Corporate Governance Services in Russia Governance Services Standard

Corporate Governance Services in Russia Governance Services Standard & Poor’s Moscow February 2008 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright (c) 2007 Standard & Poor’s, a division of The Mc. Graw-Hill Companies, Inc. All rights reserved.

Corporate Governance Score Measuring corporate governance performance • Corporate governance is: • A mechanism that encourages efficient use of resources and equally demands responsibility for managing these resources (Sir Adrian Cadbery) • A set of internal mechanisms to lead the company and control it (OECD) • The system of interaction of a company’s management, board of directors and shareholders designed to ensure maximization of the company’s value and that all financial stakeholders receive their fair share of the company’s earnings (Standard & Poor’s) • A corporate governance score (CGS) is Standard & Poor’s opinion on the effectiveness of corporate governance practices and mechanisms • The assessment of non-financial risks – primarily the risks associated with inefficient or dishonest management 2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Investors are the CGS target audience 3. • Governance evaluation helps investors to minimize their risks • Is particularly important for institutional international investors • CGS is important for equity investors, as well as creditors (examples include Enron, World. Com, Kmart, Global Crossing, Marconi, Lucent, Nortel, ABB, Tyco International, Adelphia, Cable & Wireless, Parmalat, Finmatica, Health. South, Hollinger, Qwest, Adecco, AIG, Refco etc. ) • In Emerging Markets, governance-related risks are particularly high; hence governance assessment is critical, despite high growth and volatility • Standard & Poor’s is the most reliable source of independent professional information on that (11, 000 original subscribers to Ratings. Direct) Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Reasoning behind a company’s decision to receive a CGS can • Push the share price and liquidity up by providing additional assurance to investors • Decrease the cost of debt and equity, diversify the sources of funding • Reduce the costs of D&O insurance policies • Help to improve the image for clients and investors; build up reputation and corporate history • Provide companies with benchmarks for internal change • particularly if an enhanced comparative analytical report is produced in the framework of ‘Corporate Governance Evaluation’, or CGE 4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Global Investor Opinion Survey Mc. Kinsey & Co. (July 2002) Ë200 institutional investors (collectively responsible for some USD 2 trillion of assets under management) Ë85% - put corporate governance on a par with financial indicators when evaluating investment decisions Ë78% - willing to pay a premium for a well-governed company ËPremium for good corporate governance may be as high as 40% (see graph on the next slide) Corporate governance is at the heart of investment decisions 5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Global Investor Opinion Survey Mc. Kinsey & Co. (July 2002) 33% Average premium investors would pay for a wellgoverned company by country and region 6. 22% Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 14% 13%

Corporate Governance and Equity Prices Survey by Andrew Metrick (Wharton School of business), Paul A. Gompers and Joy L. Ishii (Harvard University) of 1, 500 US companies for period 1990 -1999 Stock returns 16% Hewlett-Packard, IBM, Wal-Mart, Du. Pont, Southern Company GTE, Waste Management, Time Warner, Kmart, United Technologies 10% 4% 12% S&P Index *August 2001 7. CG premium – 8. 5% 15. 5% 7% well-governed companies with low standards of corporate governance Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Relation between CGS and value: Deutsche Bank study, 50 emerging-markets companies Note: Group 1: Score > 80% Group 2: Score 70 -80% Group 3: Score 60 -70% Group 4: Score < 60% Source: Deutsche Bank, January 2003 Companies under study: 50 leading companies operating in Eastern Europe and Middle East Score components: country infrastructure, financial transparency, independence, openness, equal shareholder rights, etc. 8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Relation between CGS and value: Deutsche Bank study, 50 emerging-markets companies Companies under study: 50 leading companies operating in Eastern Europe and Middle East Score categories: country infrastructure, financial transparency, independence, openness, equal shareholder rights, etc. 9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Relation between CGS and value: Deutsche Bank study, 50 emerging-markets companies 110 Relative stock performance by the groups for 2 years 100 380 Group 1 330 90 80 Relative stock performance by the groups for 5 years 280 MSCI index 230 70 60 Groups 3&4 50 40 30 11/16/00 02/16/01 05/16/01 08/16/01 11/16/01 02/16/02 05/16/02 08/16/02 11/16/02 180 Group 1 130 Groups 3&4 80 30 /97 /12 11 MSCI index /98 /12 11 /99 /12 11 11 /12 /00 /12 11 Source: Deutsche Bank, January 2003 Score components: country infrastructure, financial transparency, independence, openness, equal shareholder rights, etc. 10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. /01 /02 /12 11

