Download pdf - MegaFon Investor presentation · MegaFon Investor presentation Bank of America Merrill Lynch 2016 CalGEMs One-on-One Conference June 13-15, 2016. 2 Certain statements and/or other

MegaFonInvestor presentation

Bank of America Merrill Lynch

2016 CalGEMs One-on-One ConferenceJune 13-15, 2016

2

Certain statements and/or other information included in this document may not be historical facts and may constitute “forward looking statements”

within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 2(1)(e) of the U.S. Securities Exchange Act of 1934, as amended. The

words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plans”, “forecast”, “project”, “will”, “may”, “should” and similar expressions may

identify forward looking statements but are not the exclusive means of identifying such statements. Forward looking statements include statements

concerning our plans, expectations, projections, objectives, targets, goals, strategies, future events, future revenues, operations or performance,

capital expenditures, financing needs, our plans or intentions relating to the expansion or contraction of our business as well as specific acquisitions

and dispositions, our competitive strengths and weaknesses, the risks we face in our business and our response to them, our plans or goals relating

to forecasted production, reserves, financial position and future operations and development, our business strategy and the trends we anticipate in

the industry and the political, economic, social and legal environment in which we operate, and other information that is not historical information,

together with the assumptions underlying these forward looking statements. By their very nature, forward looking statements involve inherent risks,

uncertainties and other important factors that could cause our actual results, performance or achievements to be materially different from results,

performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous

assumptions regarding our present and future business strategies and the political, economic, social and legal environment in which we will operate

in the future. We do not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be

achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most

likely or standard scenario. We expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect actual results,

changes in assumptions or in any other factors affecting such statements.

Disclaimer

Agenda

1. About MegaFon

2. Market Overview

3. Key Corporate and Financial Highlights for Q1 2016

4. Appendix

About MegaFon

1

Wireless revenues; 85.9%

Wireline revenues; 8.0%

Sales of handsets and accessories; 6.1%

>98% of revenues comes from Russia

RUB 75.2bn

MegaFon – a leading Russian telecommunication company…

Highlights Consolidated Q1 2016 revenue breakdown

Source: Company data. Note: (1) – By overall mobile revenue and number of subscribers as of the year end of Q1 2016 in Russia

(2) – Total number of subscribers as of the year end of Q1 2016 was 76.4m in Russia, Tajikistan, South Ossetia and Abkhazia(3) – Russian population as of the latest census in October 2010

Compelling historical financial performance

• 2nd largest Russian mobile operator(1), with 74.5m subscribers(2) and historically growing market share

• Unique network position overall on the back of substantial investments

• Unrivalled frequency spectrum

• Leading 4G/LTE operator providing access to 4G/LTE network in 77 Russian regions to 59.2%(3) of population by the end of Q1 2016

• Innovative player with a customer-centric approach and a leading position in digital services and content

• Extensive retail network consisting of over 8,000 stores, including 2,096 owned-and-operated stores, approx. 2,000 third-party monobrand stores and 4,000 Euroset stores

• Managed by a professional team with solid track record

• Listed on the London and Moscow stock exchanges since 27 Nov 2012

Strong fundamentals

Growth

Returns

• Superior historical growth among Big 3 Russian mobile operators with future growth potential

• Robust dividends payout history based on the Company’s attractive shareholder remuneration policy: at least 50% of net income, or 70% of free cash flow

RUB bn 2012 2013 2014 2015 CAGR Q1 2016

Total mobile subscribers (m) 64.6 70.1 72.2 76.8 5.2% 76.4

Consolidated revenue 272.3 297.2 314.8 313.4 6.6% 75.2

Consolidated OIBDA 117.1 132.6 138.5 132.4 7.1% 30.2

Margin (%) 43.0% 44.6% 44.0% 42.2% 40.2%

Capex (45.2) (47.1) (56.5) (70.2) -0.1% (14.3)

As % of revenues 16.6% 15.9% 17.9% 22.4% 19.0%

OIBDA−Capex 71.9 85.4 82.0 62.2 20.0% 15.9

As % of revenues 26.4% 28.7% 26.1% 19.8% CAGR 21.2%

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… with 22 years of our success story to become a market leader…

Source: Company data.

Launch of 4G/LTE services in partnership with Yota

Acquisition of 50% stake in Euroset

Start listing on the LSE and MICEX

242.4

272.3297.2

314.8 313.4

1993 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

“NorthWest GSM” founded, launched operations in St. Petersburg

1st operator in Europe to launch “MMS” and 1st

operator in Russia to introduce “Mobile-TV”

1st operator to cover all regions in Russia

1st operator to launch 3G network in Russia in St.Peters-burg

Acquisition of Synterra

Becomes #2 mobile operator in Russia in terms of subscribers

Acquisition of Net-by-Net

MegaLabs launches operations

NorthWest GSM acquired nine other regional GSM operators and renamed MegaFon

MegaFon total revenues(RUB bn)

Launch of online store and introduction of EDGE technology

Acquisition of 100% stake in Yota/Scartel

Number of 4G subscribers hits 1 million

~20x

Leading 4G provider in Russia

General Communication partner for Sochi Olympics 2014

Acquisition of four SMARTS companies in the Volga region

Acquisition of GARS

Purchase of a 49.99% stake in class A office building in Moscow

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30.7% 30.9%29.3%

31.0% 30.7% 30.9%

27.1%

27.1% 28.8%29.0% 29.7% 29.7%

25.1%

24.3% 23.9% 23.8% 23.7% 23.0%

17.1% 17.6% 18.1%16.1% 15.9% 16.4%

2011 2012 2013 2014 2015 1Q 2016

Source: Bloomberg Consensus Forecast summary (April 2015)Note:(1) - Government focus on MTR and potential roaming regulation is increasing(2) - Fully implemented since April 2014 (3) - Including numbers ported into Scrtel/Yota network(4) - Includes Canada, Germany, France, Italy, Japan, United Kingdom, United States

… operating in a highly attractive Russian telecommunications market despite turbulent macroeconomic environment…

Russian market fundamentals

Competitive telecom market dynamics

• 3 nationwide mobile operators

• Tele2 lags the Big3 operators in the market share, but launched its services in Moscow in late October 2015

• Predominantly prepaid market, limited handset subsidies

• Relatively high OIBDA margin (compared to developed markets) on the back of relatively benign competition and regulatory framework

Benign regulatory framework

• Mobile termination rates, roaming rates, and last mile fiber access are not regulated(1)

• Mobile number portability implemented relatively late in terms of market development(2). In 2015, MegaFon was the beneficiary of 32% of total numbers ported in(3).

