position which helps us to meet our obligations in the future.

Alright, so you haven't bought any of your bonds so far?

No.

Okay. Thank you so much.

And the next question comes from Stephen Pettyfer. Please go ahead.

Yes thanks. Three questions please; first just on Ukraine; could you give us an idea of what your CapEx will be for 2009 there or if indeed the pace-- the slowdown matches the rest of the group?

Secondly, on I think the time of the last conference call you outlined a figure for about $400 million to be spent on distribution and then today you mentioned I think $450 for 3G and distribution. Does that imply that you're scaling back that sort of $400 million thought of the last call?

And then finally, just on the cash flow side of things; you had a good accounts payable number in your balance sheet. Is that a sort of one off uptick as it were, or is that a sustainable improvement? Thanks.

The Ukraine question; we don't disclose at this point, CapEx by country. The only thing I can say is that in Ukraine, given the macroeconomic situation and the agreement development, the CapEx is going to be substantially less than in 2008.

As far as $400 million to be spent on distribution is concerned-- we have scaled it back but not substantially. The reason we now say $450 million is both 3G and retail is because part of retail investment is M&A such as Telefon.ru; and part of it is in OpEx and also the provision of working capital to the retail company, so the pure capital investment on retail is less in a way that we account for CapEx.

And accounts payable is a question for Aleksey Kornya.

With regards to accounts payable, we have an increase which is attributable to seasonality and there was no slowdown or postponement of payments which were not negotiated with our suppliers. So this is just a technical thing and nothing in particular.

Okay, thank you.

The next question comes from (inaudible). Please go ahead.

Yes, thanks very much. I actually have a couple of questions. The first relating to the cash flow and dividends; if my numbers are right, if we assume an exchange rate of 35 to 40 for the next couple of years, on my numbers after CapEx you'll be accumulating about $3 billion of free cash flow. If we add the cash in the bank plus facilities, you really will have a float of about $4 billion.

So coming back to the dividends; you can actually afford to maintain the dividends going forward; so what signs are you looking for-- some degree of stability in ruble exchange rate to commit to the payment-- particularly given that that is the only source of viable cash flow for Sistema?

The second question relates to Ukraine. We discussed a little bit the margins in Ukraine; could we be a little bit more specific? How much of the cost space in Ukraine is actually foreign currency denominated? Is it comparable to Russia or is it a substantially larger portion?

And a final question, also relating to usage of cash; could we just talk a little bit about Comstar and GM Telecom and whether we should be expecting anything in either of those fronds and what your use will be on the relative merits of the two transactions? Thank you.

Alright. Thank you. On the use of cash, you're absolutely right. The ruble exchange rate and the potential devaluation is the key instability factor and the key uncertainty factor which we have to account for. If we do see signs going further in the next three to four months, than the ruble continues to be stable and the economy sort of stabilizes or starts to improve; if we gain confidence that ruble rate is not going to go much beyond 35 to 40 rubles, then of course we can commit to a certain level of dividend payments beneficial to all of our shareholders.

If however, ruble goes to 50 to 55 or 60, then we'll have to take some dramatic measures to change our CapEx and OpEx and potentially reconsider the dividend policy.

The Ukraine question I will leave to Mark Burden to answer. On Comstar and GM, I would say that we are looking at both opportunities and calculating the upside and the potential effect. And of course as far as the Comstar is concerned, it could be a good time to do a transaction given that there is some strategic rationale behind it and the price at this point, given of course our cash position at the time; if the price is attractive, it could be a good acquisition. We are not at this point in a position to say whether we're going to make it or not, but we certainly are considering it.

Indian story is of course, is a much more difficult question to answer because successful development of this business will require capital, capital to be invested. And this is the biggest if, because again at the level of debt which we can allow ourselves to have, given the exchange rate is a major unknown. So we are cautious on this one.

And Ukraine, Mark-

It's-- thank you for your question-- I want to say that approximately 80 percent of our expenses are nominated in hryvnia and 20% nominated in dollars. And thinking about-- hryvnia nominated expenses I'm going to say that it's for example electricity, rental payments, salaries etc. Thinking about dollars expenses-- it's maintenance of our network- it's enough.

Okay. Thank you.

And the next question comes from [Michael Kovacoki]. Please go ahead.

Yes, hello gentlemen. Very quick questions; first on CapEx, you're showing about a 32.6% drop guided year on year into 2009. And my question would be however, how much of this is perhaps due to efficiencies, i.e. you're still putting in the base stations and etc. but you're extracting some type of favorable agreements; perhaps from pressed suppliers of equipments or perhaps shifting around say 2G infrastructure from more developed countries where you are actually putting in 3G and shifting it over without a cost basis; any clarity on that?

