20-F 1 d339641d20f.htm FORM 20-F Form 20-F
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

 

¨ Registration Statement Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934

OR

 

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2011

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

OR

 

¨ Shell Company Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-34694

VIMPELCOM LTD.

 

(Exact name of registrant as specified in its charter)

Bermuda

 

(Jurisdiction of incorporation or organization)

Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands

 

(Address of principal executive offices)

Jeffrey D. McGhie

Group General Counsel

Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands

Tel: +31 20 797 7200

Fax: +31 20 797 7201

 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class         Name of Each Exchange on Which Registered

American Depositary Shares, or ADSs, each
representing one common share

      New York Stock Exchange

Common shares, US$ 0.001 nominal value

      New York Stock Exchange*

 

* Listed, not for trading or quotation purposes, but only in connection with the registration of ADSs pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

1,628,199,135 common shares, US$ 0.001 nominal value.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x            Accelerated filer ¨            Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ¨            International Financial Reporting Standards as issued by the International Accounting Standards Board x Other ¨

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ¨             Item 18 x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x


Table of Contents

TABLE OF CONTENTS

 

ITEM 1.*  

Identity of Directors, Senior Management and Advisers

     7   
ITEM 2.*  

Offer Statistics and Expected Timetable

     7   
ITEM 3.  

Key Information

     7   
ITEM 4.  

Information on the Company

     41   
ITEM 4A.  

Unresolved Staff Comments

     129   
ITEM 5.  

Operating and Financial Review and Prospects

     129   
ITEM 6.  

Directors, Senior Management and Employees

     173   
ITEM 7.  

Major Shareholders and Related Party Transactions

     184   
ITEM 8.  

Financial Information

     190   
ITEM 9.  

The Offer and Listing

     191   
ITEM 10.  

Additional Information

     192   
ITEM 11.  

Quantitative and Qualitative Disclosures About Market Risk

     207   
ITEM 12.  

Description of Securities other than Equity Securities

     208   
ITEM 13.  

Defaults, Dividend Arrearages and Delinquencies

     210   
ITEM 14.  

Material Modifications to the Rights of Security Holders and Use of Proceeds

     210   
ITEM 15.  

Controls and Procedures

     210   
ITEM 16A.  

Audit Committee Financial Expert

     211   
ITEM 16B.  

Code of Ethics

     211   
ITEM 16C.  

Principal Accountant Fees and Services

     211   
ITEM 16D.  

Exemptions from the Listing Standards for Audit Committees

     212   
ITEM 16E.  

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     212   
ITEM 16F.  

Change in Registrant’s Certifying Accountant

     212   
ITEM 16G.  

Corporate Governance

     212   
ITEM 17.**  

Financial Statements

     214   
ITEM 18.  

Financial Statements

     214   
ITEM 19.  

Exhibits

     215   

 

* Omitted because the item is not required.
** We have responded to Item 18 in lieu of this item.

 

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EXPLANATORY NOTE

References in this Annual Report on Form 20-F to “VimpelCom” and the “VimpelCom Group,” as well as references to “our company,” “the company,” “our group,” “we,” “us,” “our” and similar pronouns, are references to VimpelCom Ltd., an exempted company limited by shares registered in Bermuda, and its consolidated subsidiaries. All section references appearing in this Annual Report on Form 20-F are to sections of this Annual Report on Form 20-F, unless otherwise indicated.

On April 15, 2011, we completed our acquisition of 100% of Wind Telecom S.p.A., or “Wind Telecom” (or together with its consolidated subsidiaries, the “Wind Telecom Group”) and its interests in Orascom Telecom Holding S.A.E, or “OTH,” and WIND Telecomunicazioni S.p.A., or “WIND Italy.” Wind Telecom is an international provider of mobile and fixed-line telecommunications and Internet services with operations in Europe, North America, Africa and Asia. We refer to the acquisition of Wind Telecom in this Annual Report on Form 20-F as the “Wind Telecom Transaction.” As we did not consolidate Wind Telecom into our financial statements until the effective acquisition date, the historical financial and operating data of VimpelCom set forth in this Annual Report on Form 20-F do not reflect Wind Telecom’s results prior to April 15, 2011, unless otherwise indicated.

In October 2009, Telenor ASA, the parent company of the Telenor Group, and Altimo Holdings & Investments Ltd., or “Altimo Holdings” (or together with its consolidated subsidiaries, “Altimo”), a member of the Alfa Group Consortium, or the “Alfa Group,” announced that they agreed to combine their ownership of OJSC “Vimpel-Communications,” or “OJSC VimpelCom,” and Private Joint Stock Company “Kyivstar,” or “Kyivstar,” under a new company called VimpelCom Ltd. We refer to the combination in this Annual Report on Form 20-F as the “VimpelCom Ltd. Transaction.” The VimpelCom Ltd. Transaction involved a series of transactions, including exchange offers by VimpelCom Ltd. to holders of OJSC VimpelCom shares, including shares represented by ADSs. On April 21, 2010, all conditions of the exchange offers were satisfied, and VimpelCom Ltd. acquired approximately 98.0% of OJSC VimpelCom’s outstanding shares, including shares represented by ADSs. Immediately following completion of the exchange offers, subsidiaries of Telenor and Altimo caused their direct and indirect interests in Kyivstar to be transferred to VimpelCom Holdings B.V., or “VimpelCom Holdings.” On May 14, 2010, OJSC VimpelCom’s ADSs were delisted from the NYSE, and on June 2, 2010, OJSC VimpelCom’s shares were excluded from the list of traded securities at the Open Joint Stock Company Russian Trading System Stock Exchange. On August 6, 2010, VimpelCom Ltd. completed the acquisition of all of OJSC VimpelCom’s shares, including those represented by ADSs, from OJSC VimpelCom’s remaining minority shareholders by way of a squeeze-out process under Russian law commenced on May 25, 2010.

This Annual Report on Form 20-F includes audited consolidated financial statements as of and for the years ended December 31, 2011, 2010 and 2009 prepared in accordance with International Financial Reporting Standards, or “IFRS,” as issued by the International Accounting Standards Board, or “IASB,” and presented in U.S. dollars. As a result of the VimpelCom Ltd. Transaction, VimpelCom Ltd. is as of April 21, 2010, the accounting successor to OJSC VimpelCom, and accordingly, accounting data and disclosure relating to the period prior to April 21, 2010 in VimpelCom Ltd.’s IFRS financial statements represent accounting data and disclosure of OJSC VimpelCom except for equity, which was restated to reflect the capital structure of VimpelCom Ltd. The historical operating data for periods prior to April 21, 2010, the date on which the VimpelCom Ltd. Transaction was completed, represents the historical operating data of OJSC VimpelCom. See also “Item 5—Operating and Financial Review and Prospects—Factors Affecting Comparability of Prior Periods.”

In this Annual Report on Form 20-F, references to “€,” “EUR,” or “Euro” are to the lawful currency of the member states of the European Union that adopt the single currency in accordance with the Treaty of Rome which established the European Community, as amended, references to “Russian rubles” or “rubles” or “RUB” are to the lawful currency of the Russian Federation, references to “US$ “ or “$” or “USD” or “U.S. dollars” are to the lawful currency of the United States of America and references to “DZD” are to the lawful currency of Algeria. References to “LIBOR” are to the London Interbank Offered Rate, references to “MosPRIME” are to the Moscow Prime Offered Rate, references to “KIBOR” are to the Karachi Interbank Offered Rate, references to “AB SEK” are to AB Svensk Exportkredit and references to “Rendistato” are to the weighted average yield on a basket of Italian government securities produced and published by Bank of Italy.

In addition, the discussion of our business and the telecommunications industry in this Annual Report on Form 20-F contains references to certain terms specific to our business, including numerous technical and industry terms. Such terms are defined below:

 

   

References to “ADSL” are to asymmetric digital subscriber line.

 

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References to “ANOs” are to alternative network operators.

 

   

References to “ARPU” are to the monthly average revenue per mobile subscriber.

 

   

References to “BITS” are to basic international telecommunications service, a type of license.

 

   

References to “BU-LRIC” are to bottom-up long-run incremental cost.

 

   

References to “CAMEL” are to a customized application for mobile network enhanced logic, an intranetwork prepaid roaming service.

 

   

References to “CLECs” are to competitive local exchange carriers.

 

   

References to “CPR” are to customer premises equipment.

 

   

References to “CUG” are to closed user group.

 

   

References to “DDos” are to distributed denial of service.

 

   

References to “DLD” are to domestic long distance.

 

   

References to “DSLAMs” are to digital subscriber line access multiplexers.

 

   

References to “DSR” are to direct selling representatives.

 

   

References to “DVR” are to digital video recorder.

 

   

References to “DWDM” are to dense wavelength division multiplexing.

 

   

References to “FTN” are to a Federal Transit Network.

 

   

References to “FTTB” are to fiber to the building.

 

   

References to “FMTN” are to fixed mobile technological network.

 

   

References to “GSM” are Global System for Mobile Communications standard.

 

   

References to “GSM-900” are to networks that provide mobile telephone services using GSM in the 900MHz frequency range.

 

   

References to “GSM-900/1800” are to dual band networks that provide mobile telephone services using the GSM standard in the 900 MHz and 1800 MHz frequency ranges.

 

   

References to “GSM-1800” are to networks that provide mobile telephone services using GSM in the 1800 MHz frequency range.

 

   

References to “HD” are to high definition.

 

   

References to “HSDPA” are to High Speed Downlink Packet Accesses, which is a 3G mobile telephony communications protocol in the High-Speed Packet Access, or “HSPA,” family.

 

   

References to “ILD” are to international long distance.

 

   

References to “ILEC” are to incumbent local exchange carriers.

 

   

References to “IMSI” are to international mobile subscriber identification.

 

   

References to “IP” are to Internet Protocol.

 

   

References to “IP VPN” are to IP virtual private network.

 

   

References to “ISDN” are to integrated services digital network.

 

   

References to “ISP” are Internet service provider.

 

   

References to “LAN” are to local area network.

 

   

References to “LLU” are to local loop unbundling. In Italy, this is the regulatory process of allowing multiple telecommunications operators to use connections from Telecom Italia’s local exchanges to the customer’s premises.

 

   

References to “LTE” are to long term evolution, a mobile access technology.

 

   

References to “MEN” are to metropolitan Ethernet technology.

 

   

References to “MMS” are to multimedia messaging service.

 

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References to “mobile services” are to our wireless voice and data transmission services but excluding WiFi.

 

   

References to “MNP” are to mobile number portability.

 

   

References to “MOU” are to the monthly average minutes of use per mobile subscriber.

 

   

References to “MPLS” are to multiprotocol label switching.

 

   

References to “MVNOs” are to mobile virtual network operators.

 

   

References to “NGAN” are to next generation access network.

 

   

References to “PBX” are to private branch exchange.

 

   

References to “PSTN” are to public switched telephone network.

 

   

References to “REDs” are to radio electronic devices.

 

   

References to “RBT” are to ringback tones, which are customized ringtones.

 

   

References to “SaaS” are to software as a service.

 

   

References to “SLA” are to service level agreement.

 

   

References to “SDH” are to synchronous digital hierarchy technology.

 

   

References to “SMS” are to short messaging service.

 

   

References to “STBs” are to set-top-boxes.

 

   

References to “TDM” are to time division multiplexing.

 

   

References to “TFO” are to tandem free operation.

 

   

References to “TrFO” are to transcorder free operation.

 

   

References to “UMTS” are to Universal Mobile Telecommunications System.

 

   

References to “USB” are to Universal Serial Bus.

 

   

References to “USO” are to universal service obligations.

 

   

References to “UTN” are to telephone urban set.

 

   

References to “VoIP” are to voice over Internet protocol.

 

   

References to “VPN” are to virtual private network.

 

   

References to “VSAT” are to very small aperture terminal.

 

   

References to “VULA” are to virtual unbundling local access.

 

   

References to “WAN” are to wide area network.

 

   

References to “WiMax” are to the worldwide interoperability for microwave access communication standard.

 

   

References to “WLR” are to wholesale line rental.

 

   

References to “3G” technologies are to third generation mobile technologies, including UMTS.

 

   

References to “4G” technologies are to fourth generation mobile technologies, including LTE and WiMax.

Certain amounts and percentages that appear in this Annual Report on Form 20-F have been subject to rounding adjustments. As a result, certain numerical figures shown as totals, including in tables, may not be exact arithmetic aggregations of the figures that precede or follow them.