• Local loop unbundling is not implemented

MegaFon track record of gaining market share

(Subscribers in millions)

-0.7 pp

+0.0pp

+0.5 pp

+0.2 pp

∆ Q1 2016/2015

228 230 237 240

Others

Total mobile revenues FY 2015 Data revenues FY 2015

252

RussiaEastern Europe

G7(4)

GDP (CAGR 2015-2018E, real change p.a.) 0.6% 2.2% 1.8%

CPI (CAGR 2015-2018E, change p.a.) 6.8% 5.4% 1.8%

29.9%

33.4%

25.0%

11.7%

+0.1 p.p.

+0.7 p.p.

+0.1 p.p.

37.5%

36.7%21.7%

4.1%

+0.0 p.p.

+0.3 p.p.-0.4 p.p.

-0.9 p.p. +0.1 p.p.

YoY change in market shareOther

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252

MegaFon has noticeable advantage in terms of frequencies… … allowing to get significantly higher datatransfer rate in MegaFon’s network

Both operator and end-user equipment already support 2x20

MHz for LTE, no other operator beside MegaFon can provide such

band length

After implementation of technology neutrality MegaFon is the

only operator able to utilize 3 times 2x20 MHz channels (2x20

MHz in 1800 band and 2 times 2x20 in 2600 band) for LTE

In other technologies all nation-wide operators are almost equal

None of nation-wide operators except MegaFon can realize

significant benefits from implementing technological neutrality

700 MHz (LTE) 2x7,5 2x7,5 2x7,5 2x7,5

800 MHz (LTE) 2x7,5 2x7,5 2x7,5 2x7,5

900 MHz (2G(2))2x4,8-

2x15,6(1)

2x2,4-2x13,2(1)

2x0,8-2x13,6(1)

2x0,6-2x8,4(1)

1 800 MHz (2G / LTE)

2x14,6-2x30,6(1)

2x13,6-2x44,4(1)

2x12-2x29,6(1)

2x9,4-2x44,6(1)

2 100 MHz (3G) 2x15 2x15 2x15 2x15

2 400 MHz (LTE) - - - 30 - 70(1)

2 600 MHz (LTE - TDD(3))

25 25 - -

2 600 MHz (LTE) 2x40 2x10 2x10 2x10

(1) Band size varies depending on Russian region(2) 3G only for Moscow, Moscow region and Komsomolsk-on-Amur(3) In Moscow only

Wider band means higher data transfer rate and higher capacity of the network

… possessing a unique spectrum advantage…

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9

… coupled with extensive infrastructure development…

Fiber opticsinfrastructure

Number of base stations

46,337 47,946

38,147 42,281

18,54723,003

2014 2015

Growth▲ 9.9%

2G BS, units 3G BS, units 4G BS, units

121,102 126,030

2014 2015

Growth▲ 10.8%

Share of BS interconnected via FOCL(1), %

Backbone, km

• In 2015, MegaFon remained focused on increasing the quality of itsservices by continued roll-out and modernisation of 4G/3G/2Gnetworks in Russia

• By the year-end, the key indicators for the connection quality inMegaFon network improved:

• As of the end of 2015, MegaFon had the largest network amongRussian mobile operators, which comprised more than 113,000 basestations, +10% y-o-y

• MegaFon increased the length of its backbone infrastructure by 4%y-o-y, while its fiber optics infrastructure expanded to 184.4K km(4)

This enabled it to expand network footprint and capacity to providefixed-line business services

• In 2015, MegaFon completed integration of all branches into itsGlobal network operational center (GNOC). As of now, the GNOCenables centralised monitoring of, maintenance of and control overthe network quality across MegaFon’s country-wide operations

Note: (1) FOCL – fiber-optic communication lines(2) CSSR – Call set-up success rate(3) DCR - Drop call rate(4) Refined data, vary from those reported earlier

▲ 24.0%

▲ 10.8%

▲ 3.5%

64% 64%

Backhaul, km

184,401166,453

Key points

▲ 4.1%

▲ 28.7%

4G 3G 2G

CSSR(2) 99.47% 99.27% 98.98%

DCR(3) 0.33% 0.39% 0.75%

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10Note: (1) — Russian population as of the latest census in October 2010

… with key competitive advantage in 4G and service quality… 4G/LTE network development

• MegaFon is focused on expansion of coverage and increaseof its 4G network capacity in existing areas of presence andservice quality improvement

• More 4G availability:

