Letter to Shareholders

Dear Shareholders,

Welcome to this year’s online annual review.

Delivering on 3i strategy

The year 2010 was a year of transition for MTS. The Company has transformed itself from a simple mobile operator to a full-fledged telecommunications provider, offering mobile, fixed, internet and content products and services. Our accomplishments during the year clearly establish MTS as the leading telecommunications group in the region, boasting a platform for managing growth and realizing profitability in the coming years.

During the year, we have made significant progress in the execution of our 3i strategy that encompasses offering integrated services, differentiating ourselves through an innovative product and service mix and leveraging greater internet capabilities to capture additional value.

We have significantly expanded our footprint in the fixed business with the completion of our acquisition of Comstar-UTS, the leading supplier of integrated telecommunication solutions in Russia and the CIS, following the conclusion of the merger in April 2011. In July 2010 we acquired a 100% stake in CJSC Multiregion, one of the leading groups of broadband and cable TV providers with presence in 37 Russian cities. In 2010 we have also added a number of smaller alternative operators in the Russian regions to further expand our presence in the fixed-line space.

We are one of the leading players in the broadband internet and pay-TV markets in Russia. At the end of Q4 2010, we already served 1.8 million broadband subscribers and 2.6 million pay-TV subscribers nationwide in addition to providing traditional residential voice services in Moscow. Overall, revenues from the fixed business in Q4 2010 already represented close to 15% of the total Group revenues.

During the last year we have continued the strategic build-out of our proprietary distribution network of MTS-owned and franchise stores. With more than 2,300 of our own and around 1,000 franchise stores, MTS is the third largest retailer of handsets and accessories in Russia. Our retail presence provides us with critical access to our subscribers and helps us improve the customer experience. It also helps retain existing subscribers through upselling of additional services and further promotes the MTS brand. The business also contributes significant revenues on the back of growing handset and accessories sales.

Robust Growth across Markets and Business Lines

In 2010 we delivered strong revenue growth across our markets of operations as economic recovery in Russia and the CIS gained momentum. Annual Group revenue increased 14% to $11.3 billion. In our mobile business growth was driven by subscriber acquisitions, general growth in consumption of voice and data products, and strong handset sales. Sustained development of the MTS retail network with the opening of new stores also contributed to this growth. In 2010 sales of handsets and accessories doubled to reach $707 million.

In our fixed business, we witnessed growth of 13% year-over-year. We attribute the growth to the increased domestic and international long-distance calling, contributions from acquired companies and subscriber additions.

Healthy Financial Performance

In 2010 Group OIBDA increased 9% to reach $4.9 billion on the back of revenue dynamics, rising sales and marketing expenses, as well as the development of our retail chain. For the year, our Group OIBDA margin came in at 43.1%, which was in line with our guidance.

For the year, net income came in at $1.4 billion – a healthy 36% improvement from 2009. This does include a non-cash impairment loss of $138 million recorded in the fourth quarter resulting from the suspension of our operations in Turkmenistan. We suspended operations starting from December 21, 2010 in compliance with the notice from the Ministry of Communications of Turkmenistan. More details are provided in the Turkmenistan section below.

Free cash flow in 2010 increased 43% to $1.5 billion despite higher CAPEX spending. The increase is attributable to healthy operating cash flows as well as Comstar’s transfer of its ownership stake in Svyazinvest to Rostelecom for a cash consideration of RUB 26 billion. The proceeds of the sale were used by Comstar to pay down its outstanding debt to Sberbank.

Facing 3G Challenge

In 2010 we invested significant resources in the build-out of our 3G and fixed networks. We are committed to bringing our customers fast and reliable mobile internet and innovative data products. Achieving greater 3G coverage in Russia as well as in Uzbekistan and Armenia is a top priority for MTS. By the end of 2010 we have installed roughly 8,000 3G base stations and aim to at least double this number by the end of 2011. In 2010 our CAPEX to sales reached 23% or $2.6 billion with most of the resources directed to 3G infrastructure. Going forward, we expect CAPEX for 2011 to come in at 22-24% as a percentage of revenues. The final CAPEX figure will depend on such factors as currency volatility, vendor terms, project implementation schedules and other developments that MTS cannot accurately predict.

Russia

In Russia, our largest market, revenues – including mobile, retail and fixed businesses – increased 12% to RUB 286.4 billion. Our mobile operations demonstrated robust growth on the back or subscriber additions, increasing usage of voice and data products, and rising contribution from our retail chain. A 12% increase in revenues from fixed operations came on the back of rising domestic and international long-distance calling and consolidation of the acquired companies.

In 2010, our traditional voice revenues increased due to the introduction of compelling value propositions and an overall economic improvement leading to a pick-up in business activity. During the year MOU increased by 10% to 234 minutes on the back of the introduction of tariffs aimed at stimulating voice usage. ARPU for the same period also rose by 2% to RUB 253.

As the market evolves, VAS and mobile internet in particular become the main drivers of growth. While messaging revenue in 2010 was still showing good dynamics – an increase of 12% to RUB 15 billion, it was data traffic revenue that demonstrated strong growth – an increase of 62% to RUB 16.6 billion. Data content revenue contribution was relatively stable with a 2% growth to RUB 13.5 billion impacted by anti-fraud measures undertaken by the Company in 2010.