Non-GAAP Financial Measures

        Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. VimpelCom calculates adjusted EBITDA as profit for the year before depreciation, amortization, impairment loss, finance costs, income tax expense and the other line items reflected in the reconciliation table in “Item 3—Key Information—A. Selected Financial Data” below. Our consolidated adjusted EBITDA includes certain reconciliation adjustments necessary because our Russia Business Unit and Europe & North America Business Unit exclude certain expenses from their adjusted EBITDA. As result of the reconciliations, our consolidated adjusted EBITDA differs from the aggregation of adjusted EBITDA of each of our business units. Adjusted EBITDA margin is calculated as adjusted EBITDA divided by total operating revenues. Adjusted EBITDA and adjusted EBITDA margin should not be considered in isolation or as a substitute for analyses of the results as reported under IFRS. Our management uses adjusted EBITDA and adjusted EBITDA margin as supplemental performance measures and believes that adjusted EBITDA and adjusted EBITDA margin provide useful information to investors because they are indicators of the strength and performance of the company’s business operations, including its ability to fund discretionary spending, such as capital expenditures, acquisitions and other investments, as well as indicating its ability to incur and service debt. In addition, the components of adjusted EBITDA and adjusted EBITDA margin include the key revenue and expense items for which the company’s operating managers are responsible and upon which their performance is evaluated. Adjusted EBITDA and adjusted EBITDA margin also assist management and investors by increasing the comparability of the company’s performance against the performance of other telecommunications companies that provide EBITDA (earnings before interest, taxes, depreciation and amortization) or OIBDA (operating income before depreciation and amortization) information. This increased comparability is achieved by excluding the potentially inconsistent effects between periods or companies of depreciation, amortization and impairment losses, which items may significantly affect operating profit between periods. However, our adjusted EBITDA results may not be directly comparable to other companies’ reported EBITDA or OIBDA results due to variances and adjustments in the components of EBITDA (including our calculation of adjusted EBITDA) or calculation measures. Additionally, a limitation of EBITDA’s or adjusted EBITDA’s use as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues or the need to replace capital equipment over time. Reconciliation of adjusted EBITDA to profit for the year, the most directly comparable IFRS financial measure, is presented in “Item 3—Key Information—A. Selected Financial Data” below.

 

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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 20-F contains “forward-looking statements,” as this phrase is defined in Section 27A of the U.S. Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Forward-looking statements are not historical facts and can often be identified by the use of terms like “estimates,” “projects,” “anticipates,” “expects,” “intends,” “believes,” “will,” “may,” “should” or the negative of these terms. All forward-looking statements, including discussions of strategy, plans, objectives, goals and future events or performance, involve risks and uncertainties. Examples of forward-looking statements include:

 

   

our strategy to generate sufficient net cash flow in order to meet our debt service obligations;

 

   

our plans to develop and provide integrated telecommunications services to our customers, increase fixed and mobile telephone use and expand our operations;

 

   

our ability to execute our business strategy successfully and achieve the expected benefits from our existing and future acquisitions;

 

   

our ability to extract anticipated synergies or to integrate an acquired business, including Wind Telecom, into our group in a timely and cost-effective manner;

 

   

our expectations as to pricing for our products and services in the future, improving the total average monthly service revenues per subscriber and our future operating results;

 

   

our ability to meet our projected capital requirements;

 

   

our ability to meet license requirements and to obtain, maintain, renew or extend licenses, frequency allocations and frequency channels and obtain related regulatory approvals;

 

   

our ability to obtain and maintain interconnect agreements; and

 

   

other statements regarding matters that are not historical facts.

While these statements are based on sources believed to be reliable and on our management’s current knowledge and best belief, they are merely estimates or predictions and cannot be relied upon. We cannot assure you that future results will be achieved. The risks and uncertainties that may cause our actual results to differ materially from the results indicated, expressed or implied in the forward-looking statements used in this Annual Report on Form 20-F include:

 

   

risks relating to changes in political, economic and social conditions in each of the countries in which we operate;

 

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in each of the countries in which we operate, risks relating to legislation, regulation and taxation, including laws, regulations, decrees and decisions governing the telecommunications industry, currency and exchange controls and taxation legislation, and their official interpretation by governmental and other regulatory bodies and courts;

 

   

risks that various courts or regulatory agencies in which we are involved in legal challenges or appeals may not find in our favor;

 

   

risks relating to our company, including demand for and market acceptance of our products and services, regulatory uncertainty regarding our licenses, frequency allocations and numbering capacity, constraints on our spectrum capacity, availability of line capacity and competitive product and pricing pressures;

 

   

risks associated with discrepancies in subscriber numbers and penetration rates caused by differences in the churn policies of mobile operators; and

 

   

other risks and uncertainties.

These factors and the other risk factors described in “Item 3—Key Information—D. Risk Factors” are not necessarily all of the factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our future results. Under no circumstances should the inclusion of such forward looking statements in this Annual Report on Form 20-F be regarded as a representation or warranty by us or any other person with respect to the achievement of results set out in such statements or that the underlying assumptions used will in fact be the case. The forward-looking statements included in this Annual Report on Form 20-F are made only as of the date of this Annual Report on Form 20-F. We cannot assure you that projected results or events will be achieved. Except to the extent required by law, we disclaim any obligation to update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.

 

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PART I

 

ITEM 1. Identity of Directors, Senior Management and Advisers

Not required.

 

ITEM 2. Offer Statistics and Expected Timetable

Not required.

 

ITEM 3. Key Information

A. Selected Financial Data

The following selected consolidated financial data for the three years ended December 31, 2011 are derived from our historical consolidated financial statements which have been audited by Ernst & Young Accountants LLP, an independent registered public accounting firm, for the years ended December 31, 2011 and 2010, and by Ernst & Young LLC, an independent registered public accounting firm, for the year ended December 31, 2009. The data should be read in conjunction with our audited consolidated financial statements and related notes include elsewhere in this Annual Report on Form 20-F and the financial information in “Item 5—Operating and Financial Review and Prospects.” As a result of the VimpelCom Ltd. Transaction, VimpelCom Ltd. is the accounting successor to OJSC VimpelCom, and accordingly, accounting data and disclosure relating to periods prior to April 21, 2010 represent accounting data and disclosure of OJSC VimpelCom, except for equity which was restated to reflect the capital structure of VimpelCom Ltd. In addition, accounting data and disclosure relating to periods prior to April 15, 2011 do not include the Wind Telecom Group. We omit selected financial information for the earliest two years of the five year period ended December 31, 2011 because we adopted IFRS in 2010 and accordingly have only three years of selected consolidated financial data prepared in accordance with IFRS as issued by the IASB.

 

     Years ended December 31,  
     2011     2010     2009  
     (In millions of US dollars, except per
share amounts)
 

Service revenues

     19,579        10,291        8,691   

Sale of equipment and accessories

     516        194        110   

Other revenues

     167        37        12   
  

 

 

   

 

 

   

 

 

 

Total operating revenues

     20,262        10,522        8,813   
  

 

 

   

 

 

   

 

 

 

Operating expenses

      

Service costs

     4,962        2,251        1,895   

Cost of equipment and accessories

     663        217        111   

Selling, general and administrative expenses

     6,381        3,198        2,482   

Depreciation

     2,726        1,403        1,190   

Amortization

     2,059        610        440   

Impairment loss

     527        —          —     

Loss on disposals of non-current assets

     90        49        77   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     17,408        7,728        6,195   
  

 

 

   

 

 

   

 

 

 

Operating profit

     2,854        2,794        2,618   
  

 

 

   

 

 

   

 

 

 

Finance costs

     1,586        536        603   

Finance income

     (120     (69     (58

Other non-operating losses/(gains)

     308        (35     69   

Shares of loss/(profit) of associates and joint ventures accounted for using the equity method

     35        (90     (3

Net foreign exchange loss

     190        5        404   
  

 

 

   

 

 

   

 

 

 

Profit before tax

     854        2,447        1,603   
  

 

 

   

 

 

   

 

 

 

Income tax expense

     585        574        431   
  

 

 

   

 

 

   

 

 

 

Profit for the year

     269        1,873        1,172   
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

Non-controlling interest

     (274     67        30   

The owners of the parent

     543        1,806        1,142   
  

 

 

   

 

 

   

 

 

 
     269        1,873        1,172   
  

 

 

   

 

 

   

 

 

 

Earnings per share

      

Basic, profit for the year attributable to ordinary equity holders of the parent

   $ 0.36      $ 1.50      $ 1.13   

Diluted, profit for the year attributable to ordinary equity holders of the parent

   $ 0.36      $ 1.50      $ 1.13   

Weighted average number of common shares (millions)

     1,524        1,207        1,013   

Dividends declared per share

   $ 0.80      $ 0.80      $ 0.30   

 

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     At December 31,  
     2011     2010     2009  
     (In millions of US dollars)  

Consolidated balance sheets data:

      

Cash and cash equivalents

     2,325        885        1,451   

Working capital (deficit)(1)

     (3,074     (1,023     (562

Property and equipment, net

     15,165        7,299        5,861   

Intangible assets and Goodwill

     28,601        9,217        4,843   

Total assets

     54,039        19,505        14,618   

Total liabilities

     39,137        9,093        10,416   

Total equity

     14,902        10,412        4,202   

 

(1) Working capital is calculated as current assets less current liabilities.

 

     Years ended December 31,  
     2011      2010      2009  
     (In millions of US dollars)  

Other data:

        

Adjusted EBITDA *

     8,127         4,906         4,334   

 

* Adjusted EBITDA is a non-GAAP financial measure. Please see “Explanatory Note—Non-GAAP Financial Measures,” for more information on how we calculate adjusted EBITDA. Reconciliation of adjusted EBITDA to profit for the year, the most directly comparable IFRS financial measure, is presented below.

Reconciliation of Adjusted EBITDA to profit for the year

(Unaudited, in millions of US dollars)

 

     Years ended December 31,  
     2011     2010     2009  

Adjusted EBITDA

     8,127        4,906        4,334   

Reconciliation adjustments

     129        (48     (9

Depreciation

     (2,726     (1,403     (1,190

Amortization

     (2,059     (610     (440

Impairment loss

     (527     —          —     

Loss on disposals of non-current assets

     (90     (49     (77

Finance costs

     (1,587     (536     (603

Finance income

     120        69        58   

Shares of (loss)/profit of associates and joint ventures accounted for using the equity method

     (35     90        3   

Net foreign exchange loss

     (190     (5     (404

Income tax expense

     (585     (574     (431

Profit for the year

     269        1,873        1,172   

 

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SELECTED OPERATING DATA

The following selected operating data as of and for the years ended December 31, 2011, 2010 and 2009 has been derived from internal company sources. The selected operating data set forth below should be read in conjunction with our consolidated financial statements and their related notes included elsewhere in this Annual Report on Form 20-F and the section of this Annual Report on Form 20-F entitled “Item 5—Operating and Financial Review and Prospects.” The historical operating data for periods prior to April 21, 2010, the date on which the VimpelCom Ltd. Transaction was completed, represent the historical operating data of OJSC VimpelCom. The historical operating data for periods prior to April 15, 2011, the date on which the Wind Telecom Transaction was completed, exclude historical operating data of the Wind Telecom Group.

 

     As of December 31,  
     2011      2010      2009  

Selected company operating data (1):

        

End of period mobile subscribers (in millions):

        

Russia

     57.2         52.0         50.9   

Europe & North America

     21.4         —           —     

Africa & Asia

     82.1         0.7         0.4   

Ukraine

     24.8         24.4         2.0   

CIS

     19.7         15.6         13.2   

Total mobile subscribers

     205.2         92.7         66.5   

Mobile MOU (2)

        

Russia

     243         219         211   

Europe & North America

        

Italy

     197         —           —     

Africa & Asia

        

Algeria

     286         —           —     

Pakistan

     206         —           —     

Bangladesh

     209         —           —     

CAR

     47         —           —     

Burundi

     37         —           —     

Cambodia

     419         331         78   

Laos

     233         —           —     

Vietnam

     143         —           —     

Ukraine

     467         378         209   

CIS

        

Kazakhstan

     148         120         93   

Tajikistan

     229         179         173   

Uzbekistan

     425         386         314   

Armenia

     257         294         238   

Georgia

     207         137         138   

Kyrgyzstan

     303         258         164   

Mobile ARPU (2)

        

Russia

   US$ 11.0       US$ 10.8       US$ 10.1   

Europe & North America

   US$ 21.7         —           —     

Africa & Asia

   US$ 3.8       US$ 3.5         n/a   

Ukraine

   US$ 5.1       US$ 4.8       US$ 4.7   

CIS

   US$ 6.6       US$ 7.1       US$ 7.2   

Churn (as a percentage) (2)

        

Russia

     62.8         50.8         42.8   

Europe & North America

        

Italy

     28.3         —           —     

Africa & Asia

        

Algeria

     20.9         —           —     

Pakistan

     29.5         —           —     

Bangladesh

     18.5         —           —     

CAR

     102.0         —           —     

Burundi

     59.9         —           —     

Cambodia (3)

     128.0         167.0         —   (3) 

Laos

     258.0         —           —     

Vietnam

     158.0         —           —     

Ukraine

     22.3         29.5         81.0   

CIS

        

Kazakhstan

     47.4         43.5         46.3   

Tajikistan

     67.4         82.8         52.9   

Uzbekistan

     59.7         54.2         63.7   

Armenia

     87.6         67.6         58.6   

Georgia

     70.1         94.1         46.6   

Kyrgyzstan

     52.3         61.9         60.5   

End of period broadband subscribers (in millions):

        

Russia

     4.6         3.3         2.1   

Europe & North America

     6.6         —           —     

Africa & Asia

     —           —           —     

Ukraine

     0.4         0.2         0.1   

CIS

     0.7         0.1         —     

Total broadband subscribers

     12.3         3.7         2.2   

 

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(1) For information on how we calculate mobile subscriber data, mobile MOU, mobile ARPU, mobile churn rates and broadband subscriber data, please refer to the section of this Annual Report on Form 20-F entitled “Item 5—Operating and Financial Review and Prospects—Certain Performance Indicators.” Please note that the data presented above for our Europe & North America segment relate only to our operations in Italy, except for mobile subscriber data, which include the subscribers of our equity associate in Canada (0.4 million for 2011). The number of mobile subscribers for Africa & Asia includes subscribers of Telecel Zimbabwe (1.5 million for 2011), in which we have an equity investment and is accounted at cost.
(2) For Wind Telecom Group companies acquired on April 15, 2011, mobile MOU, ARPU and churn are calculated based on the full year.
(3) Churn figures for Cambodia in 2009 are not provided due to partial year consolidation.