The second question relates to your-- I believe it's an interesting approach to revenue claw back; i.e. not trying to put up prices in order to position yourselves more favorably, so to speak, versus your competitors. You've indicated that you were worried about the churn; outbound churn; if you were actually look to increase prices. However, the flip side of that is if your competitors aggressively try to do that, and you are seen as perhaps not having done that and have a better cost proposition for customers, you could see inbound churn from your competitors-- any thoughts on those two points?

Yes of course, thank you. On the CapEx, I would say around 25% of the decrease in CapEx is due to efficiency and the rest is due to the simple reduction of needs to invest in capacity and slowing down or stopping projects which are not necessary for the business and could be delayed, given the overall financial situation in the world.

As far as revenue claw back, you're absolutely right. This is what we are counting on. We have-- our philosophy is to give our customers the best custom experience and the best value proposition. In fact, the mission of our brand is to give our customers more. And therefore we have to make sure that our customers like us and they want to be with us and they are loyal to us.

This is not to say that we absolutely exclude price increases. Of course we are aware of what's happening and we're intelligent enough to understand where we can increase prices and where we cannot increase prices not to stimulate churn. And of course we're counting to get some of the churning customers and as we were in fact getting in previous years.

And again our strategy is to be very segment focused and provide customers in every segment with a product that they can afford to the limits of what they can afford. In other words, what we are doing now is very similar to what you see in airlines when they do revenue management. When you see a guy who is sitting in an airplane seat, having paid $1000 for a ticket and you have another guy next to him who has paid $200 for exactly the same ticket. This is what we are doing with our customer base. We are trying to segment it as much as possible, using our CRM instruments to extract the maximum value, given the crisis situation.

We believe that we have to look beyond the next quarter or beyond the next six months, to make sure that we come out of the situation with much better potential to grow revenue, a loyal customer base and opportunities to monetize it and we're confident that we can monetize it, given our investments in value-added services, in content; where we're leaders in 3G networks and all the other new products and services which are coming online including mobile advertising and many others which we are working on.

And just one last question on that if I may; in terms of the share-- the market share that you may actually see as an uptick, any idea as to how far that could go?

At this point, given that the market shares of all the competitors are more or less sort of close to each other, especially in terms of revenue; I don't believe that we will see a significant shift in the market share, but we are prepared to take every single opportunity that competitors may or may not give us. I mean it is very hard for me to talk about how competitors will behave, but I can tell you for sure that keeping leadership in customer base is clearly a priority for us.

Thank you.

And of course our strategy of growing profitably remains with us. We're not saying that we are willing to sacrifice our profitability for growth or for customer base, at least not in the long run and not to a large extent.

Thank you. And the next question comes from [Andre Ekov]. Please go ahead. Sorry, Andre's line just disconnected. And the next question comes from Igor Semenov. Please go ahead.

Yes, hi. Thank you. I just wanted to ask a couple of questions. First, you mentioned MegaFon. MegaFon's plans to launch a discounter in Moscow; you yourself have launched A-Mobile with [Ocean] a few months ago. Could you tell us a bit about this experience and how it's developing?

And also in terms of the guidance, I have to say that of course it's a very uncertain environment but can you give us a bit more in terms of how you're thinking in terms of the margins? Do you have-- does your budget envision meeting certain EBITDA margins or maybe cash flow, KPIs or perhaps CapEx to revenue ratios; anything because I think it would really, really help to understand your sort of commitments or your thoughts on all this. Thank you.

Alright, thank you. The margin in 2009; of course we have internal targets for margin and we are trying to keep up a relatively high margin. There are two factors which will put major pressure on the margin. One is, as I said, if the top line doesn't grow aggressively and in 2009 we have all the chances that the top line is not going to grow as aggressive as it has been growing in 2007 and 2008. At the same time, if we have 13% or 15% inflation, which is something that we are witnessing at least in the first two months of 2009; that will put very hard pressure on our bottom line and we have the cost efficiency program to compensate for that but it is going to be a factor which we at this point cannot fully account for; even though of course we do have targets and KPIs and all that set for the team.

And the second factor, which is more of a technical sort of mathematical factor, we will have to consolidate the retail business which we have not been consolidating in the past. And we will grow the number of our outlets to sort of 2000 to 2500 by the end of this year. And the overall volume of this business can be up to $2 billion versus turnover in the mobile phones with the margin of 5% or so.

So that of course technically will also impact the margin, even though the core business will benefit from it because of the increased loyalty of customers and reduced churn; therefore, we should expect some reduction in our acquisition costs because the number of subscribers that we would have to acquire will be less to maintain the same level of activity and ARPU in our customer base.