– 77 federal regions

–more than 790 cities and towns

– 14 out of 15 cities with a population(1) over 1m people

• 4G infrastructure included 23,550 base stations

4G/LTE services

• LTE-Advanced services providing speeds of 150-450

Mbit/sec were available in 16 cities and regions as of the

year-end

• 4G-enabled devices registered on MegaFon network – 8.5 m

units, or +37% y-o-y

• 4G traffic usage increased by 38% y-o-y

• Share of 4G traffic in total data traffic is 40%

LTE-roaming

• MegaFon is one of the world’s leaders in LTE-roaming

coverage in terms of countries covered

• In Q1 2016, LTE-roaming coverage extended to 69 countries

with 86 operators

4972

77 77

36%51%

59% 59%

2013 2014 2015 Q1 2016

Availability of MegaFon 4G services

Number of Russia’s regions, where MegaFon 4G is available

% of population covered

Federal regions covered by MegaFon 4G / LTE network

Cities where LTE-Advanced available

Saint-Petersburg

Chelyabinsk

Moscow

Rostov-on-Don

Chita

Nizhniy Novgorod

SamaraSakhalin

Vladivostok

Ufa

Tula

OmskSochi

Novosibirsk

KhabarovskKrasnoyarsk

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11

… and strong position in retail…

Structure of MegaFon distribution network

MegaFon Retail,incl. online store

~ 2,100 stores

Franchised stores underMegaFon brand

~ 2,000 stores

Euroset(50% interest)

~ 4,000 stores

Controlled retail

Independent dealers:

Multi-brand electronic storesRussian Post outletsLocal dealersOther

Federal retail chain(dealer agreement)

~ 3,000 stores

72% gross additions(1)

• Through its controlled and non-controlled retail network,MegaFon holds the leading position in distribution in Russia

• The current structure of the distribution network enablesMegaFon to steadily increase its subscriber and data userbase in a cost-effective way and improve the quality of grossadditions

• MegaFon’s controlled retail accounted for 72% of total grossadds, while the owned retail stores accounted for c.40% oftotal gross adds in 2015

• Despite the shift to cheaper and more affordable devicesamid weaker consumer purchasing power, in 2015 we sold25% more smartphones in unit terms than a year ago in ourown retail stores. This helped us to deliver stronger mobiledata revenue

Note: (1) - Sales for the quarter, excluding Yota, as of end of Q4 2015(2) – Sales represented in unit terms(3) – Sales of data-enabled devices include sales of 4G smartphones, tablets, modems and routers

Non-controlled retail 28% gross additions(1)

+25% y-o-y

Smartphones

+113% y-o-y

4G smartphones

Sales of data-enabled devices(2) in MegaFon

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… an increasing footprint in digital services…

12

Content

Devices supported

Uniqueness

• Unique terms of use for subscribers using “All inclusive” bundled tariff plans and options

• VOD and LiveTV tandem solution

• Premium HD content: Amedia, Discovery HD, HBO, Disney, Warner, Universal, Sport HD, etc.

• Individual recommendations based on ratings and perceptions by subscribers

• OTT solution available for all types of devices: smartphone, tablet, SMART TV, Web

• VOD: Large catalogue of movies, TV series and sequels of first-rate Russian and foreign studios

• Live TV: 130+ channels, including 1 and 2 multiplex

Company’s existing subscribers

3rd party clients

… aimed at both subscribers of MegaFon and those of other mobile operators

Clients Purposes

• Boosting of subscribers loyalty and lifetime

• Data usage enhancement

• Monetisation of subscriber base

• Monetisation of active users of MegaFon.TV app

• Acquisition of new subscribers

80% of app users rate the service as “good” and “excellent”3.5 average rate in Google Play and AppStore

Fully-fledged video and TV OTT solution launched in June 2015 MegaFon TV creates value for digital offering…

Customers’ dynamics satisfaction by the service

796K users registered at 31 March 2016c.40% average monthly growth of user base since launch

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13

… as well as second core B2X(1) segment…

Note: (1) B2X includes B2B and B2G business segments(2) CDN – Content delivery network(3) Based on Company’s estimate of M2M market in terms of M2M subscribers

Key projects in 2015

• Development of new IT tariff products to reduce the time to market launch ofindividual offerings for corporate clients

• Launch of programme for improvement of indoor coverage in business andcommercial centers

• Launch of the mono-industry towns development programme

• Launch of new exclusive overland cross-border passages Russia-Georgia andRussia-Kazakhstan

• Contract with RT-Invest Transportation Systems signed for distribution of 2million sim-cards to be installed on board heavy vehicles to meter over thehighway tracking

B2X strong performance in FY2015

New products and services

• Launch of M2M-Monitoring service on the basis of a new platform in all branchesof MegaFon

• Commercial launch of “Wi-Fi with authorisation” service on a federal level

• Launch of “Electronic document flow” service

• Upgrade of “Office zone” service, a cloud solution for SME business

• Launch of “Online conference” service in all branches of MegaFon

• Promotion of Geo-analytics service based on BigData analysis

• Upgrade of CDN(2) network: network capacity increased by more than 40%, scopeof services expanded by 60%

286 K

Number of B2X clients + 5% y-o-y

2.8 m

Number of B2X mobile data users

+23.1% y-o-y

8.2%

B2X total revenue

+ 8.2% y-o-y

6.6%

B2X mobile revenue

+ 6.6% y-o-y

30.9%

B2X mobiledata revenue +

30.9% y-o-y

• M2M subscribers exceeded 1.6 million as at 31 Dec 2015

• MegaFon’s M2M market share increased to 25%(3)

New B2B/B2G clients

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Data ARPU, RUB per month APPMb, RUB

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed. (1 ) —Data Service User is defined as a Subscriber who has used any of our data transfer services within the preceding one month (2) — Active subscribers that do not comply with the definition of Data Service User Base(3) — Total data revenues in a given period divided by average number of data service subscribers during such period, divided by number of months in such period(4) — Starting from 2013, APPMb presented here vary from those reported earlier do to the change in methodology for data service user calculation. APPMb is calculated by taking ARPDU for a given period, and dividing by DSU in that period(5) — Total number of megabytes transferred during a given period divided by average number of data subscribers during such period, divided by number of months in such period(6) — Total CAPEX, including CAPEX on spectrum acquisition via purchase of SMARTS in August 2015. Refers to actual CAPEX accrued for the year and may not match cash flow CAPEX