B. Capitalization and Indebtedness

Not required.

C. Reasons for the Offer and Use of Proceeds

Not required.

D. Risk Factors

The risk factors below are associated with our company and our ADSs. Before purchasing our ADSs, you should carefully consider all of the information set forth in this Annual Report on Form 20-F and, in particular, the risks described below. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. In that case, the trading price of our ADSs could decline and you could lose all or part of your investment.

The risks and uncertainties below are not the only ones we face, but represent the risks that we believe are material. However, there may be additional risks that we currently consider not to be material or of which we are not currently aware and these risks could have the effects set forth above.

Risks Related to Our Business

Substantial leverage and debt service obligations may materially adversely affect our cash flow.

We have substantial amounts of indebtedness. As of December 31, 2011, the principal amount of our external debt for bank loans, bonds, equipment financing, and loans from others amounted to approximately US$26.8 billion.

In connection with the acquisition of Wind Telecom in April 2011, we incurred significant additional indebtedness to pay for the acquisition of Wind Telecom and to refinance debt of Wind Telecom entities that had to be refinanced because we acquired control. We refer to the acquisition of Wind Telecom in this Annual Report on Form 20-F as the “Wind Telecom Transaction.” For more information on the Wind Telecom Transaction, see “Item 4—Information on the Company—History and Development.” For more information on the debt agreements entered into by members of the VimpelCom Group in connection with the Wind Telecom Transaction, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities— Financings for the Wind Telecom Transaction.” In addition to our debt existing before the Wind Telecom Transaction and debt we incurred in connection with the Wind Telecom Transaction, in acquiring Wind Telecom we acquired entities with substantial debt that we did not refinance. This debt remains outstanding and further increases the leverage of the VimpelCom Group.

 

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Proceeds from debt obligations we have incurred or may incur that are loaned to our subsidiaries, including subsidiaries acquired in the Wind Telecom Transaction, may not be available to us, or repaid when needed, for support of our operations and payment of our debt service obligations. There can be no assurance that we will recover any amounts we lend to our subsidiaries. Furthermore, in the short to medium term we will not derive additional sources of cash flow or revenues from the Wind Telecom entities and will have to satisfy our debt service obligations from our operations in OJSC VimpelCom and Kyivstar. For more information regarding the Wind Telecom Transaction, our outstanding indebtedness and the outstanding indebtedness of Wind Telecom entities, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.”

Our substantial leverage, our lending to and refinancing of debt of our subsidiaries, including subsidiaries acquired in the Wind Telecom Transaction, and limits imposed by our debt obligations, including limits on subsidiaries we acquired in the Wind Telecom Transaction, could have significant negative consequences for our business. These factors could require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for dividends, working capital, capital expenditures, acquisitions, joint ventures and other purposes necessary for us to maintain our competitive position and placing us at a disadvantage in relation to competitors with less leverage and greater access to financial resources. These factors could also increase our vulnerability to, and limit our ability to respond to, general adverse economic and industry conditions, limit our ability to obtain additional financing, and increase the cost of such financing.

We must generate sufficient net cash flow in order to meet the substantial debt service obligations which we have following the Wind Telecom Transaction and may incur in the future, and we cannot assure you that we will be able to meet those obligations. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, we would be in default under the terms of our indebtedness, and the holders of our indebtedness would be able to accelerate the maturity of the indebtedness which in turn could cause defaults under our other indebtedness. This could also result in loss of any assets that secure this debt. If we do not generate sufficient cash flow from operations in attempting to meet our obligations, we may have to undertake alternative financing plans to alleviate liquidity constraints, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital expenditures or seeking additional capital. We cannot assure you that any refinancing or additional financing would be available on acceptable terms, or that assets could be sold, or if sold, that such sales would be on satisfactory terms, that the proceeds realized from those sales or refinancing would be sufficient to meet our obligations or that such sales or refinancing could be effected in time to alleviate financial constraints. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance debt on commercially reasonable terms, could materially adversely affect our business, financial condition, results of operations and business prospects.

Covenants in our debt agreements could impair our liquidity and our ability to expand or finance our future operations.

Agreements under which we borrow funds (as set forth in further detail in “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities”) contain a number of different covenants that impose on us certain operating and financial restrictions. Some of these covenants relate to our financial performance, such as the level of earnings, debt and assets. Other covenants limit the ability of, and in some cases prohibit, among other things, us or certain of our subsidiaries from incurring additional indebtedness, creating liens on assets, entering into business combinations or engaging in certain activities with companies within our group. A failure to comply with these covenants would constitute a default under these relevant agreements and could trigger cross payment default/cross acceleration provisions under some or all of these agreements discussed above. In the event of such a default, the debtor’s obligations under one or more of these agreements could, under certain circumstances, become immediately due and payable, which could have a material adverse effect on our business, our liquidity and our shareholders’ equity.

We may not be able to raise additional capital.

We may need to raise additional capital in the future, including through debt financing. The actual amount of debt financing that we will need to raise will be influenced by the actual pace of subscriber growth and growth in usage over the period, the pace of technological development, capital expenditures, our acquisition plans and our ability to continue to generate sufficient amounts of revenue and ARPU growth. If we incur additional indebtedness, the related risks that we now face could increase. Specifically, we may not be able to generate enough

 

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cash to pay the principal, interest and other amounts due under our indebtedness. In addition, in the future we may not be able to borrow money within the local or international capital markets on acceptable terms or at all. As a result, we may be unable to make desired capital expenditures, take advantage of investment opportunities, refinance existing indebtedness or meet unexpected financial requirements, and our growth strategy and liquidity may be negatively affected. This could cause us to be unable to repay indebtedness as it comes due, to delay or abandon anticipated expenditures and investments or otherwise limit operations, which could materially adversely affect our business, financial condition, results of operations and business prospects.

We are exposed to foreign currency exchange loss and convertibility risks.

A significant amount of our costs, expenditures and liabilities are denominated in U.S. dollars and Euros, including capital expenditures and borrowings, while a significant amount of our revenues are in currencies other than the U.S. dollar and Euro. As a result, we are exposed to higher foreign exchange loss risks related to the varying exchange rate of our local currencies against the U.S. dollar or Euro. Unless effectively hedged, these risks could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will be able to effectively hedge currency fluctuations due to the cost or availability of hedging instruments. For more information about the market risks we are exposed to as a result of foreign currency exchange rate fluctuations, see the section of entitled “Item 11—Quantitative and Qualitative Disclosures About Market Risk.” Also, the imposition of exchange controls or other similar restrictions on currency convertibility in our geographic areas of operation could limit our ability to convert currencies in a timely manner or at all, which could have a material adverse effect on our business, financial condition and results of operations.

We may not realize the anticipated benefits from acquisitions and we may assume unexpected or unforeseen liabilities and obligations or incur greater than expected liabilities in connection with acquisitions.

The actual outcome of our acquisitions and their effect on our company and its subsidiaries and the results of our operations may differ materially from our expectations as a result of the following factors, among others:

 

   

past and future compliance with the terms of the telecommunications licenses and permissions of the acquired companies, their ability to get additional frequencies and their past and future compliance with applicable laws, rules and regulations (including, without limitation, tax and customs legislation);

 

   

unexpected or unforeseen liabilities or obligations or greater than expected liabilities incurred prior to or after the acquisition, including tax, customs, indebtedness and other liabilities;

 

   

the acquired company’s inability to comply with the terms of its debt and other contractual obligations;

 

   

the acquired company’s ability to obtain or maintain favorable interconnect terms;

 

   

our inability to extract anticipated synergies or to integrate an acquired business into our group in a timely and cost-effective manner;

 

   

changes to the incumbent management personnel of our acquired companies or the possible deterioration of relationships with employees and customers as a result of integration;

 

   

exposure to foreign exchange risks that are difficult or expensive to hedge;

 

   

the acquired company’s inability to protect its trademarks and intellectual property and to register trademarks and other intellectual property used by such company in the past;

 

   

developments in competition within each jurisdiction, including the entry of new competitors or an increase in aggressive competitive measures by our competitors;

 

   

governmental regulation of the telecommunications industry in each jurisdiction, ambiguity in regulation and changing treatment of certain license conditions;

 

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political economic, social, legal and regulatory developments and uncertainties in each jurisdiction; and

 

   

claims by third parties challenging our ownership or otherwise.

For information about our acquisitions, please see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Investing Activities.”

Our rationale behind the Wind Telecom Transaction was based on certain beliefs and assumptions, among others, that the assets of the VimpelCom Group and Wind Telecom Group are complementary and that demand for mobile data services in its markets is set to grow significantly. If any of these fundamental beliefs or assumptions proves to be incorrect or if we are unable to effectively execute our strategy, the return on our substantial investment in Wind Telecom may not materialize and our business, financial condition and results of operations could be materially adversely affected.

Management of the growth from the Wind Telecom Transaction will require significant managerial and operational resources. We will in part rely on the existing Wind Telecom Group management team and employees to help us successfully manage our growth and operate in jurisdictions that are new to our group. However, there can be no assurance that we will be able to retain key employees of the Wind Telecom Group, and if we are unable to successfully manage our growth, our further development could be hampered and our business, financial condition and results of operations could suffer.

We may still pursue a strategy that includes additional expansion. Any future acquisitions or investments could be significant and in any case could involve risks inherent in assessing the value, strengths and weaknesses of such opportunities, particularly if we are unable to conduct thorough due diligence prior to the acquisition. Such acquisitions or investments may divert our resources and management time. We cannot assure you that any acquisition or investment could be made in a timely manner or on terms and conditions acceptable to us.

VimpelCom is a holding company and depends on the performance of its subsidiaries and their ability to make distributions to it.

VimpelCom is a holding company and does not conduct any revenue-generating business operations of its own. Its principal assets are the equity interests it owns in its operating subsidiaries, either directly or indirectly. As a result, it is dependent upon cash dividends, distributions, loans or other transfers it receives from its subsidiaries in order to make dividend payments to its shareholders (including holders of ADSs), to repay any debt it may incur, and to meet its other obligations. In some instances, VimpelCom needs guarantees from its subsidiaries to incur debt.

The ability of VimpelCom’s subsidiaries to pay dividends and make payments or loans to VimpelCom, and to guarantee VimpelCom’s debt, will depend on their operating results and may be restricted by, among other things, applicable corporate, tax and other laws and regulations. These laws and regulations include restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange restrictions in the jurisdictions in which VimpelCom’s subsidiaries operate. For example, our Ukrainian subsidiaries, Kyivstar and Storm, may be required to obtain individual licenses or approvals from the National Bank of Ukraine in order to pay us dividends. Kyivstar has successfully obtained such licenses and approvals for its dividend distributions in the past, but there is no guarantee it will be able to do so in the future. Our subsidiary in Algeria, Orascom Telecom Algérie s.p.a., or “OTA,” has been unable to repatriate certain dividends to foreign investors, including its parent company, during the pendency of the tax assessment by the Algerian Directions des Grandes Entreprises (Tax Department for Large-Scale Companies or “DGE”). In 2010, the Bank of Algeria effected an injunction that restricts all Algerian banks from engaging in foreign banking transactions on behalf of OTA, preventing OTA from transferring funds outside of Algeria, including by way of dividends or other distributions to OTH. For more information, see “—Legal and Regulatory Risks—The Algerian Government has made substantial tax and other claims against OTA which have harmed OTA’s business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH” below. In addition, a recent claim brought by “the Russian Federal Antimonopoly Service, or “FAS,” against two of our strategic shareholders in the Moscow Arbitration Court could prevent us from receiving dividends from OJSC VimpelCom. For more information the FAS claim, see “—Legal and Regulatory Risks—The FAS claim recently brought against two of our strategic shareholders could adversely impact on our business and the governance of our company.”