Link between Valuation multiples and CGS of Russian companies 40. 00 35. 00 30. 00 CGS level 25. 00 4 -6 20. 00 6 or higher 15. 00 10. 00 11. 47 5. 78 6. 98 1. 69 2. 46 5. 00 5. 45 2. 71 0. 00 EV/EBITDA P/E EV/Sales P/BV Source: Standard & Poor’s CGS, Valuation multiples - Bloomberg (average for October 2006 – May 2007) Companies with CGS ranging from 4 to 6: NWT, Sibirtelecom, Center. Telecom, STC, MGTS, Dalsvyaz, Volga. Telecom, WGC-5, WGC-4 Companies with CGS higher or equal to 6: MTS, WBD, TMK, Vimpel. Com 11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Link between P/BV and CGS of Russian companies 10. 000 9. 000 y = 1. 0 x - 2. 0 8. 000 Vimpelcom 7. 000 WGC-5 P/BV 6. 000 TMK 5. 000 WGC-4 4. 000 3. 000 МТS WBD CTC MGTS Sibirtelecom Volgatelecom STC Dalsvyaz NWT 2. 000 1. 000 0. 000 4 4. 5 5 5. 5 6 6. 5 CGS Source: Standard & Poor’s CGS, P/BV - Bloomberg 12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 7 7. 5 8

S&P Corporate Governance Score – a global instrument • Company scores are comparable on a global basis • Country context critical Country infrastructure Selected companies on the CGS/country scale Maximum shareholder protection strong average weak Minimum shareholder protection 13. 0 5 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 10 CGS

Interpretation of Scores • 7 -10: strong global governance standards – – Ownership structures do not pose conflicts Shareholder rights well defined and protected High transparency and disclosure (IFRS or GAAP) Effective board structure and active engagement by nonexecutives and independent directors • 4 -6: basic governance standards in place, though certain shortcomings are apparent – Ownership structures and the board are often the weakest areas of assessment • 1 -3: fundamental weaknesses or holes in governance structures and practices 14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

List of public Corporate Governance Scores (CGS) in Russia # Company CGS initially assigned Latest review Current CGS Russia national scale 1 Wimm-Bill-Dann 19. 04. 2004 09. 07. 2007 7+ 7. 7 2 Mobile Tele. Systems (MTS) 20. 05. 2002 27. 12. 2007 6+ 6. 9 3 MDM Bank 14. 11. 2002 04. 02. 2008 6+ 6. 7 4 Euro. Chem 24. 04. 2006 11. 04. 2007 6+ 6. 5 5 North-West Telecom(NWT) 10. 2005 19. 10. 2007 5+ 5. 6 6 TGC-1 25. 03. 2002 25. 05. 2007 5+ 5. 5 7 MGTS 06. 03. 2006 14. 05. 2007 5+ 5. 5 8 Dalsvyaz 03. 07. 2003 31. 07. 2007 5 5. 4 9 WGC-5 27. 04. 2007 - 5 5. 4 10 Sibir Telecom 03. 07. 2003 11. 09. 2007 5 5. 3 11 Rus. Hydro 23. 10. 2007 - 5 5. 2 12 TGC-8 15. 02. 2007 15. 10. 2007 5 5. 2 13 Volgatelecom 15. 08. 2003 19. 09. 2007 5 5. 2 14 South Telecom 12. 02. 2003 24. 08. 2007 4+ 4. 9 15 TGC-9 22. 06. 2006 - 4+ 4. 8 16 WGC-4 21. 05. 2007 - 4 4. 4 17 Trans. Tele. Com 23. 12. 2004 06. 03. 2007 4 4. 2 15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