Superior operating performance…

Operating results provided on this page cover only the Russian business. Financial results are presented on a consolidated basis

…translating into strong financials

241.1 259.0 269.5 270.0

64.1 64.6

17.9 20.1 22.2 23.4

5.5 6.0

13.318.1

4.4 4.6

272.3297.2

74.0 75.2

2012 2013 2014 2015 1Q 2015 Q1 2016

117.1132.6 138.5 132.4

32.0 30.2

43.0% 44.6% 44.0% 42.2% 43.2%40.2%

2012 2013 2014 2015 1Q 2015 Q1 2016

21.0 25.2 27.4 29.3 29.6

62.668.1 69.7

74.8 74.5

2012 2013 2014 2015 Q1 2016

Data service user base (1) User base not using data service (2) Wireless services Wireline services Equipment & Accessories

Total Russia wireless subscribers, m

Russia Data ARPU (ARPDU(3)) and APPMb(4)

Consolidated Revenue breakdown, RUB bn

Consolidated OIBDA and OIBDA margin

45.2 47.156.5

70.2

8.1 14.316.6% 15.9% 17.9%

22.4%10.9%

19.0%

2012 2013 2014 2015 Q1 2015 Q1 2016

Consolidated CAPEX(6) and CAPEX margin

… allowing to demonstrate resilient operating and financial performance despite recent macro

314.8

23.1313.4

19.9

1,091 1,5562,614

3,2863,942

32%38%

47% 53% 54%

2012 2013 2014 2015 Q1 2016

Data-enabled device penetration

Russia DSU(5) and data-enabled device penetration

DSU, MB/month

164177

211 233 2320.150.11

0.08 0.070.06

0.00

0.05

0.10

0.15

0.20

2012 2013 2014 2015 Q1 2016

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Existing MegaFon Corporate Governance structure complies with allrequirements of the London Stock Exchange and Moscow Exchange whereMegaFon trades

Board of Directors elected in June-2015 consists of 7 members:

5 Board members represent interests of minority shareholders: 2TeliaSonera representatives and 3 INEDs

2 representatives of controlling shareholder USM

Three Committees of the Board of Directors have been set up forimproving corporate governance standards:

Audit Committee

Remuneration and HR Development Committee

Finance and Strategy Committee

On 12 Nov 2013, MegaFon’s Board of Directors approved the Code ofBusiness Conduct and Ethics further streamlining the corporategovernance procedures in the Company

Following the listing reform on the Moscow Exchange, in June 2014, theCompany’s shares were upgraded to the “Highest” quotation list QL I,thus allowing pension funds and state corporations to invest inMegaFon’s stock

- This upgrade confirms MegaFon compliance with MOEX’s highestcorporate standards

Corporate governance Board of Directors composition

MegaFon employs the best-in-class Corporate Governance practices…

Vladimir StreshinskyChairman of the Board

Sergey Kulikov

Carl Peter Christian Luiga

Ingrid Maria Stenmark

Jan Rudberg

Nominated by USM Nominated by TeliaSonera

Independent directors

Lord Myners

The majority of the Board represents minority shareholders

Sergey Soldatenkov

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…led by a management team with extensive TMT experience

Konstantin Likhodedov, Director, Consumer Business

● Director for Consumer Business since September 2015

● Previously Director of the Moscow branch of MegaFon

● Joined MegaFon in 2012

Dmitry Kononov, Director, Investors Relations and M&A

● Director for Business Development, M&A, IR since Dec 2008

● Joined MegaFon in 2000. Served as the Company’s CFO in 2002-2004

● 22 years of TMT experience

Alexander Bashmakov, Chief Technical Officer

● CTO since August 2015

● Previously Chief Strategy and Procurement Officer of MegaFon

● 8 years in management consulting with focus on Telecom & IT (Accenture and BCG)

Gevork Vermishyan, Chief Financial Officer

● CFO since Jul 2011

● Previously Director of Corporate Finance at AFK Sistema

● 13 years of finance / 8 years of TMT experience

Sergey Soldatenkov, Acting Chief Executive Officer

● Acting Chief Executive Officer since 28 April 2016

● Chief Executive Officer of MegaFon from April 2003 to April 2012

● Extensive experience in the Russian telecom industry

● Before joining MegaFon held senior management positions in Telecominvest, Delta Telecom, North West GSM

● Member of the Board of Directors of MegaFon since May 2012

Evgeny Chermashentsev, Chief Operating Officer

● Appointed Chief Operating Officer (Executive Director) of MegaFon in July2015

● Previously Deputy CEO for Infrastructure of MegaFon


● Before joining MegaFon held various senior positions at media andbroadcasting companies

● c.20 years of TMT experience

Executive Bodies

Alexander Sobolev, Director, Strategy

● Director for Strategy since September 2015

● Previously Head of Strategic Partnerships and Projects, MegaFon


● 5 years in consulting (Strategy Partners Group and BCG)

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Return to growth through digital strategy

17

New strategy focuses on “Digital“ trend, mobile data monetization and new product offerings

Since 2012 MegaFon successfully implementedan efficient growth strategy

Strategy implementation in 2012-15 allowed to accumulate free cash flow and increase the dividends

• Grown MegaFon share in the mobile market

• Increased business efficiency

• Deployed modern infrastructure and full-fledged 4G communications network

• Implemented new investment management process and subsequent optimized investment budget

• Enhanced organizational structure to strength the Company's position in the B2C, B2B, B2G and B2O markets with the aligned governance models

• Cover digital subscriber needs and requirements

• Leverage Internet and OTT companies cooperation

• Develop own innovative products and services (MegaFon TV, М2М services, mobile finance mobile advertising, cloud solutions)

• Well-timed construction and modernization of the network, utilizing spectrum advantage