 

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VimpelCom’s subsidiaries operating under WIND Italy are restricted from paying dividends or making certain other payments to VimpelCom by existing covenants of the Wind Telecom Group, including in the senior notes issued by Wind Acquisition Holdings Finance S.A., or “WAHF SA,” dated December 15, 2009, in original principal amounts of €325.0 million and US$625.0 million, which prohibit outright any dividends above Wind Acquisition Holding Finance S.p.A., or “WAHF,” the immediate holding company of WIND Italy, until January 2014, when those notes convert to cash pay (rather than payment in kind) instruments. After January 2014, the WAHF SA notes and WIND Italy financings will continue to restrict upstream dividends, payments or loans to amounts permitted under restricted payment tests set out in the documents and when leverage to earnings ratios reach specified levels. For more detail on the WIND Italy financings, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.”

VimpelCom’s subsidiaries are separate and distinct legal entities. Any right that VimpelCom has to receive any assets of or distributions from any subsidiary upon its bankruptcy, dissolution, liquidation or reorganization, or to realize proceeds from the sale of the assets of any subsidiary, will be junior to the claims of that subsidiary’s creditors, including trade creditors.

We have a global strategy which is set by group leadership in our Amsterdam headquarters. For more information on our strategy, see “Item 4—Information on the Company—Strategy.” However, management at our local operations is responsible for executing many aspects of our strategy. This can be made more challenging given the broad geographic span of our operations and great cultural diversity among our local operations, which can make it more difficult to implement and maintain effective internal communication and reporting across the group. Local management’s failure to execute our group strategy effectively could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to maintain our favorable brand image, we may be unable to attract new subscribers and retain existing subscribers, leading to loss of market share and revenues.

We have expended significant time and resources building our “Beeline,” “Kyivstar,” “djuice,” “Wind,” “Infostrada,” “Mobilink,” “Leo,” “banglalink,” “Telecel,” and “Djezzy” brand images. Our ability to attract new subscribers and retain existing subscribers depends in part on our ability to maintain what we believe to be our favorable brand image. Negative rumors or other claims by governmental authorities, individual subscribers and third parties against us could materially adversely affect this brand image. In addition, consumer preferences change and our failure to anticipate, identify or react to these changes by providing attractive services at competitive prices could negatively affect our market share. We cannot assure you that we will continue to maintain a favorable brand image in the future. Any loss of market share resulting from any or all of these factors could negatively affect our business, financial condition and results of operations.

Our strategic partnerships and relationships to develop our business are accompanied by inherent business risks.

We are in, and may enter into additional, strategic partnerships and joint ventures with other companies to develop our business and expand our operations. We currently participate in strategic partnerships and joint ventures in a number countries where we operate, including Russia (Euroset), Kazakhstan (KaR-Tel and TNS-Plus LLP), Uzbekistan (Buzton JV LLC), Kyrgyzstan (Sky Mobile), Georgia (Mobitel), Cambodia (Sotelco/Beeline), Zimbabwe (Telecel) and Canada (WIND Mobile).

Our participation in each of our subsidiaries and affiliated companies varies from market to market, and we do not always have a majority interest in our affiliates companies. Our business, prospects, financial condition and results of operations may be materially and adversely affected if disagreements develop with our partners.

Our ability to withdraw funds, including dividends, from our participation in, and to exercise management control over, subsidiaries and investments may depend on the consent of partners. Further, failure to resolve any disputes with our partners in certain of our operating subsidiaries could restrict payments made by these operating subsidiaries to us and have an adverse effect on our business, prospects, financial condition and results of operations. In addition, agreements governing these arrangements contain, in some cases, change of control and similar provisions which, if triggered under certain circumstances could give other participants in these investments the ability to purchase our interests or enact other penalties.

 

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Emerging market strategic partnerships and joint ventures are often accompanied by risks, including in relation to:

 

   

the possibility that a strategic or joint venture partner or partners will default in connection with their obligations;

 

   

the possibility that a strategic or joint venture partner will hinder development by blocking capital increases and other decisions if that partner runs out of money, disagrees with our views on developing the business, or loses interest in pursuing the partnership or joint projects;

 

   

risk inherent in the business of the partnership or joint venture itself, such as funding and liquidity;

 

   

diversion of resources and management time;

 

   

potential joint and several or secondary liability for transactions and liabilities of the partnership or joint venture entity;

 

   

the difficulty of maintaining uniform standards, controls, procedures and policies; and

 

   

the loss of a strategic or joint venture partner and the associated benefits, such as insight into operating a business in an economic, social and political environment that is unfamiliar to us.

VimpelCom’s strategic shareholders may pursue different development strategies from us and from one another in the regions in which we operate, and this may hinder our ability to expand and/or compete in such regions and may lead to a deterioration in the relationship among our strategic shareholders.

Our company’s largest shareholders, Telenor, Altimo and Weather Investments II S.à r.l., or “Weather II” (from which we acquired Wind Telecom), and their respective affiliates, beneficially own, in the aggregate, approximately 83% of our outstanding voting shares. As a result, these shareholders, if acting together, may have the ability to determine the outcome of matters submitted to our shareholders for approval, including the acquisition of assets by us. The October 4, 2009 shareholders agreement among Telenor, Altimo and us in relation to our company, or the “VimpelCom Shareholders Agreement,” which terminated on December 10, 2011, included a voting arrangement that determined the composition of our supervisory board and granted each of Telenor and Altimo the right to appoint three of the nine members of our supervisory board and to influence the appointment of the remaining three members of our supervisory board. Although the VimpelCom Shareholders Agreement is no longer in effect, our largest shareholders nevertheless have sufficient voting rights to jointly elect a majority of our supervisory board, and they may in the future enter into arrangements similar to those present in the VimpelCom Shareholders Agreement. In addition, in April 2012 we were named as a third party in a claim brought by the FAS against Telenor East Holding II AS, or “Telenor East,” and Weather II in the Moscow Arbitration Court. Among other measures, FAS is asking the Moscow Arbitration Court to oblige VimpelCom, Telenor East and Altimo to enter into a shareholders agreement on substantially the same terms as the VimpelCom Shareholders Agreement. For more information on this claim, see “—Legal and Regulatory Risks—The FAS claim recently brought against two of our strategic shareholders could adversely impact on our business and the governance of our company” below.

Under our group’s corporate governance structure, significant corporate action on behalf of VimpelCom and/or its subsidiaries requires the prior approval of our supervisory board. Acting jointly, our largest shareholders’ nominees to the supervisory board could cause us to take corporate actions or block corporate decisions by VimpelCom or its subsidiaries, including with respect to our capital structure, financings and acquisitions, which may not be in the best interest of our minority shareholders, or other security holders.

 

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In the past, Telenor and Alfa Group have had different strategies from us and from one another in pursuing development in Ukraine and the CIS and other regions. For example, prior to the VimpelCom Ltd. Transaction, affiliates of Telenor and members of the Alfa Group of companies reportedly owned 56.5% and 43.5%, respectively, of Kyivstar. According to public reports, companies in the Telenor Group and the Alfa Group historically were involved in various disputes and litigations regarding their ownership of and control over Kyivstar. See also “—Litigation involving Telenor and Altimo, two of our largest shareholders, could lead to deterioration in their relationship and could have a material adverse effect on our business, financial condition, results of operations and prospects” below.

Weather II has retained some telecommunications assets that were not included within the scope of the Wind Telecom Transaction. We cannot assure you that Weather II will not compete in the future with us in those countries or markets where we have a presence. In addition, our operations in Pakistan and Bangladesh compete with Telenor. For more information, see “Item 4—Information on the Company—Description of Operations of the Africa & Asia Business Unit—Mobile Business in Africa & Asia—Competition-Mobile Business in Africa & Asia.”

We cannot assure you that we, the Telenor Group, the Alfa Group or the Weather Group will not choose to pursue different strategies, including in markets or countries where the Telenor Group, the Alfa Group or the Weather Group have a presence. Furthermore, if and to the extent that our strategic shareholders have different expansion strategies, it could lead to deterioration of their relationship which could have a material adverse effect on our business, financial condition, results of operations and business prospects.

Litigation involving Telenor and Altimo, two of our largest shareholders, could lead to deterioration in their relationship and could have a material adverse effect on our business, financial condition, results of operations and prospects.

During the past six years two of our largest shareholders, Telenor and Altimo, have been involved in various disputes and litigation regarding their ownership of and control over OJSC VimpelCom and Kyivstar. In October 2009, Telenor and Altimo entered into agreements under which, among other things, they agreed to dismiss or withdraw or to cause the dismissal or withdrawal of outstanding legal proceedings between, or involving, them and their respective affiliates, and reportedly they did so. More recently, Telenor and Altimo, have been involved in litigation regarding their ownership of and control over our company. On January 28, 2011, Telenor commenced arbitration proceedings against each of Altimo Holdings, Altimo Coöperatief U.A., or “Altimo Coöperatief” (a subsidiary of Altimo Holdings), and VimpelCom Ltd. for the stated purpose of enforcing its alleged pre-emptive rights under the VimpelCom Shareholders Agreement with respect to VimpelCom shares issued in the Wind Telecom Transaction. In this Annual Report on Form 20-F, we refer to these proceedings as the “Arbitration Proceedings.”

On February 15, 2012 Telenor notified the tribunal in the Arbitration Proceedings that it was withdrawing all of its claims against Altimo Holdings, Altimo Coöperatief and us. According to Telenor’s February 15, 2012 press release, Telenor withdrew its claims because it purchased 234,000,000 of Weather II’s VimpelCom convertible preferred shares, thus raising Telenor’s share of VimpelCom’s outstanding voting shares to 36.4% (Telenor’s stake has since been raised to 39.5%). On March 8, 2012, the tribunal dismissed all claims in the Arbitration Proceedings with prejudice. For more information on the Arbitration Proceedings, see “Item 4—Information on the Company—Legal Proceedings—Telenor Arbitration.” For more information on our largest shareholders, see “Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders.”

In addition, as a result of Altimo’s sale of 123,600,000 convertible preferred shares in June 2011, which reduced its voting rights in our company to below 25%, the VimpelCom Shareholders Agreement terminated on December 10, 2011. Termination of the VimpelCom Shareholders Agreement could result in further disputes between Telenor and Altimo.

Furture legal proceedings between Altimo and Telenor and the termination of the VimpelCom Shareholders Agreement could cause the relationship between Altimo and Telenor to deteriorate. As a result of the disputes among two of our largest shareholders and claims made against us, we could suffer material adverse effects on our business, financial condition, results of operations and prospects. For more information on the legal proceedings between Altimo and Telenor, see “Item 4—Information on the Company—Legal Proceedings—Telenor Arbitration.”

 

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A disposition by our strategic shareholders of their respective stakes in VimpelCom or a change in control of VimpelCom could harm our business.

Certain of our debt agreements have “change of control” provisions that may require us to make a prepayment if certain parties acquire beneficial or legal ownership of or control over more than 50.0% of our shares, which could occur if certain parties acquired more than 50.0% of our company. Generally, this change of control provision is not triggered as long as a combination of the Alfa Group, Telenor and/or Weather II (or other entity more than 50% owned by the Sawiris family) own more than 50% of our company. If a change of control is triggered and we fail to make any required prepayment, this could lead to an event of default, and could trigger cross default/cross acceleration provisions under certain of our other debt agreements. In such event, our obligations under one or more of these agreements could become immediately due and payable, which would have a material adverse effect on our business, financial condition and results of operations.

We derive benefits and resources from the participation of Telenor, Altimo and Weather II in our company. If Telenor, Altimo and/or Weather II were to dispose of its stake in our company, either voluntarily or involuntarily, we may be deprived of the benefits and resources that we derive from Telenor, Altimo and/or Weather II which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Industry

Our business is highly capital intensive and requires substantial and ongoing expenditures of capital, which, in the future, we may not be able to obtain on favorable terms or at all.