List of public Corporate Governance Scores (CGS) and Governance Assessments (GA) assigned outside Russia in 2001 -2005 Company Country CGS/GA initially assigned Latest review Current CGS/GA India 12. 04. 2004 13. 07. 2004 8+ Hong Kong 13. 12. 2001 02. 03. 2005 8 Japan 09. 08. 2002 08. 07. 2005 8 Italy 14. 04. 2005 7+ Korea 19. 10. 2003 23. 02. 2005 7+ Italy 15. 09. 2004 7 Japan 21. 12. 2004 26. 12. 2005 7 UK 26. 07. 2004 Strong Jones Apparel USA 18. 10. 2004 Moderate/strong Schering Plough USA 02. 08. 2004 Moderate/strong PT Antam Tbk. Indonesia 10. 04. 2005 6+ PT Bank Niaga Tbk. Indonesia 12. 04. 2005 6+ Canada 20. 05. 2005 6+ China 19. 02. 2004 15. 05. 2005 6 USA 05. 10. 2004 Moderate Indonesia 10. 05. 2004 15. 04. 2005 5 Infosys Technologies Ltd. Hong Kong Exchanges Inc. ORIX Corp. Telecom Italia Korea Tobacco & Ginseng Sanpaolo IMI Resona Holdings, Inc ITV Biovail Corp. Sinochem International Co. Ltd. Baxter International Inc Bank Mandiri (Gov. Watch Negative) Royal Dutch/Shell 16. UK 21. 07. 2004 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Moderate/weak

Standard & Poor’s CGS: methodology • Interactive analytical process • Four main mechanisms of mitigating risks -- Four components of analysis (and 11 sub-categories) 1. Ownership structure and external influences 2. Shareholder rights and stakeholder relations • Scores from 1 (the lowest) to 10 (the highest) – sub-scores and overall score 3. Transparency, disclosure and audit 1 17. 4. Board structure and effectiveness Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 10

CGS evaluates the effectiveness of co-ordination mechanisms between management, board of directors and shareholders Ø Accountability and succession Ø Timely provision of information Ø Balanced influence Shareholders Board of directors Ø Fair and integrate disclosure of company operations and financial results Ø Distribution of profits CEO, management Ø Independent oversight over management Ø Strategic decision-making 18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Key analytical issues: 1. Ownership structure and external influence • Transparency of ownership – Disclosure of beneficiaries of large blocks, including their external interests – Management shareholdings – Group structure, affiliate parties • Concentration and influence of ownership and external stakeholders – Clear and balanced influence – Existence of conflicts of interests of different shareholder groups (cross-subsidization, transfer pricing) – If that exists, how it is balanced (decisions on related party transactions) – Influence of external stakeholders (federal government, local authorities) 19. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Key Analytical issues (cont. ): 2. Shareholder rights and stakeholder relations • Shareholder meetings and voting procedures – Ease of access – Quality of materials provided – Voting procedures and discussions • Ownership rights and takeover defenses – Guarantees of ownership rights – Dividend policy and discipline – Mechanisms impeding change of ownership • Stakeholder relations – Social policy – Ecological policy – Labor relations 20. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Key Analytical issues (cont. ): 3. Transparency, Disclosure and Audit • Content of public disclosure – – – Financial reporting standards, completeness of disclosure Non-financial information (assets, strategy) Analysis of risks Management and director remuneration Auditor compensation Non-financial reporting (GRI standards) • Timing of, and access to, public disclosure – Timeline – Ways of disclosure, non-discriminating access – Timeliness of event-driven commentaries • The audit process – – 21. Auditor selection process Scope of services provided by the auditor Independent oversight (Audit Committee) Internal controls Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Key Analytical issues (cont. ): 4. Board structure and effectiveness • Board structure and independence – – Balance of interests Independent directors Skill mix and personal qualities Committees • Role and effectiveness of the board – Oversight and audit (related-party transactions, material transactions, investments) – Strategic planning – Risk management policies (incl. non-financial risks) – Evaluations of efficiency, management nomination procedures • Director and senior executive remuneration – Adequacy of director remuneration policy; evaluation procedures – Principles and forms of remuneration (BSC, KPI system) 22. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Russian companies CGS and their components 23. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Selected comparative governance data on Russian companies Disclosure of private ownership* Financials under IFRS / US GAAP Published on time S&P Transparency Index 70 largest Russian companies 34 77 60 53 74 19 companies with public S&P CGSs 70 84 37 62** 95*** Note: all data for 70 companies is based on public sources (*) share of the disclosed private ownership in aggregate private ownership (**) based on results of 15 companies (except for Eurochem, Trans. Tele. Com, TGC-1 and WGC-4) (***) including 47% -- independent Audit committees 24. Audit committee Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.

Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each. Permission analytic process. to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 25.