• Identification and implementation of new growth areas in operating efficiency

Despite challenging macro MegaFon will return to sustainable growth with winning the “Digital”

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Market overview

2

World mobile market is declining, but still there are countries which return to growth in local currency

Countries: developed – Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong-Kong, Israel, Italy, Japan, S.Korea,Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, Spain, Sweden, Switzerland, USA, UK; emerging – Argentina, Brazil, Chile, China,Columbia, India, Indonesia, Malaysia, Mexica, Nigeria, Peru, Philippines, South Africa, Taiwan, Thailand, Turkey, Ukraine

Source: Bank of America Merrill Lynch Wireless Matrix, MegaFon Strategy analysis

-6%

2015

5%

-10%

2014

14%

2011

16%

-4%-5%

2012

4%

-2%

2010 2013

6%

-4%

3%

2009

1%

-4%

2008

24%

7%

Marketvolume

% y-o-y growth,developed

% y-o-y growth,emerging

World mobile market dynamics, USD bn

-20%

-10%

0%

10%

2015201420132012

Sweden

Singapore

New Zealand

Greece

Finland

AustraliaMobile market dynamics in local currency, %

-10%

0%

10%

20%

30%

2015201420132012

Taiwan

Thailand

Turkey

Nigeria

Philippines

South Africa

Indonesia

India

China

Argentina

World mobile market in USD is declining… ... but still some countries grow in local currencies

Developed countries

Emerging countries

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In 2015 Russian economy suffered from recession

-3,8%

1Q14

1,3%

0,7%

4Q151Q15

-2,2%

0,6%0,9%

1Q13

Since 1Q 2015 Russian economy started to shrink …

GDP growth, % YoY

… along with decline in consumer spending…

… yet a small portion of population tends to cut telco-

related spending

-7%

1%

1Q15

0%2%

1Q14

3%

-8%

-10%

-12%

4Q15

Household consumption growth, % YoY % population who cut spending on services, %

15%

33%

42%

57%

63%69%69%

76%76%

Tra

veli

ng

Eat

ing

ou

t

Ou

tin

gs

Mo

bil

e

Cin

ema

Rep

airs

FT

TB

Pet

rol

Spo

rts

Source: Rosstat, Synovate Comcon, MegaFon Strategy analysis

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Mobile market in Russia is entering area of zero growth

Russian mobile market(1) quarterly dynamics, RUB bn

-4%

-2%

0%

2%

4%

6%250

100

0

50

150

200

2Q 2014

1Q 2014

4Q2014

3Q2014

1Q 2013

2Q2013

3Q2013

4Q2013

1Q2015

2Q 2015

4Q2015

3Q 2015

% y-o-y growthMobile market volume

Note: (1) - Mobile market consists of Big-4 official revenue (including MTS Crimean operations), Yota revenue and small regional operators’ revenue

according to AC&M. Source: operators’ official data, AC&M, MegaFon Strategy analysis

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Data revenue remains the major growth driver

Data users by devices in Russia, mn units

80

120

20

40

60

100

0201520142013 2018F2017F2016E

Modem

Others

Tablet

Featurephone

Smartphone

Source: official companies’ reporting, ACM, MegaFon Strategy analysis, B2C data

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Revenue continues to grow in the new businesses and fixed BB

On fixed BB markets B2B and B2C segments grow against negative

dynamics of B2G и B2O

One of key new markets for MF –Video and TV – will continue to grow,

in particular due to OTT and IPTV

Other target new markets will grow significantly faster than traditional

ones

0

50

100

150

200

250

300

20182017201620152014

B2C/B/G/O fixed BB market forecast in Russia(excl. fixed telephony), RUB bn

0

20

40

60

80

100

20182017201620152014

Pay Video and TV market forecast in Russia, RUB bn

New businesses market forecast in Russia, RUB bn

0

20

40

60

2017201620152014 2018

Corporate M2M connections

Cloud B2B communications

Mobile advertising

ОТТ

IPTV

Satellite TV

Cable TVB2OB2GB2BB2C

Note: B2B market excludes cloud servicesSource: TMT consulting, iKS, J’Son, MegaFon Strategy analysis

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Financial and Operating Results

3

Events in Q1 2016 and post-closing events

25

RECOMMENDATION OF DIVIDENDS FOR 2015

• On 27 April, based on the results for 2015, MegaFon’s Board of Directors recommended

payment of a final dividend for 2015 in the amount of RUB 30 billion¹, equivalent to

RUB 48.38 per ordinary share (or GDR), subject to approval by the AGM

• The Board will also make a recommendation to shareholders, later this year, for the

payment of an interim dividend for 2016, the amount of which will be based on the

financial performance of the Company at that point in time

REGISTRATION OF NEW BOND PROGRAMME

• On 20 April, MegaFon registered a new programme with the regulatory authorities to

issue interest-bearing nonconvertible exchange bonds in the maximum principal

amount of RUB 80 billon (the “Programme”)

• Each bond issue under the Programme will have a maturity of up to 30 years, and the

coupon rate for each bond issue will be determined separately at the time of issue,

either by an auction or by book building

UPGRADE OF BUNDLED TARIFFS AND TARIFF OPTIONS

• In February and March, MegaFon upgraded its Internet tariff options and bundled tariff

plans to fit to customer patterns of use. As a result, the data traffic allowance under

the Internet tariff options was increased in certain regions, and subscription fees were

significantly reduced

MVNO PROJECT WITH GLONASS

• On 1 April, MegaFon signed a contract with the state-owned company GLONASS

(Global Navigation Satellite System) to act as a full-MVNO partner and an operator for

transmission of emergency call traffic. This project is an important milestone for

MegaFon, which has a strong track record in successful implementation of MVNO

projects

JOINT PROJECT WITH ER-TELECOM

• In April, MegaFon and ER-Telecom launched a joint offering relating to mobile and

fixed-line services. Customers subscribing to MegaFon’s bundled tariff plans get

access to fixed-line broadband Internet and digital TV from ER-Telecom with a 20%

discount. This joint service was initially offered in three large cities in Siberia and may

be extended to other regions going forward

COOPERATION WITH PAYMENT SYSTEM MIR

• MegaFon has become the first mobile operator to start working with the Russian

national payment system Mir. Starting from March 2016, holders of Mir banking cards

can pay for MegaFon’s mobile communication services via the “Autopayment” service.