Our industry is highly capital intensive, and our success depends to a significant degree on our ability to keep pace with new developments in technology, to develop and market innovative products and to update our facilities and process technology. All of our operations have extensive capital expenditure programs that require substantial outlays. We may require additional capital in the future to finance our future growth and development, implement further marketing and sales activities, fund our ongoing research and development activities, implement new technological advances and meet our general working capital needs. The amount and timing of our capital requirements will depend on many factors, including acceptance of and demand for our products and services, the extent to which we invest in new technology and research and development projects, and the status and timing of competitive developments. We may require greater capital investments in shorter time frames than we have anticipated, and we or our operations may not have the resources to make such investments. If we do not have the resources for necessary capital expenditures, we may be required to raise additional debt or equity financing, which may not be available when needed on terms favorable to us or at all. If we are unable to obtain adequate funds on acceptable terms, we may be unable to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures, which could adversely affect our business, financial condition and results of operations.

Our revenues are often unpredictable and our revenue sources are short-term in nature.

Future revenues from our prepaid mobile subscribers, our primary source of revenues, and our contract mobile subscribers are unpredictable. We do not require our prepaid mobile subscribers to enter into long-term service contracts and cannot be certain that they will continue to use our services in the future. We require our contract mobile subscribers to enter into service contracts; however, many of these service contracts can be cancelled by the subscriber with limited advance notice and without significant penalty. Consumption of mobile telephone services is driven by the level of consumer discretionary income. Deterioration in the economic situation could cause subscribers to have less discretionary income, thus affecting their spending on our services. The loss of a larger number of subscribers than anticipated could result in a loss of a significant amount of expected revenues. Because we incur costs based on our expectations of future revenues, our failure to accurately predict revenues could adversely affect our business, financial condition, results of operations and business prospects.

We are in competitive industries and we may face greater competition as a result of market and regulatory developments.

The markets in which we operate are competitive in nature, and we expect that competition, especially in the least developed markets, will continue to increase. If we are unsuccessful in our marketing campaigns or the

 

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services we introduce are not well received by consumers, or in the event of any delays in developing our networks, we will not generate the revenue anticipated and our ARPU may decline, which may materially adversely affect our business, financial condition and results of operations. We cannot assure you that our revenue will grow in the future, as competition puts pressure on prices.

In addition, as the subscriber penetration rates increase and the markets in which we operate mature, mobile services providers, including us, may be forced to utilize more aggressive marketing schemes to retain existing subscribers and attract new ones. If this were to occur, we may choose to adopt lower tariffs, offer handset subsidies or increase dealer commissions, any or all of which could materially adversely affect our business, financial condition and results of operations.

Some of the markets in which we operate are already mature or approaching saturation and are characterized by high levels of competition. For more information on our markets and the competition we face, see “Item 4—Information on the Company—Description of Operations of the Russia Business Unit,” “—Description of Operations of the Europe & North America Business Unit,” “—Description of Operations of the Africa & Asia Business Unit,” “—Description of Operations of the Ukraine Business Unit,” and “—Description of Operations of the CIS Business Unit.”

In addition, as we expand the scope of our services, such as fixed-line residential and commercial broadband services, we may encounter a greater number of competitors who provide similar services. In the event we fail to successfully address challenges from our competition in new services, our financial condition and results of operations could be materially and adversely affected.

The issuance of additional telecommunications licenses or the implementation of new technology in any of the license areas in which we operate could also greatly increase competition and threaten our business. For example, in October 2007 the Italian government announced that operators could bid for 3.5 GHz radio frequencies (for the worldwide interoperability for microwave access communication standard, or “WiMax,” spectrum). Many of the larger Italian operators such as WIND Italy, Fastweb S.p.A. and Mediaset S.p.A withdrew from the tender. Although WiMax, which is a fixed wireless technology, has not reached a commercially viable scale yet, it is possible that it could emerge as an alternative and potentially dominant access technology for the provision of broadband access. Currently, fixed-line (i.e., fixed wireline) broadband is the dominant access technology in Italy, although WIND Italy, along with other operators, offer mobile Internet services. If WiMax emerges as a fully mobile technology and challenges the current fixed and mobile access technologies in the broadband market, the business of operators who have chosen not to invest in WiMax technology/spectrum may be materially adversely affected.

In addition, the liberalization of the regulations in areas in which we operate could also greatly increase competition and put pressure on our pricing. For example, the government of Armenia has recently liberalized the fixed–line market in Armenia, which will result in increased competition. If competitors are able to operate telecommunications networks that are more cost effective than ours, then they may have competitive advantages over us, which could harm our business.

Providers of traditional fixed-line telephone services and mobile operators that have obtained fixed-line licenses may compete more effectively with us. Former state-controlled telecommunications service providers have dominated the fixed-line market in many of the countries in which we operate. These companies have some competitive advantages over our fixed-line operations, including:

 

   

significant resources and greater market presence and network coverage;

 

   

brand name recognition, customer loyalty and goodwill; and

 

   

control over domestic transmission lines and over access to these lines by other participants.

Our competitors, particularly former state-controlled telecommunications service providers, may receive preferential treatment from the regulatory authorities and benefit from the resources of their shareholders, potentially giving them a substantial competitive advantage over us. Additionally, current or future relationships among our competitors and third parties may restrict our access to critical systems and resources. New competitors or alliances among competitors could rapidly acquire significant market share. We cannot assure you that we will be able to forge similar relationships or successfully compete against them.

 

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We could experience subscriber database piracy, which may materially adversely affect our reputation, lead to subscriber lawsuits, loss of subscribers or hinder our ability to gain new subscribers and thereby materially adversely affect our business.

We may be exposed to database piracy which could result in the unauthorized dissemination of information about our subscribers, including their names, addresses, home phone numbers, passport details and individual tax numbers. The breach of security of our database and illegal sale of our subscribers’ personal information could materially adversely impact our reputation, prompt lawsuits against us by individual and corporate subscribers, lead to adverse actions by the telecommunications regulators, lead to a loss in subscribers and hinder our ability to attract new subscribers. In case of detection of severe customer data security breaches, the regulatory authority can sanction our company, and such sanction can include suspension of operations for some time period. These factors, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations and business prospects.

Our failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially adversely affect our business.

The telecommunications industry is characterized by rapidly changing technology and evolving industry standards. We experience new customer demand for more sophisticated telecommunications and Internet services in the markets in which we operate, as well as for other new technologies such as Internet Protocol, or “IP,” telephony and Worldwide Interoperability for Microwave Access. Accordingly, our future success will depend, in part, on the adoption of a favorable policy and regulation of standards utilizing these technologies. Our success will also depend on our ability to adapt to the changing technological landscape. However, the rapid technological advances in the telecommunications industry make it difficult to predict the extent of future competition. It is possible that the technologies we utilize today will become obsolete or subject to competition from new technologies in the future for which we may be unable to obtain the appropriate license. We may not be able to meet all of these challenges in a timely and cost-effective manner.

In addition, we may not be able to acquire licenses, which we may deem necessary to compete or we may not be able to acquire such licenses on reasonable terms and we may not be able to develop a strategy compatible with this or any other new technology.

We operate third generation mobile technologies, or “3G,” networks in some of our markets, and we will need to develop 3G networks in additional markets in which we operate. 3G network development requires significant financial investments and there can be no assurance that we will be able to develop a 3G network on commercially reasonable terms, that we will not experience delays in developing our 3G network or that we will be able to meet all of the license terms and conditions. If we experience substantial problems with our 3G services, or if we fail to introduce new services on a timely basis relative to our competitors, it may impair the success of our 3G services, delay or decrease revenues and profits and therefore may hinder recovery of our significant capital investments in 3G services as well as our growth. In Georgia, for example, our competitors have obtained 3G licenses, but we have not. Therefore, we may be unable to effectively compete in the Georgia in the future.

In September 2009, the Ukrainian National Commission for Communications Regulation, or the “NCCR,” made a decision to issue four 3G licenses to Ukrainian telecommunications operators, in addition to the 3G license awarded to Ukrtelecom in 2005. On September 22, 2009, the NCCR announced its decision to hold an auction for the first of these 3G licenses and, on September 29, 2009, approved the auction conditions. This tender was subsequently cancelled by government authorities and Ukrtelecom continues to be the only operator in Ukraine to hold a 3G license. Kyivstar’s failure to obtain a 3G license in future, as well as the award of a 3G license to one of Kyivstar’s competitors would increase the competition Kyivstar faces in the provision of mobile services in Ukraine. If Kyivstar acquires a 3G license later than its competitors or pays a significantly higher price to obtain a 3G license than its competitors pay, it could be at a significant competitive advantage and face increased costs in implementing its 3G network rollout.

We also expect to face future competition from networks that provide faster, higher quality data transfer and streaming capability than 2G and 3G networks. The Russian government recently issued licenses for broadband wireless mobile access services for 40 regions throughout Russia. Svyazinvest (now Rostelcom) won the tender for 38 out of the 40 licenses. Increased competition from the new networks could have a material adverse effect on our business, financial condition and results of operations.

 

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We are exploring options for developing a 4G/LTE network for deploying 4G/LTE services. There can be no assurance that we will be able to develop a commercially viable means of providing 4G/LTE services on competitive terms in the markets in which we operate. If our competitors gain access to, or deploy, 4G/LTE networks before us or on better terms, they would have an advantage over us, which may in turn have a material adverse effect on our business, financial condition and results of operations.

The next step in the development of Russian telecommunications is the deployment of 4G/LTE networks. The cost of 4G/LTE network development and quality of services (data speed, quality of coverage) depend on the band and the width of frequency range given to an operator. In September 2011, the Russian government announced its intention to auction frequencies for LTE use on a national level in 2012. Additionally, the State Radio Frequencies Commission gave Scartel (Yota brand) two ranges of LTE frequencies, 30 MHz each, in the 2.5-2.7 GHz band for use on the whole territory of Russia in exchange for 4G frequencies held by Scartel for Wi-Max technology of total width of 70MHz (the exchange was completed on a non-auction basis). Four sets of frequencies in the 791-862 MHz band are planned to be sold during the auction in 2012, after which the winners of the frequencies will also receive frequencies in the 2.5-2.7 GHz band. The remaining frequencies that are to be sold during the auction comprise 40 MHz of the 2.5-2.7 GHz band. Therefore, other operators may receive frequency ranges much later than Scartel and the ranges they receive may be much smaller than those given to Scartel. Initially it was planned that all operators would receive equal access to the Scartel infrastructure, which would allow each operator to reduce its 4G/LTE network development costs. In March 2011, we, MTS, MegaFon and Rostelecom signed a non-binding memorandum of understanding with Scartel, according to which we, MTS, MegaFon and Rostelecom were to receive access to Scartel’s 4G network infrastructure (which was to be built) and were to receive options to purchase shares in Scartel in 2014 at a price determined by an independent appraisal. According to recent news reports, Megafon is negotiating a possible acquisition of Scartel. If this transaction takes place, Megafon may obtain a significant competitive advantage both in terms of frequency resources and LTE network development costs. Furthermore, the limited number of available frequencies may prevent us from realizing the full benefits we expect to receive from the development of a 4G network, because our network capacity would be constrained and our ability to expand limited.

On the fixed line network in Italy, our competitor, Telecom Italia, recently announced a plan to introduce a progressive roll out of a “next generation network,” a superior architectural telecommunications technology using fiber optic cables delivering a speed of up to 100MB. The “next generation network,” if introduced, would replace Telecom Italia’s legacy copper network with fiber. Although there is uncertainty around Telecom Italia’s strategy for implementing the roll-out of such next generation network, including the timing, and despite the fact that much will depend on the political and legislative framework as well as the regulatory infrastructure for such next-generation network in Italy, it is possible that as Telecom Italia upgrades its network, the local exchanges WIND Italy uses to provide LLU services could be closed over time. As a result, WIND Italy may be forced to co-locate at a different location where the cost of unbundling is likely to be more expensive and space for co-location is likely to be more limited, or adopt a different approach to its business or build its own fiber network at a material cost, which could have a material adverse effect on WIND Italy’s business or results of operations. LLU, which stands for “local loop unbundling,” is the regulatory process of allowing multiple telecommunications operators to use connections from Telecom Italia’s local exchanges to the customer’s premises.

In addition, market demand for new technologies in which we have invested may not increase or may decrease over time, limiting our ability to recoup the costs of our investments in such new technologies. For example, WIND Italy’s UMTS license, which is valid until 2029, cost an aggregate of €2,427 million. In June 2009, WIND Italy was awarded an additional 5MHz block of UMTS spectrum for the assignment of rights of use for the frequencies in the 2100 MHz band for approximately €89 million, which rights were assigned by the Italian Ministry of Economic Development in September 2009. On September 29, 2011 WIND Italy was awarded spectrum in both the 800MHz and 2600MHz frequencies following the completion of the competitive spectrum auction initiated by the Italian Ministry for Economic Development, for a total consideration of approximately €1.1 billion. WIND Italy plans to make significant investments in its LTE network during the next several years.