As far as the guidance is concerned, I mean it really is very difficult for us at this point to give guidance because of the uncertainty with the exchange rate. As you see, exchange rate has stabilized now but has been dramatically changing in January and February. We do not exclude that something may happen again with the exchange rate in like May and we'll have to wait and see at least another two or three months, how the situation really develops.

If the exchange rate experiences dramatic shifts, our guidance could be way off; both in rubles and in dollars. That's why it's quite difficult for us at this point to give guidance and this is why we're only guiding our CapEx numbers. Of course cash flow maximization is top priority this year.

But in Q4 the ruble devalued by 16% and you managed to maintain a very strong margin in Russia. The drop was not really different to Q4 last year when we didn't have any devaluation. So what precludes you from saying that-- we want to maintain a certain level of the margin in our core business and yes we can clearly calculate ourselves the dilution from the additional retail lag? So why-- it's just a bit difficult to understand if in terms of the revenue, yes it impacts the dollar number. I suppose you could at least tell us the revenue in ruble terms or the thought process around the revenue in ruble terms.

I mean on the margin again, the costs are to a substantial degree under your control and we can see that because in Q4 you maintained a very decent margin.

Yes. Not all of our operating costs are evenly spread between quarters and also revenue dynamics in quarters are different. And yes, overall, we maintained the margin at 50%, but that was on the back of 24% year on year growth in our revenues.

And yes, we do control the cost to a very large extent, and yes we will try to maintain the margin this year in 2009, but again; revenue side is a big question to us and the inflation is a big question to us. Those are the two key parameters that will impact the margin which we at this point cannot really control, given that the revenue will be driven throughout the whole year, to a very large extent, by the development in the Russian economy, specifically individual incomes in rubles and dollars and the inflation again is a factor that we cannot control.

But in terms of targets, for the team and for the management, obviously margin is one of the key priorities that we have this year.

Okay. And on your own discounted project, can you tell us a bit about the progress on that front?

The average level of sales for this in Moscow has been around 10,000 contracts a month, which given that in Moscow on average we sell around 350,000 to 400,000 SIM cards a month, that this is not very significant. So yes, this product exists. I wouldn't say that it made a dramatic change in the market, even though while crisis develops-- who knows? We have not advertised this product [ATO]. It's been a niche product and all purpose we don't want our customer base to actively migrate to this tariff. If our competitor chooses to go on the TV and advertise this countrywide, than there may be of course a different impact; but again, we will have to see.

We believe that the NVNO that acquired the NVNO concept-- is not going to stop the subscribers of this very competitor to migrate to this very tariff, given that it's still the same network and still the same product; it's just cheaper.

Okay. Thank you.

And the next question comes from Olga Bystrova. Please go ahead.

Yes, good evening. I have a clarification on some of the statements that you made earlier today, specifically on stabilization of spend by heavy customers, whether corporates or just sort heavy postpaid individuals. Because you mentioned that sort of the impact has been seen in the fourth quarter and it hasn't worsened in the first quarter. However, when you talk about fourth quarter, is that December only or it's actually third quarter that you started seeing that impact?

And also a similar question to that one-- when you talk about mass market; and you say that customers have been shopping for cheaper tariffs but haven't been using less; are they actually using more or are they using the same amounts of minutes, data traffic, etc.?

And then I have a few other questions to follow up.

Okay, on Q4 versus Q1, evidently most impact has been taken in November and December where we had I believe an 8% drop in industrial output in November and something similar, 8% or 9% in December. That's when we took the biggest hit in the corporate segment and also that's when the mass market behavior started to change.

In October we haven't seen much of that impact but November and December clearly we saw a change.

And how much worse December was relative to October?

How much worse was December relative to November?

Yes, relative to October, how much worse it was relative to October in the fourth quarter?

If you look at the ruble figures, you will see that the overall drop of Q4 versus Q3 has been 4%. The typical seasonality of Q4 to Q3 would be around 1.5% to 2% difference. And therefore, sort of 2% to 2.5% is attributed not to seasonality but to the drop in the usage and of course you can do the math.

In the mass market, do you see them using more of the cheaper tariffs or are the basic usage patterns are the same but they're still shopping for cheaper tariffs?

Mass market is using more on-net traffic than off-net, so people are trying to call each other on MTS network and they draw friends and relatives to MTS network to take the benefit of the on-net calling. And of course they call less internationally, intercity and roaming.

Yes, but total usage-- when you look at total usage, is it more or is it basically traffic has rebalanced towards on-net from off-net and international?

Total usage, I mean MOU has grown, not significantly but has grown nevertheless; and overall traffic has grown.

Okay. And then in Ukraine it looks like fourth quarter in the Ukraine economically was much more challenging, but your numbers in the Ukraine are better at least sequentially, quarter on quarter than in Russia in the fourth quarter. How can you explain that? Is it something that corporates have not reacted in the Ukraine or maybe corporates in Russia overreacted-- some color on that would be great?