Many factors account for the growth in VAS revenues, in particular broader 3G coverage achieved in 2010 as we continued to roll-out our networks. Our proprietary retail chain enables us to stimulate usage of mobile internet through active sales of USB dongles. In 2010 we have sold over 3 million USB modems and data tariffs. Proliferation of more affordable smartphones and tablet PCs has also resulted in a greater consumption of data products.

In Q4 2010 Russia mobile OIBDA margin declined to 37.4% from 45.8% in Q4 2009. We attribute the decline to the increasing sales and marketing costs as well as the dilutive effect of our retail business and the mounting operating expenses. The increases in the marketing spend and the dealer commissions were triggered by the dynamics of the competitive environment which forced us to defend our revenue market share through a significant ramp-up of gross additions. This has enabled us to stabilize the market and sustain our leading position with a market share of 32.6%¹. Going forward we aim to increase the profitability of our business by:

• Optimizing our retail network;
• Reducing dealer commissions through fewer gross additions and a greater emphasis on subscriber quality;
• Increasing the share of higher margin data revenues in the revenue mix through a broader 3G network build-out;
• Rebalancing of tariffs to stimulate lower cost on-net traffic.

Ukraine

In Ukraine, revenues grew by 4% in 2010 to roughly UAH 8.5 billion. OIBDA increased by 7% to UAH 4.0 billion with the OIBDA margin for the year coming in at 46.5% - 1.5pp higher than in 2009.

Robust financial performance is reflective of the fact that we have been successful in promoting our value propositions in the marketplace. Significant network improvements that we have made over the past few years have led to an increase in voice and data consumption, stronger brand perception and helped sustain our subscriber base level. Our efforts to improve the quality of our subscriber base and loyalty of our customers resulted in an impressive contraction in annual churn rate from 40% to 31%.

Uzbekistan

In Uzbekistan, we were able to improve our top line by 11% for the year to $448 million on the back of continued subscriber growth and expansion of our product portfolio.

While we witnessed competition intensify during the year, we managed to maintain our leadership in the market with a 42%² market share. The ARPU and MOU dynamics during the year reflective of the influx of lower value mass-market subscribers.

In 2010 we have launched a number of initiatives aimed at stimulating data usage that resulted in growth of data traffic revenues of 133%. Given Uzbekistan’s low fixed-line and internet penetration rates, our investments into 3G networks should lead to healthy growth of mobile broadband usage going forward.

Turkmenistan

With 2.4 million customers and a 78%³ market share MTS has led the development of the country’s mobile infrastructure. However, in December 2010 we had to suspend the operations following a notice received from the Ministry of Communications of Turkmenistan. The notice informed of a decision to suspend licenses held by BCTI, the Group’s wholly-owned subsidiary in Turkmenistan, for a period of one month starting from December 21, 2010. On January 21, 2011, the period of license suspension expired, however, permission to resume operations was not granted.

Following the decision to suspend licenses, Turkmenistan government authorities took further steps, including the one-sided termination of interconnect agreements between BCTI and state-owned telecom operators, to prevent the Group from providing services to its customers.

The Group initiated a number of lawsuits against Turkmenistan government authorities and state-owned telecom operators to defend its legal rights. At the same time MTS continues negotiations with the Turkmenistan authorities to resolve the situation.

Considering the adverse impact of such circumstances on the Group’s ability to conduct operations in Turkmenistan, the Group recorded a non-cash impairment loss of $138 million in the consolidated statement of operations for the year ended December 31, 2010.

Armenia

In Armenia, our revenues and OIBDA decreased year-over-year by 4% to AMD 77.3 billion and by 6% to AMD 40.4 billion respectively on the back of competitive and economic factors. Despite the mounting competitive pressures, we retain our number one position with a market share of 69%⁴. MTS is well positioned to maintain its leading position in the market given the Company’s strong brand attributes, an attractive product portfolio and a strong management team.

Looking Ahead: Key Drivers of Growth

As we look to 2011 and beyond we see key drivers of the growth being:

• Increased mobile voice and data usage and the continued expansion of our fixed-broadband and pay-TV offerings;
• Greater take-up of convergent products;
• Rising sales of handsets and accessories;
• Better quality subscriber additions through our own proprietary networks.

Lastly, I wanted to thank MTS shareholders for the honor and privilege to lead MTS in these times of transition that was extended to me in March 2011. MTS has been my home since 2004, when I joined to head our operations in Nizhny Novgorod. Since then, I have managed both regions and countries, and I have watched MTS develop accordingly. I am confident that these experiences will allow me to manage MTS' further development, realize the goals of our corporate strategy and ensure that MTS remains the leader and innovator it has been.

Yours sincerely,

Andrei Dubovskov
President and Chief Executive Officer

¹ According to AC&M-Consulting as of December 31, 2010.
² According to MTS’ estimates as of December 31, 2010.
³ According to MTS’ estimates as of December 31, 2010.
⁴ According to MTS’ estimates as of December 31, 2010.