WIND Italy’s ability to recoup its LTE related and UMTS related expenditures will depend largely upon continued and increasing customer demand for LTE and UMTS based services. Although there have been signs of widespread demand for high speed data services through UMTS in recent years, the size of the market is still unknown and may fall short of industry expectations and LTE and UMTS technologies may not prove more

 

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attractive to subscribers than other existing technologies and services. If LTE based and UMTS based mobile services do not, or are slower than anticipated to, gain sufficiently broad commercial acceptance in Italy, or if WIND Italy derives a smaller percentage of its total revenues than expected from its LTE and UMTS related services, we may not be able to adequately recoup WIND Italy’s investment in its LTE frequencies and UMTS license and network or profit from such investment, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if third party application service providers fail or are slow to develop services for LTE and UMTS based mobile services, or if WIND Italy cannot obtain reasonably priced LTE/UMTS handsets, technologically proven network equipment or software with sufficient functionality or speed, our ability to generate revenues from WIND Italy’s LTE/UMTS networks may also be adversely affected, which in turn could have a material adverse effect on our business, financial condition and results of operations.

In addition, WIND Italy’s ability to recoup LTE and HSDPA related expenditures will depend largely upon implementing a competitive pricing strategy that appeals to consumers while recouping an investment in LTE and high speed downlink packet accesses, or “HSDPA,” technology. Further, Europe is facing an economic slowdown, resulting in a general contraction in consumer spending, which could affect demand for VAS such as mobile Internet. If subscribers use mobile Internet services offered by WIND Italy’s competitors, reduce their usage of mobile Internet services offered by WIND Italy, or cease to use mobile Internet at all, WIND Italy may not be able to profit from its build out of LTE and HSDPA coverage at the levels it anticipates, or at all, which, in turn, could have a material adverse effect on our business, financial condition or results of operations.

Our ability to provide telecommunications services would be severely hampered if our access to local and long distance line capacity were limited or if the commercial terms of our interconnect agreements were significantly altered.

Our ability to secure and maintain interconnect agreements with other wireless and local, domestic and international fixed-line operators on cost-effective terms is critical to the economic viability of our operations. Interconnection is required to complete calls that originate on our respective networks but terminate outside of our respective networks, or that originate from outside our networks and terminate on our respective networks. A significant increase in our interconnect costs as a result of new regulations or commercial decisions by other fixed-line operators or a lack of available line capacity for interconnection could have a material adverse effect on our ability to provide services. We also cannot exclude the possibility of further increase of interconnect costs in case of increase of the inflation rate in our countries of operation.

Our equipment supply arrangements may be terminated or interrupted and our existing equipment, technological and management systems may be subject to disruption and failure, which could cause us to lose customers, limit our growth and violate our licenses.

The successful build-out and operation of our networks depends heavily on obtaining adequate supplies of switching equipment, base stations and other equipment on a timely basis. We currently purchase our equipment from a small number of suppliers, principally Alcatel-Lucent, Cisco Systems, Comverse, Ericsson, Huawei and Nokia-Siemens Networks, although some of the equipment that we use is available from other suppliers. From time to time, we have experienced delays receiving equipment. Our business could be materially adversely affected if we are unable to obtain adequate supplies or equipment from our suppliers in a timely manner and on reasonable terms.

Our business depends on providing customers with reliability, capacity and security. As telecommunications increases in technological capacity, it may become increasingly subject to computer viruses and other disruptions. We cannot be sure that our network system will not be the target of a virus or, if it is, that we will be able to maintain the integrity of the data of our corporate customers or of that in individual handsets of our mobile subscribers or that a virus will not overload our network, causing significant harm to our operations. In addition to computer viruses, the services we provide may be subject to disruptions resulting from numerous other factors, including human error, security breaches, equipment defects, and natural disasters, which could have a material adverse effect on our business.

Our technological infrastructure is vulnerable to damage or disruptions from numerous events, including fire, flood, windstorms or other natural disasters, power outages, terrorist acts, equipment or system failures, human errors or intentional wrongdoings, including breaches of our network or information technology security. Problems with our backbone, switches, controllers, fiber optic network or network nodes at one or more of our base stations,

 

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whether or not within our control, could result in service interruptions or significant damage to our networks. All of our equipment for provision of mobile services in Moscow is located primarily in two buildings in Moscow. Disruption to the operation of these buildings, or buildings where our equipment is held in other jurisdictions where we operate, such as from electricity outages or damage to these buildings could result in disruption of our mobile services in those jurisdictions.

Although we have back-up capacity for our network management operations and maintenance systems, automatic transfer to our back-up capacity may not be seamless, and may cause network service interruptions. In recent years, we have experienced network service interruptions, which occur from time to time during installations of new software. Interruptions of services could harm our business reputation and reduce the confidence of our subscribers and consequently impair our ability to obtain and retain subscribers and could lead to a violation of the terms of our licenses, each of which could materially adversely affect our business. In some of the markets in which we operate, we do not carry business interruption insurance to prevent against network disruptions.

Our ability to manage our business successfully is contingent upon our ability to implement sufficient operational resources systems and processes to support our rapid growth. We may face risks in connection with the correct use of the newly introduced systems and processes in the regions where our group operates or integrating new technologies into existing systems. For example, if our billing systems develop unexpected limitations or problems, subscriber bills may not be generated promptly and/or correctly. This could materially adversely impact our business since we would not be able to collect promptly on subscriber balances.

We depend on third parties for certain services important to our business.

There is inherent risk in relying on third parties for services important for our operations. For example, we may outsource our networks in certain markets in which we operate, and our networks are important to our business. To the extent that the third parties on which we rely fail to provide the required service, it could have a materially adverse impact on our business, financial condition and results of operations.

Historically the vast majority of our operating subsidiaries’ revenue has come from providing telecommunications services, with relatively little of our revenue coming from sales of handsets and other devices. In 2008, OJSC VimpelCom significantly increased its sale of devices by beginning to sell broadband Internet modems and entering into an agreement with Apple Sales International, or “Apple,” to sell iPhones in Russia. Sales of devices tend to yield lower profit margins than sale of services and the need to maintain devices in inventory can have a negative impact on our working capital. In addition, sales of handsets are sensitive to changes in economic conditions and there can be no assurance that we will be able to make the purchase installments contemplated by the agreement with Apple. At the same time, we expect that the sales of handsets, including iPhones, will contribute to our subscriber growth, and such sales are therefore critical for our overall growth strategy. In the event we are unable to extend our existing agreements with, or fail to agree on acceptable terms or lose exclusivity in our agreements with handset providers, we could experience a negative impact on our ARPU and our churn rate, which could have a material adverse effect on our business, financial condition and results of operations. For more information, please see the section of this Annual Report on Form 20-F entitled “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Contractual Obligations.” For information on proceedings commenced by FAS relating to our sale of iPhones, please see the section of this Annual Report on Form 20-F entitled “Item 4—Information on the Company—Legal Proceedings—Proceedings Involving OJSC VimpelCom and its Subsidiaries—FAS Litigation—I-Phone Proceedings.”

 

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Many of our mobile products and services are sold to customers through retail channels. The third party distributors, retailers and sales agencies that we use to distribute and sell products are not under our control and may stop distributing or selling its products at any time. Should this occur with particularly important distributors, retailers or agencies, we may face difficulty in finding new distributors, retailers or sales agencies that can generate the same level of revenues. In addition, distributors, retailers and sales agencies that also distribute or sell competing products and services may more actively promote the products and services of our competitors. Such developments with our third party distributors, retailers and sales agencies could materially adversely affect our business, financial condition and results of operation.

Furthermore, WIND Italy no longer owns the internet portal spun off as part of the acquisition of Wind Telecom, and has entered into a service agreement with Libero S.r.l. to continue to utilize the Libero internet portal. If this agreement were to terminate for any reason, WIND Italy would need to establish alternative distribution channels for its broadband services, which may result in significant costs and/or may not be successful. If WIND Italy fails to maintain or expand its direct and indirect distribution presence, its ability to retain or further grow its market share in the Italian mobile and fixed-line telecommunications markets, including the broadband market, could be adversely affected, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Allegations of health risks related to the use of mobile telephones could have a material adverse effect on us.

There have been allegations that the use of certain portable mobile devices may cause serious health risks. The actual or perceived health risks of mobile devices could diminish subscriber growth, reduce network usage per subscriber, spark product liability lawsuits or limit available financing. Each of these possibilities has the potential to cause material adverse consequences for us and for the entire mobile industry.

Our intellectual property rights are costly and difficult to protect, and we cannot guarantee that the steps we have taken to protect our property rights will be adequate.

We regard our copyrights, trademarks, trade dress, trade secrets and similar intellectual property, including our rights to certain domain names, as important to our continued success. We rely upon trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. However, intellectual property rights are especially difficult to protect in the markets where we operate. In these markets, the regulatory agencies charged to protect intellectual property rights are inadequately funded, legislation is underdeveloped, piracy is commonplace and enforcement of court decisions is difficult.

In addition, litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement. As the number of convergent product offerings and overlapping product functions increase, the possibility of intellectual property infringement claims against us may increase. Any such litigation may result in substantial costs and diversion of resources, and, if decided unfavorably to us, could have a material adverse effect on our business, financial condition or results of operations. We also may incur substantial acquisition or settlement costs where doing so would strengthen or expand our intellectual property rights or limit our exposure to intellectual property claims of third parties. While we have successfully enforced our intellectual property rights in courts in the past, we cannot assure you that we will be able to successfully protect our property rights in the future.

Legal and Regulatory Risks

The FAS claim recently brought against two of our strategic shareholders could adversely impact on our business and the governance of our company.

Our company has been named as a third party in a recent claim brought by the FAS against two of our strategic shareholders, Telenor East and Weather II, in the Moscow Arbitration Court. Under Russian law, a person named as a third party to a claim is generally a person potentially interested in the case whose rights and obligations can be affected by the claim. OOO Altimo and Altimo Coöperatief have also been named as third parties.

The claim was filed by FAS on the alleged basis that Telenor East’s February 15, 2012 purchase (the “Purchase”) of 234 million preferred shares in our company from Weather II violated relevant Russian law because Telenor East, as a company controlled by a foreign state (the Kingdom of Norway), may not exercise control over a Russian entity having strategic importance

 

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for the national defense and state security (such as our Russian subsidiary, OJSC VimpelCom). FAS is asking the Moscow Arbitration Court to (a) invalidate the share purchase agreement between Telenor East and Weather II of February 15, 2012, which provided for the Purchase; (b) invalidate the option agreement between Telenor East and Weather II of February 15, 2012, which provides for call and put options under which Telenor East could acquire an additional 71 million preferred shares in our company from Weather II extending into January 2016; (c) oblige Telenor East to return the preferred shares to Weather II; and (d) oblige our company, Telenor East and Altimo Coöperatief to enter into a shareholders agreement on substantially the same terms as the VimpelCom Shareholders Agreement, which recently terminated.

In connection with the above claim, FAS filed a separate motion seeking interim relief from the Moscow Arbitration Court to (a) prohibit our company and our subsidiary, VimpelCom Holdings, from voting our shares, representing 100.0% of the outstanding shares, in OJSC VimpelCom; (b) prohibit Telenor East and Weather II from changing the management bodies of our company (which includes our supervisory board); and (c) prohibit Telenor East and Weather II from exercising their rights under their option agreement of February 15, 2012. On April 24, 2012, the Moscow Arbitration Court granted FAS’s above-requested interim relief in part only. The court rejected the Russian regulator’s request to completely prohibit our company and VimpelCom Holdings from voting our shares in OJSC VimpelCom. The injunction order states that our company and VimpelCom Holdings are prohibited from voting our shares at shareholder meetings of OJSC VimpelCom to: (i) change the OJSC VimpelCom board of directors, and (ii) approve major transactions and interested party transactions, as such terms are defined under Russian law. The injunction order does not, however, prohibit our company and VimpelCom Holdings as shareholders of OJSC VimpelCom from exercising our other shareholder rights, including, among other things, rights to approve the OJSC VimpelCom annual accounts, to appoint OJSC VimpelCom’s external auditor, to approve dividend payments by OJSC VimpelCom and to re-elect the current OJSC VimpelCom board members. The court did grant the requested interim relief pertaining to Telenor East and Weather II set out in clauses (b) and (c) above.

There can be no assurance that the Moscow Arbitration Court will not change the injunction order or issue a new injunction order, or that the injunction order will not be interpreted differently by the Moscow Arbitration Court or other judicial bodies, as a result of an appeal or otherwise, with the effect of further limiting the right of our company and VimpelCom Holdings to vote our shares of OJSC VimpelCom. Further limitations on voting our shares in OJSC VimpelCom could lead to adverse effects on our ability to pay dividends, on the business of OJSC VimpelCom and the VimpelCom Group and potentially to defaults under financing documents.