This is an important step in promoting the Russian national payment system and

expanding the methods of payment for MegaFon’s services

CHANGE IN CEO OFFICE

• After successful four years with MegaFon, Mr. Ivan Tavrin has announced his

resignation as MegaFon’s CEO to pursue other business interests. His resignation was

accepted by the Board on 27 April 2016

• Subject to shareholders approval at the Annual General Meeting scheduled for 30 June

2016 (“AGM”), the Board has designated Mr. Sergei Soldatenkov, Chairman of the

Board and a former CEO of MegaFon, as the new CEO for a term of three years ending

on the date of the 2019 AGM

• Mr. Ivan Streshinsky was elected as the Chairman of the Board to replace Mr.

Soldatenkov, effective 27 April 2016

(1) Exact number of the dividends declared is 29,995,600,000 rubles

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26

Key highlights: earnings trend

Note: Due to rounding, manual calculations for financials and KPIs(2) may differ from those displayed(1) — Net profit attributable to equity holders of the Company(2) — Key performance indicators (“KPIs”)

Revenue

Revenue, OIBDA and Net profit

74.0 76.1 81.3 82.0 75.2

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Growth▲ 1.6%

OIBDA

Net profit(1)

Quarterly data, RUB bn % of RevenueQuarterly data, RUB bn

32.0 34.7 36.129.5 30.2

43.2% 45.6% 44.5%36.0% 40.2%

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

7.4

13.0 13.3

5.38.8

10.0%17.1% 16.4%

6.5% 11.8%

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Growth▲ 19.4%

Lower▼ 5.4%

• In Q1 2016, total revenue increased by 1.6% y-o-y to

RUB 75.2bn supported by growth across all revenue

segments: wireless revenue was up by 0.7%, wireline

revenue – by 9.2% and revenue from sales of equipment

and accessories – by 4.4%

• OIBDA declined by 5.4% y-o-y due to higher dealer

commission related to a growing number of subscribers,

including those acquired via Svyaznoy; growth in general

and administrative expenses driven by increased rent and

utilities expense and higher radio frequency fees

• As a result of the OIBDA decline, OIBDA margin

decreased by 3.0 p.p. y-o-y to 40.2%

• Net profit(1) increased by 19.4% y-o-y due to non-cash

foreign exchange gain

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27

Key highlights: free cash flow and CAPEX

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) – MegaFon CAPEX refers to actual CAPEX accrued for the year and may not match cash flow CAPEX.

CAPEX

CAPEX(1), OIBDA-CAPEX, Free Cash FlowGrowth▲ 76.7%

OIBDA-CAPEX

Free Cash Flow

Quarterly data, RUB bn % of RevenueQuarterly data, RUB bn

Lower▼ 24.0%

Lower▼ 33.2%

• In Q1 2016, MegaFon spent RUB 14.3bn, which is 76.7%

higher than in Q1 2015 mainly due to:

– higher spending on 4G/LTE network roll-out and

modernisation of 2G/3G network

– acquisition of frequency spectrum in February

– development of Unified Billing system

• Due to the lower OIBDA and higher CAPEX spending,

OIBDA-CAPEX decreased by 33.2% y-o-y

• Free Cash Flow decreased by 24.0% y-o-y mostly due to

higher CAPEX and decreased cash flow from operating

activities

8.112.5

25.923.6

14.3

10.9%16.5%

31.9% 28.8%19.0%

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

23.9 22.2

10.25.9

15.9

32.3% 29.1%

12.6%7.2%

21.2%

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

11.7

19.3

8.913.8

8.915.9%

25.4%

10.9%16.9%

11.9%

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

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28

Mobile data revenue remains the key revenue growth driver

Key revenue components

Due to rounding, manual calculations for financials and KPIs may differ from those displayed.Note: (1) — Other wireless revenue includes revenues from VAS services; revenue from local subscribers which includes monthly fees, airtime revenues, own subscriber roaming and connection fees; wireless interconnection revenues; roaming charges to other wireless operators and other wireless revenues(2) — Include smartphones, tablets, dongles, routers, and other data-enabled devices

Wireless revenue increased in Q1 2016 by 0.7% y-o-y. Growthin mobile data revenue and higher demand for MegaFon’svalue-added services (+8.3% y-o-y) fully compensated for aslowdown in revenue from traditional voice services

Mobile data continued to be the key growth driver andrepresented 27.5% of total revenue in Q1 2016 vs. 24.1% inQ1 2015, increasing by 15.6% y-o-y due to:

― expansion of data user base by 9.8% y-o-y to 30.2 millionusers as a result of our pro-active data user acquisitionefforts and higher adoption of data-enabled devices(54.4% of data-enabled devices(2) registered on MegaFonnetwork)

― higher data usage resulting from:

• effective promotion of mobile data offerings and newtariff initiatives

• promotion of tablets (complete plug-and-playpackaged solutions) and smartphones in controlledretail stores

Wireline service revenues increased by 9.2% y-o-y due todevelopment of the B2G segment and further expansion ofthe B2B segment supported by the acquisition of GARS

Sales of handsets and accessories increased by 4.4% y-o-y,although numbers related to the prior year may have beenaffected by an unusual spike in Q4 2014 influenced by theadverse economic environment