Well, if you're looking at [given] numbers, then the Russian numbers are actually better because Russia in Q4 dropped by 4% in revenue and Ukraine dropped by 6% in revenue.

No, but I mean ARPU, like spending I meant per subscriber.

Oh, ARPU-- because Russia has a much heavier customer base in Ukraine and more corporate segment than Ukraine.

Okay, okay. And also if-- let's say if you look in the first quarter dynamics, what has surprised you on the upside relative to your expectations, and what has surprised you on the downside-- how customers are spending, how KPIs are developing?

Olga, could you repeat that question please?

Let's say when you look into your performance in the first quarter, without giving any sort of specific numbers; what has surprised you on the upside and what has surprised you on the downside-- so what negative surprises did you see in terms of customer behavior or KPIs development.

Let's say corporates were spending less than you expected or more than you expected? Mass market was more economically sensitive or less economically sensitive? How can you suggest that?

The upside is that we still continue to maintain leadership in our active customer base, so we still have our customers. We don't see an increase in churn, even though our price for instance is higher than MegaFon and TELE2; which I think is a very good sign.

Also in mass segment we have not seen further dramatic decline which we could have experienced, given the development of unemployment in Russia, which I think is a good sign.

Bad signs; first quarter we obviously don't have any recovery in the (inaudible) segment and we believe that given the lack of price elasticity in those segments, we will not see a rebound there until the economy actually starts to rebound, even though again, on positive side we've been able to save pretty much all of our corporate customers. We haven't lost the corporate customer base and we haven't even lost the corporate customers who were written out from the corporate contracts because we picked them up on the special offers that we do with our corporate clients to keep employees as our customers now individually but on the corporate payment plans.

Okay, great. Thank you very much.

Thank you. And our next question comes from (inaudible). Please go ahead.

Yes, good afternoon (inaudible), ING. First question on promotions in Russia; you mentioned in your presentation that the growth in usage was due to successful marketing campaigns and promotions. I was just wondering what kind of-- and what level we could have expected in the fourth quarter '08 excluding the effect of these promotions? And what are your expectations for this year in terms of promotional activity and are you encouraged in usage given the trends that you already observed in the first months of 2009?

And the second question is on subscriber data for January. I was just wondering what was the main reason for the drop in the regional subscriber base that was reported by you for the month of January.

Okay. I think overall for 2009, the strategy is to keep the customer base in all segments, including-- especially the mass market segment and grow this customer base.

We believe that we may see a slight increase in minutes, but we will not see a dramatic increase in minutes and MOUs throughout 2009, given the overall economic situation. Therefore, if we are to see the growth, we believe this growth will come from our value-added services. And this growth may come because the penetration of those services is very low, and therefore through increase of this penetration, introduction of 3G services, expansion of smart phones including iPhones by the way-- in our customer base may lead to value-added services growth.

And the drop of subs in the month of January is due to the fact that we've written off subscribers in one of our regions, I believe. But I'll have to get back to you with the exact answer to this.

Okay, thank you. And if I may ask a question -- a follow up on the debt; you mentioned this repayment of $700 million. I must have missed, but what is your currency situation; how are you going to repay it if it's borrowed funds or cash-- have you already decided on that?

We have a credit facility of around $650 million which is a structured loan from several banks and we a possibility to restructure this and move it into sort of 2011-2012. We're investigating this possibility. We are able to meet this repayment from our existing cash flow, but given that the potential rates for restructuring are quite favorable and given that we have payments or bonds coming in 2010 which we have to meet, we may consider actually moving this further into 2011-2012.

Okay, thank you.

And the last question please?

Thank you, sir. And the next question comes from [Andre Ekov]. Please go ahead. Mr. Ekov your line is now open. Please go ahead with your question.

Hello. First question I guess is could you elaborate a little bit more on why the high wealth individuals are scaling back on mobile spend as one would assume that they're rather indifferent to this relatively small portion of their disposable income? It is understood why the corporate clients are doing so, and on the other hand, how is that compared to the mass market holding relatively well?

The answer is actually quite simple. It is not because people are deliberately saving on their expenses, but it is because they have less reasons to call internationally and go abroad for roaming because of the reduced business activity. People travel less, including so-call HVPCs. That's the key answer. It's the overall reduction in the business situation.

Alright.

And mass market-- mass market primarily is using on-net and off-net calls in their local region and therefore this is less affected by economic slowdown than the heavy segment.

Okay ladies and gentlemen, thank you very much for your attention and your interest. We welcome you at any time to contact our Investor Relations department if you have any further questions or if we can clarify anything. A webcast of this discussion will be available on our website if you wish to replay the call. In the meantime, we appreciate your interest again and wish you a very pleasant day and good-bye.