Furthermore, it is currently unclear what effect, if any, the granting by a Russian court of the relief for re-instituting the VimpelCom Shareholders Agreement and/or the granting of the requested injunction prohibiting Telenor East and Weather II from changing the management bodies of our company may have on the composition of our supervisory board and governance of our company. The VimpelCom Shareholders Agreement expired by its terms as of December 10, 2011, and we are required under Bermuda law to hold our AGM to, among other things, elect our supervisory board prior to December 31, 2012. For more information about the FAS claim, see the section of this Annual Report on Form 20-F entitled “Item 4—Information on the Company—Legal Proceedings—FAS Claim.”

We operate in a highly regulated industry and are subject to a large variety of laws and extensive regulatory requirements.

 

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As a multinational telecommunications company that operates in regulated markets, we are subject to different laws and regulations in each of the jurisdictions in which we provide services. Mobile, Internet, fixed-line, voice and data markets are all generally subject to extensive regulatory requirements, including strict licensing regimes, as well as anti-monopoly and consumer protection regulations, in the countries in which we operate. Regulations may be especially strict in the markets of those countries in which we are considered to hold a significant or dominant market position. Furthermore, regulations could require us to reduce roaming prices and termination rates in mobile and/or fixed line networks, require us to offer access to our network to other operators, and result in the imposition of fines if we fail to fulfill our service commitments. Such regulations and regulatory actions could place significant competitive and pricing pressure on our operations and could have a material adverse effect on our business, financial condition, results of operations and cash flow. For more information on the regulatory environment in which we operate, see “Item 4—Information on the Company—Regulation of Telecommunications.”

Anti-monopoly regulations in the countries where we operate may require us to obtain anti-monopoly approvals for certain acquisitions, reorganizations or other transactions as may be provided for in applicable law. The applicable rules are generally subject to different interpretations and the competent authorities may challenge the positions that we take. We may also be unable to comply with anti-monopoly approvals due to administrative delays in the review process or for other reasons. Failure to obtain such approval or the activity of the relevant anti-monopoly bodies may impede or adversely affect our business and ability to expand our operations.

Anti-monopoly and consumer protection regulators in countries where we operate have oversight over consumer affairs and advertising and are authorized to regulate companies deemed to be a dominant force in, or a monopolist of, a market. In some countries in which we operate, including Russia, Italy, Ukraine, Kazakhstan, Armenia and Pakistan, we have been identified by the regulators as having a significant or dominant market position. In such markets, we are subject to stricter controls on our operations and higher scrutiny in achieving anti-monopoly approvals.

Regulatory measures taken in response to competition violations may include inter alia the requirement to discontinue certain activities, the imposition of fines, confiscation of revenue derived from monopolistic activities, restrictions on increase of tariffs, on acquisitions or on other activities, such as contractual obligations. Any successful challenge by an anti-monopoly regulator or other competent authority may expose us or certain of our officers, directors, or shareholders to fines or penalties and may result in the invalidation of certain agreements or arrangements. This may adversely affect the manner in which we manage and operate certain aspects of our business.

In connection with the FAS approval of our acquisition of a 49.9% stake in Euroset, the FAS issued an order that prohibits Euroset from setting discriminatory terms in its sale of services of mobile telecommunications operators for a period of three years. Our company does not control Euroset, and we cannot assure you that Euroset will comply with the FAS order. If Euroset fails to comply with the FAS order, the FAS may fine us and Euroset and it may apply to a court to invalidate the acquisition of our 49.9% stake in Euroset.

For more information about the competition proceedings in which our subsidiaries are involved, see “Item 4—Information on the Company—Legal Proceedings.”

Our licenses may be suspended or revoked and we may be fined or penalized for alleged violations of law or regulations.

We are required to meet certain terms and conditions under our licenses, including meeting certain conditions established by the legislation regulating the communications industry. For more information on our licenses and their related requirements, please see the sections of this Annual Report on Form 20-F entitled “Item 4—Information on the Company—Description of Operations of the Russia Business Unit,” “—Description of Operations of the Europe & North America Business Unit,” “—Description of Operations of the Africa & Asia Business Unit,” “—Description of Operations of the Ukraine Business Unit,” and “—Description of Operations of the CIS Business Unit.” If we fail to comply with the conditions of our licenses or with the requirements established by the legislation regulating the communications industry, or if we do not obtain permits for the operation of our equipment, use of frequencies or additional licenses for broadcasting directly or through agreements with broadcasting companies, we anticipate that we would have an opportunity to cure any non-compliance. However, we cannot assure you that we will receive a grace period, and we cannot assure you that any grace afforded to us would be sufficient to allow us to cure any remaining non-compliance. In the

 

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event that we do not cure any remaining non-compliance, the applicable regulator could decide to suspend and seek termination of the license. The occurrence of any of these events could materially adversely affect our ability to build out our networks in accordance with our plans and could harm our reputation.

We may from time to time receive notices with respect to violations of our licenses. To the extent possible, we take measures to comply with the requirements of the notices. However, to the extent the alledged violations in these notices are not resolved within the required period, including due to delay of the authorities, we may suffer significant interuptions to our operations, which could have a material adverse effect on our business, financial condition or results of operations.

If we fail to fulfill the specific terms of any of our licenses, frequency permissions or other governmental permissions or if we provide services in a manner that violates applicable legislation, government regulators may levy fines, suspend or terminate our licenses, frequency permissions, or other governmental permissions or refuse to renew licenses that are up for renewal. A suspension and the subsequent termination of licenses or refusal to renew our licenses could materially adversely affect our business, financial condition and results of operations.

Our licenses are granted for specified periods and they may not be extended or replaced upon expiration.

Most of our licenses are granted for specified terms, and we can give you no assurance that any license will be renewed upon expiration. If renewed, our licenses may contain additional obligations, including payment obligations (which may involve a substantial renewal or extention fee), or may cover reduced service areas or scope of service.

As a rule, the expiration date of frequency permissions for most of our mobile communications and radio-relay line base stations exceeds the validity period of communications service licenses. We cannot predict whether we will be able to obtain extensions of our frequency permissions and whether these extensions will be formalized and granted by the regulatory agency in a timely manner and without any significant additional costs. It is possible that upon expiration of frequency permissions the frequency bands currently in use by us will be wholly or partly re-allocated in favor of other communications technologies or other communications operators, requiring that we coordinate the use of our frequencies with the other license holders or experience a loss of quality in our network.

If our licenses for provision of telecommunications services or frequency allocations are not renewed, our business could be materially adversely affected. For more information our licenses, please see the section of this Annual Report on Form 20-F entitled “Item 4—Information on the Company—Description of Our Business.”

We face uncertainty regarding our frequency allocations, equipment permits and network registration, and we may experience limited spectrum capacity for providing wireless services.

To establish and commercially launch a mobile telecommunications network, we are required to receive, among other things, frequency allocations for bandwidths within the frequency spectrums in the regions in which we operate. There are a limited number of frequencies available for mobile operators in each of the regions in which we operate or hold licenses to operate. We are dependent on access to adequate frequency allocation in each such market in order to maintain and expand our subscriber base. If frequencies are not allocated to us in the future in the quantities, with the geographic span and for time periods that would allow us to provide mobile services on a commercially feasible basis throughout all of our license areas, our business, financial condition, results of operations and prospects may be materially adversely affected. In addition, a failure to make payments for frequency allocations could result in the suspension or revocation of our frequency allocations. A loss of allocated frequency that is not replaced by other adequate allocations also could have a substantial adverse impact on our network capacity and our ability to provide mobile services. In addition, frequency allocations may be issued for periods that are shorter than the terms of our licenses, and such allocations may not be renewed in a timely manner or at all. If our frequencies are revoked or we are unable to renew our frequency allocations, our network capacity and our ability to provide mobile services would be constrained and our ability to expand would be limited, which could have a material adverse effect on our business, financial conditions and results of operations.

We have in the past been unable to obtain frequency allocations necessary to test or expand our networks in Russia. For example, our applications for GSM-900 frequencies in five regions within the Urals super-region and eight regions in the Northwest super-region were denied. Further, we were denied a grant of GSM-900 and GSM-1800

 

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frequencies in the Far East super-region and E-GSM frequencies throughout all of Russia by Russia’s State Radio Frequency Commission, or “SRFC.” Although OJSC VimpelCom received frequencies in three regions within the Far East super-region through tenders conducted in 2007 and seven regions within the Far East super-region through tenders conducted in April 2011, OJSC VimpelCom’s applications for such frequencies have been denied in the past.

In addition, 3G and advanced spectrum auctions are due to be held in a number of jurisdictions in which we operate, including Algeria, Pakistan and Bangladesh, during 2012 and 2013, and failure to obtain sufficient spectrum at acceptable prices in these markets, or other markets in which 3G and advanced spectrum are introduced, may materially adversely affect our business, financial performance and results of operations.

We may encounter difficulties in building our networks, and we may face other factors beyond our control that could affect our ability to operate our networks, decrease the quality of our services, increase the cost of construction or operation of our networks or delay the introduction of services. As a result, we could experience difficulty in increasing our subscriber base or could fail to meet license requirements, either of which may have a material adverse effect on our business.

In addition, we could face significant increased costs if the laws or authorities in the countries in which we operate change the requirements for our equipment or networks. For example, in the Ukraine there have been recent proposals to change the requirements for fiber optic cables, which could require us to incur significant costs which may adversely affect our businesses in the Ukraine. This or similar measures in other jurisdictions in which we operate could result in a material adverse effect on our business, financial condition or results of operations.

The laws of the countries in which we operate generally prohibit the operation of telecommunications equipment without a relevant permit from the appropriate regulatory body. Due to complex regulatory procedures, it is frequently not possible for us to procure in a timely manner the permissions and registrations required for our base stations, including registration of our title to land plots underlying our base stations and constructions permits, or other aspects of our network before we put the base stations into operation or to amend or maintain the permissions in a timely manner when it is necessary to change the location or technical specifications of our base stations. At times, there can be a number of base stations or other communications facilities and other aspects of our networks for which we are awaiting final permission to operate for indeterminate periods. This problem may be exacerbated if there are delays in issuing necessary permits.

We also regularly receive notices from regulatory authorities in countries in which we operate warning us that we are not in compliance with aspects of our licenses and permits and requiring us to cure the violations within a certain time period. We have closed base stations on several occasions in order to comply with regulations and notices from regulatory authorities. Any failure by our company to cure such violations could result in the applicable license being suspended and subsequently revoked through court action. Although we generally take all necessary steps to comply with any license violations within the stated time periods by switching off base stations that do not have all necessary permits until such permits are obtained, we cannot assure you that our licenses will not be suspended and subsequently revoked in the future. If we are found to operate telecommunications equipment without an applicable permit, we could experience a significant disruption in our service or network operation and this would have a material adverse effect on our business, financial condition and results of operations.

We may be subject to increases in payments for frequency allocations under the terms of some of our licenses.

Legislation in many countries in which we operate, including Russia, require that we make payments for frequency spectrum usage. As a whole, the fees for all available frequency assignments have been significant. Any significant increase in the fees payable for the frequencies that we use or for additional frequencies that we need could have a negative effect on our financial results. We cannot assure you that the fees we pay for radio-frequency spectrum use will not increase, and such an increase could have a material adverse effect on our business, financial condition and results of operations. For more information on the payment requirements relating to frequency allocation, see “Item 4—Information on the Company—Regulation of Telecommunications.”

 

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We are involved in disputes and litigation with regulators, competitors and third parties.

We are party to lawsuits and other legal, regulatory and antitrust proceedings, the final outcome of which is uncertain. Litigation and regulatory proceedings are inherently unpredictable. An adverse outcome in, or any settlement of, these or other proceedings (including any that may be asserted in the future) may have a material adverse effect on our business, financial condition, results of operations and cash flows.

In April 2012 VimpelCom Ltd. was named as a third party in a claim brought by FAS against Telenor East and Weather II in the Moscow Arbitration Court. For more information on this claim, see “—The FAS claim recently brought against two of our strategic shareholders could adversely impact on our business and the governance of our company” above and “Item 4—Information on the Company—Legal Proceedings—FAS Claim.”

We are involved in significant disputes with Algerian authorities. For more information on these disputes, see “—The Algerian Government has made substantial tax and other claims against OTA which have harmed OTA’s business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH” below and “Item 4—Information on the Company—Legal Proceedings—Proceedings Involving OTH and Its Subsidiaries.”