Wireless 86.7% 87.8% 86.9% 83.5% 85.9%

- Data 24.1% 25.6% 26.6% 25.6% 27.5%

Wireline 7.4% 7.0% 7.0% 8.5% 8.0%

Handsets and accessories

5.9% 5.2% 6.1% 8.0% 6.1%

17.9 19.5 21.6 21.0 20.6

46.2 47.4

49.0 47.543.9

5.5 5.3

5.7 6.96.0

4.4 4.0

5.0 6.6

4.6

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Growth▲1.6%

▲ 15.6%

Other wirelessrevenue(1)

Wireline

Handsets and

accessories

Data

74.076.1

81.3 82.0

75.2

▲ 9.2%

▲ 4.4%

▲ 0.7%

(RUB bn)

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29

Total Russia wireless subscribersincluding data service users

(million)

26.9 27.928.5 29.3 29.6

69.571.4

73.9 74.8 74.5

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Data service user base (1) User base not using data service (2)

Drivers of Russia total wireless services revenues: Wireless subscribers

Results provided on this page cover only the Russian business

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) — Data Service User is defined as a Subscriber who has consumed any amount of data traffic within preceding month(2) — Mobile subscribers that do not fall within the definition of Data Service User Base

• Overall subscriber base in Russia increased by 5.0

million new subscribers (+7.2% y-o-y) to 74.5 million

resulting from:

- pro-active subscriber acquisition efforts in the B2C

and B2B segments and new marketing campaign

- upgrade of existing tariff plans and options

- dealer contract with Svyaznoy, which provides

access to an additional attractive customer base

• Data service user base expanded by 10.0% y-o-y to 29.6

million users accounting for almost 40% of the overall

subscriber base

– It was driven by effective promotion of mobile data

services, including Internet tariff offerings aimed at

converting ‘pure’ voice users into data users, and

supported by higher penetration of data-enabled

devices with the data-enabled devices on MegaFon

network exceeding 54%

Share of data users in overall subscriber base, %

38.7% 39.1% 38.6% 39.2% 39.7%

▲ 10.0%y-o-y

▲ 7.2%y-o-y

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30

DSU(2) & APPMB(3)

DATA ARPU (ARPDU(4))

Drivers of Russia total wireless services revenues: DSU and APPMB

Results provided on this page cover only the Russian business

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) Operating KPIs presented here vary from those reported earlier due to change of methodology for data service users calculation.

Please refer to our Q4 and FY 2015 Results press release for reconciliation details (2) Total number of megabytes transferred during a given period divided by average number of data subscribers during such period, divided by number of months in such period; (3) ARPDU for a given period divided by DSU in such period; (4) Total data revenues in a given period divided by average number of data service subscribers during such period, divided by number of months in such period

• Strong increase of DSU (+23.4% y-o-y) in Q1 2016 resulted

from:

– upgrade of tariff and internet options with higher mobile

data allowances

– promotion of mobile data offerings and new tariff

initiatives

– promotion of tablets (complete plug-and-play packaged

solutions) and smartphones in controlled retail stores

– growing penetration of data-enabled devices on

MegaFon network to more than 54% as of the end of the

quarter

– intensive roll-out of the 4G/LTE network resulting in a

higher share of 4G traffic, amounting to 40% of total

traffic

– continued increase in 4G-enabled devices registered on

MegaFon network reaching 8.5 million

• APPMB decreased by RUB 0.01 to RUB 0.06

• ARPDU increased by 5.9% y-o-y due to organic growth in

data traffic usage on the back of increasing customer

demand for larger data packs, which became more

affordable

219232

244 238 232

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

3,195 3,113 3,1853,638

3,942

0.07 0.07 0.08 0.07 0.06

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Growth▲23.4 %

Growth▲5.9%

RUB per month

DSU, Mb/month APPMb, RUB

Data revenue operating statistics

Quarterly data Quarterly data

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31Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed.

32.01.2

(1.3) (0.5)(1.1)

30.2

OIBDAQ1 2015

Revenue Cost of revenue Sales &Marketing

General &Administrative

OIBDAQ1 2016

▼ (0.5%)

OIBDA (RUB bn)

6.5%1.6% +13.3% +6.0%

Key factors influencing OIBDA margin

• In Q1 2016, OIBDA decreased by 5.4% y-o-y, while

OIBDA margin declined by 3.0 p.p. y-o-y to 40.2%

• The following factors influenced OIBDA:

- Gross profit decreased by 0.2% y-o-y due to higher

cost of revenues (+6.5% y-o-y), as gross profit margin

declined to 71.8%

- Sales & marketing expenses increased by 13.3% y-o-y

mainly a result of higher dealer commissions due to a

growing number of subscribers, including those

acquired via the Svyaznoy retail chain

- General & administrative expenses grew by 6.0% due

to:

– increased rent and utilities expenses resulting from

higher office rent costs, our network expansion and

increase in utility costs

– higher radio frequency costs resulting from the

change in methodology of fees calculation by

Roscomnadzor

y-o-y growth

Key drivers of OIBDA margin

Lower▼ 5.4 %

Gross profit

Key components

OIBDA margin

(%)

Gross profit margin43.2% 40.2% ▼3.0 p.p.▼ 0.6 p.p ▼ 1.1 p.p.

S&M as % of revenue

G&A as % of revenue

y-o-y decrease

▼ 1.3 p.p

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32

16%

84%

RUB USD

Liquidity(1) currency split

Net debt build-up, RUB bn As of 31 Dec 2015 As of 31 Mar 2016 Change

Cash and cash equivalents 17.5 15.6 (1.9)

Short-term investments 20.2 18.7 (1.5)

Total debt 218.5 208.2 (10.3)

Long-term debt 172.6 170.3 (2.3)

Short-term debt 45.9 37.9 (8)

Net debt 180.8 173.9 (6.9)

• In Q1 2016 MegaFon retained a comfortable level of

leverage

– Net debt/LTM OIBDA at 1.33x level at the end of Q1

2016

• Market volatility risks mitigation through keeping

liquidity in FX

– Over 80% of cash held in hard currencies

Net debt and liquidity evolution

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) — Liquidity is calculated as the sum of Cash @ cash equivalents and Short-term investments(2) — c. 0,1% in EUR for operating purposes

129.1 113.6 123.0

180.8 173.9

0.94x0.82x

0.90x

1.37x 1.33x

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

RUB bn / (x)

Net debt Net debt/LTM OIBDA

Growth▲ 0.39x

Net debt and Net debt/LTM OIBDA

(2)

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33

Debt portfolio structure

Debt profile

• Continued effort to keep predominant portion of the

debt portfolio in RUB

- RUB financings represent over 50% of the debt

portfolio

- Significant expansion of USD hedged portion of the

portfolio following the Company’s implementation of

a BoD approved hedging programme in March 2016

• No short-term refinancing risk

- c.50% of the Company’s debt becomes due within 3Y

tenor or later

21%

24%34%

10%

11%

61%9%

28%

2%

44%

39%

17%

47%

35%

18%

31-D

ec-2

015

By currency (1)By instrument By maturity

Bonds

Bank Loans

Equipment Financing 3 Years

1 Year

5 Years and Longer

4 Years

2 Years

EUR

RUB

USD Hedged(2)

64%18%

15%3%

18%

33%26%

10%

13%

31-M

ar-2

016

% of total

USD

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) — On nominal basis; (2 ) — Including structured and plain vanilla FX hedges

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34

Flat to low single digit y-o-y growth

RUB 120-126bn

Up to RUB 70bn

Revenue

OIBDA

CAPEX

Outlook for 2016

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Out

look

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2016

Key

Hig

hlig

hts

Revised

Reiterate

Reiterate

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Appendix

4

MegaFon’s headline tariffs (Moscow region) (1/2)TARIFF NAME

MegaFon -All included S

PRICE

MegaFon -All included M

MegaFon -All included L

300 RUB/ month• 300 minutes

• 2 GB of 3G, 4G+ traffic

• 200 SMS

• 1 free movie and channels on MegaFon TV

FEATURES

500 RUB/ month

• 550 minutes


• 400 SMS

• 2 free movies and channels on MegaFon TV

800 RUB/ month

• 1,000 minutes in Russia


• 1,000 SMS


BEYOND THE PACKAGE

• To MegaFon subs in Russia – 0 RUB/min

• To other subs of Moscow region – 1.6 RUB/min

• All outgoing calls to other regions of Russia – 3 RUB/min

Bun

dled

tar

iffs

Pop

ular

tari

ffs Switch to zero

Everything is simple 0 RUB/ month

• Outgoing calls to MF subs of Moscow region –0 RUB/ min

• Outgoing calls to other subs of Moscow region – 2.5 RUB/ min

• Outgoing call on not MG subs of Moscow region – 1.6 RUB/min

• Outgoing calls to other subs in Russia – 3.9 RUB/min

0 RUB/ month • All outgoing calls to other regions of Russia – 3 RUB/min

• Not applicable

MegaFon -All included VIP 2,700 RUB/ month



• 5,000 SMS


Fre

e o

n-ne

t ca

lls

in R

uss

ia













1,200 RUB/ month



• 2,000 SMS


MegaFon -All included XL

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MegaFon’s headline tariffs (Moscow region) (2/2)

MegaFon - Internet XS

350 RUB/ month

• 3 GB of traffic

• Maximum speed is not limited


590 RUB/ month

890 RUB/ month

Inte

rnet

tari

ffs

opti

ons

• 16 GB of traffic*



• 36 GB of traffic*



• Once a plan data allowance isused, the Internet access willautomatically be suspendeduntil the next calendar monthor until the plan is upgradedwith other options

(*) 50% of traffic is available from 8.00 am to 00.59 am, the rest 50% of traffic is available from 1.00 am to 7.59 am

(**) Amount of traffic available is unlimited from 1.00 am to 7.59 am, 30 GB of traffic is available from 8.00 am to 00.59 am

(***) Valid only within 12 months from the date of the purchase of service under the special offer

TARIFF OPTION NAME PRICE FEATURES BEYOND THE PACKAGE

190 RUB/ month – 1st month7 RUB/day – from 2nd month

1,290 RUB/ month

• 70 MB of traffic per day


• Unlimited amount of traffic**



Roa

min

gta

riff

san

dop

tion

s

Around the world- Roaming tariff 9 RUB/ day• Europe, CIS: incoming, outgoing calls – 13 RUB/min / SMS – 11 RUB/ sms

• Other countries: incoming, outgoing call – 19 or 43 RUB/ min / SMS – 14 RUB/ sms

Whole world – voice tariff option 39 RUB/ day • Incoming calls - 0 RUB/ min from 0 to 30 minutes, from 31st minute – according to the roaming price list of the country of location

Internet abroad – data tariff option Depends on country• 10 MB of traffic per day - from 49 to 1990 RUB per day (Europe – 129 RUB/ day)

• 30 MB of traffic per day – from 129 to 4990 RUB per day (Europe – 329 RUB/day)

MegaFon - Internet S

MegaFon - Internet M

MegaFon - Internet L

MegaFon - Internet XL

Internet Tablet S(special offer, valid till 12-Jun-2016) 400 RUB/ month

• 4 GB of traffic + 3 GB of traffic monthy free of charge***



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Contact Information

MegaFon Investor Relations30 Kadashevskaya embankmentMoscow, 115035, RussiaTel.: +7 495 926 2012Email: [email protected]: corp.megafon.com