KaR-Tel received an “order to pay” issued by the Savings Deposit Insurance Fund, or the “Fund,” a Turkish state agency responsible for collecting state claims arising from bank insolvencies, in the amount of approximately US$4.9 billion (stated as approximately Turkish Lira 7.6 quadrillion and issued prior to the introduction of the New Turkish Lira, which became effective as of January 1, 2005). We believe that the order to pay is without merit. We challenged it in the Administrative Court of Istanbul, which, on October 25, 2010, ruled in our favor and cancelled the order to pay. However, the Fund has appealed the ruling and there can be no assurance that the ruling will not be overturned, that KaR-Tel will ultimately prevail in its petition for the cancellation of the order to pay or that we will not be subject to protracted litigation with the Fund or others. The adverse resolution of this matter and any other matter that may arise in connection with the order to pay issued by the Fund or any other claims made by the Fund or the former shareholders of KaR-Tel, could have a material adverse effect on our business, financial condition and results of operations, including an event of default under some or all of our outstanding indebtedness. For more information about our litigation regarding KaR-Tel, see “Item 4—Information on the Company—Legal Proceedings—Proceedings Involving OJSC VimpelCom and Its Subsidiaries—KaR-Tel Litigation.”

In October 2010, OJSC VimpelCom acquired 50.1% of the share capital of Menacrest Limited, or “Menacrest,” which is the parent company of Limited Liability Company Sky Mobile, or “Sky Mobile,” a mobile operator in Kyrgyzstan, from Crowell Investments Limited, or “Crowell,” in exchange for a set-off of a portion of our US$350.0 million loan to Crowell. Sky Mobile is a defendant in litigation in the Isle of Man. The litigation was brought by affiliates of MTS against Sky Mobile and various companies and individuals directly or indirectly associated with the Alfa Group alleging that the Kyrgyz judgment determining that an Altimo affiliate was the rightful owner of an interest in the equity of Bitel, an MTS affiliate, prior to the asset sale between Sky Mobile and Bitel, was wrongfully obtained and that Bitel shares and Sky Mobile assets were misappropriated. The legal proceedings in this matter are pending. For more information about legal proceedings and threatened claims against us relating to Sky Mobile, see “Item 4—Information on the Company—Legal Proceedings—Proceedings Involving OJSC VimpelCom and Its Subsidiaries—Sky Mobile Litigation.” There can be no assurance that MTS or any other party will not bring an additional action against our company or any of our subsidiaries in connection with Sky Mobile or, if so brought, that we will prevail in any such lawsuit. The adverse resolution of any matter that may arise in connection with Sky Mobile could have a material adverse effect on our business, expansion strategy and financial results.

We have also been involved in proceedings against Canadian regulators challenging WIND Canada’s ownership structure as violative of Canadian ownership and control rules. For more information on these proceedings, see “Information on the Company—Legal Proceedings—Proceedings Involving OTH and Its Subsidiaries—Proceedings in Canada.” If we are ultimately found to violate such rules, this could result in additional expense and possibly to interruptions in the operations of WIND Canada, in which we indirectly hold 65.08% of the outstanding shares and 32.02% of the voting rights.

We could be subject to tax claims that could have a material adverse effect on our business.

Tax audits in the countries in which we operate are conducted regularly. We have been subject to substantial claims by tax authorities in Russia, Italy, Algeria, Pakistan, Bangladesh, Ukraine, Kazakhstan,

 

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Uzbekistan and Tajikistan. These claims have resulted in additional payments, including fines and penalties, to the tax authorities. For more information regarding tax claims and their effects on our financial statements, see the sections of entitled “Item 4—Information on the Company—Legal Proceedings” and note 28 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. Risks relating to tax claims of the Algerian tax authorities are described in greater detail below in “—The Algerian Government has made substantial tax and other claims against OTA which have harmed OTA’s business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH.”

Although we are permitted to challenge in court the decisions of tax inspectorates, there can be no assurance that we will prevail in our litigation with tax inspectorates. In addition, there can be no assurance that the tax authorities will not claim on the basis of the same asserted tax principles they have claimed against us for prior tax years or different tax principles that additional taxes are owed by us for prior or future tax years or that the relevant governmental authorities will not decide to initiate a criminal investigation in connection with claims by tax inspectorates for prior tax years. The adverse resolution of these or other tax matters that may arise could have a material adverse effect on our business, financial condition and results of operations.

The Algerian Government has made substantial tax and other claims against OTA which have harmed OTA’s business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH.

OTH’s subsidiary OTA accounts for a significant proportion of OTH’s consolidated revenues. For the past several years, OTA has suffered from various ongoing measures taken by the Algerian Government and its various regulatory agencies. The Algerian tax authority has made substantial tax claims against OTA. OTA continues to challenge these claims but has prepaid claimed amounts and penalties totaling approximately DZD 71,906 million (equal to approximately US$955 million at the exchange rate as of December 31, 2011) during the pendency of its legal challenges. See “Item 4—Information on the Company—Legal Proceedings—Proceedings Involving OTH and Its Subsidiaries.” There can be no assurance that the Algerian tax authority will not make further tax assessments against OTA or other OTH companies in the future or that we would be successful in challenging any assessment or successful in recovering amounts that we have prepaid against these claims. Payment of, or lack of recovery of, claimed tax amounts may have an adverse effect on OTH’s business, prospects, financial condition and results of operations.

In addition, in 2010, the Bank of Algeria effected an injunction that restricts all Algerian banks from engaging in foreign banking transactions on behalf of OTA, making it difficult for OTA to import equipment from foreign suppliers and preventing OTA from transferring funds outside of Algeria, including by way of dividends or other distributions to OTH. The Algerian authorities have also alleged breaches of foreign exchange regulations and a criminal case has been initiated by the Bank of Algeria against OTA and a member of its senior management team. On March 28, 2012, the Algerian Court of First Instance handed down a judgment against OTA and a member of OTA’s senior executive team consisting of fines of DZD 99 billion (equal to approximately US$1.3 billion at the exchange rate as of March 28, 2012) including a criminal sentence against a member of OTA’s senior executive team. OTA is appealing the decision and the execution of the sentence will be provisionally suspended pending resolution of such appeal. OTA maintains that it has, and its senior executive has, acted in compliance with the law. However, there is no guarantee that OTA will not become liable to pay some or all of the fines and become liable to further penalties and levies. This case may also interfere with the ability of members of the senior management of OTA to perform their functions and manage the company.

On April 12, 2012, OTH submitted a formal Notice of Arbitration against the Algerian government in respect of actions taken by the Algerian government against OTA. The claim in the Notice of Arbitration is being made under the arbitration rules of the United Nations Commission on International Trade Law. In its Notice of Arbitration, OTH asserts that since 2008 its rights under the Agreement on the Promotion and Reciprocal Protection of Investments between Egypt and Algeria have been violated by actions taken by the Algerian government against OTA, including the Algerian Court of First Instance’s March 28, 2012 judgment against OTA and a member of its senior executive team. VimpelCom continues to be open to finding an amicable resolution with the Algerian government that is mutually beneficial to both parties. There can be no assurance that OTH will receive a favorable outcome in the arbitration proceedings.

 

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OTH’s ability to repatriate profits from Algeria in the future and to continue to own and control its operations in Algeria may be impacted by the ongoing court cases, arbitration and disputes. In addition, a number of laws have been enacted in Algeria which have an impact on OTA and OTH’s investments in Algeria, and there can be no assurance that there will not be further new laws and changes to existing laws that will have a negative impact on OTA and OTH. These and other measures taken by the Algerian Government and its agencies against OTA have adversely impacted the business, financial condition and results of operations of OTA and may continue into the future. The tax and other regulatory laws and regulations in Algeria, are subject to change or interpretation by the local authorities, including changes or interpretations that may subject OTA to material penalties, both monetary and statutory, which could adversely affect the conduct of its business. See also the risks described below in “—Unpredictable tax systems give rise to significant uncertainties and risks that could complicate our tax planning and business decisions.”

Furthermore, the Algerian Government has announced its intention to unilaterally purchase OTA, alleging that it has the right to do so under the pre-emption right contained in the 2009 Finance Act and the 2010 Supplemental Finance Act. For more information, see “Item 4—Information on the Company—Legal Proceedings—Proceedings Involving OTH and Its Subsidiaries.” The 2010 Supplement Finance Act also introduced a new penalty for failing to identify SIM card users and a future tax on certain profit, each of which could result in additional costs to the company.

Unpredictable tax systems give rise to significant uncertainties and risks that could complicate our tax planning and business decisions.

The tax systems in the emerging markets in which we operate are unpredictable and give rise to significant uncertainties, which could complicate our tax planning and business decisions. Tax laws in many of the emerging markets in which we operate have been in force for a relatively short period of time as compared to tax laws in more developed market economies. Tax authorities in our markets are often arbitrary in their interpretation of tax laws, as well as in their enforcement and tax collection activities.

Many companies are often forced to negotiate their tax bills with tax inspectors who may assess additional taxes. Any additional tax liability, as well as any unforeseen changes in applicable tax laws or changes in the tax authorities’ interpretations of the respective double tax treaties in effect with the Netherlands, could have a material adverse effect on our future results of operations, cash flows or the amounts of dividends available for distribution to shareholders in a particular period. We may be required to accrue substantial amounts for contingent tax liabilities and the amounts accrued for tax contingencies may not be sufficient to meet any liability we may ultimately face. From time to time, we may also identify tax contingencies for which we have not recorded an accrual. Such unaccrued tax contingencies could materialize and require us to pay additional amounts of tax.

For more information on risks relating to the Russian tax system, see “—Russian tax laws, regulations and court practice are subject to frequent change, varying interpretations and inconsistent and selective enforcement.” For more information on risks relating to the Italian tax system, see “—Italian CFC legislation has been extended to EU companies” and “—WIND Italy may be subject to a deferral or to a limitation of the deduction of interest expenses in Italy” below. For more information on risks relating to Algerian tax claims, see “—The Algerian Government has made substantial tax and other claims against OTA which have harmed OTA’s business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH” above.

Russian tax laws, regulations and court practice are subject to frequent change, varying interpretations and inconsistent and selective enforcement.

Generally, taxes payable by Russian companies are relatively substantial and include, inter alia, corporate profits tax, VAT, excise, property tax and other taxes. Russian tax laws, regulations and court practice are subject to frequent change, varying interpretation and inconsistent and selective enforcement. The law and legal practice in Russia are not as clearly established as those of mature markets and there are a number of uncertainties with respect to the application of tax legislation. In some instances, although it may be viewed as contrary to Russian constitutional law, the Russian tax authorities have applied certain new tax laws retroactively, issued tax claims for periods for which the statute of limitations had expired and reviewed the same tax period multiple times.

 

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Despite the Russian government’s steps to reduce the overall tax burden in recent years, Russia’s largely ineffective tax collection system and continuing budgetary funding requirements may increase the likelihood that the Russian Federation will impose arbitrary or onerous taxes and penalties in the future, which could have a material impact on our business and financial performance. Additionally, taxation has been used as a tool for significant state intervention in certain key industries.

Since Russian federal, regional and local tax laws and regulations are subject to frequent change and some of the sections of the Tax Code of the Russian Federation (the “Russian Tax Code”) are comparatively new, interpretation of these laws and regulations is often unclear or non-existent. Taxpayers and the Russian tax authorities often interpret tax laws differently. Differing interpretations of tax regulations exist both among and within government ministries and organizations at the federal, regional and local levels, creating uncertainties and inconsistent enforcement. Furthermore, in the absence of binding precedent, court rulings on tax or other related matters by different courts relating to the same or similar circumstances may also be inconsistent or contradictory. Taxpayers often have to resort to court proceedings to defend their position against the tax authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their assessments and their interpretation of legislation and it is possible that transactions and activities that have not been challenged in the past may now be challenged.

In addition to the usual tax burden imposed on Russian taxpayers, these conditions complicate tax planning and related business decisions, potentially exposing us to significant fines and penalties as well as potentially severe enforcement measures and greater than expected tax burdens despite our best efforts to comply. There can be no assurance that the Russian Tax Code or its interpretation will not be changed in the future in a manner adverse to the stability and predictability of the tax system (including in relation to thin capitalization and transfer pricing rules and other rules governing the deductibility of interest or other expenses and the timing thereof). It is expected that Russian tax legislation will become more sophisticated, which, coupled with the state budget deficits, may result in the introduction of additional revenue raising mechanisms. Although it is unclear how these measures would operate, the introduction of such measures could affect our overall tax efficiency and result in significant additional tax liabilities. This could have a significant adverse effect on our business, prospects, financial condition and results of operations.

Current Russian tax legislation is, in general, based upon the formal manner in which transactions are documented, looking to form rather than substance. However, the Russian tax authorities, in some cases, are increasingly taking a “substance and form” approach, which may cause additional tax exposures to arise in future. On October 12, 2006, the Plenum of the High Arbitration Court of the Russian Federation issued Resolution No. 53 formulating the concept of “unjustified tax benefit,” which is described in the Resolution by reference to circumstances, such as absence of business purpose or transactions where the form does not match the substance, and which could lead to the disallowance of tax benefits resulting from the transaction or the recharacterization of the transaction. There has been very little further guidance on the interpretation of this concept by the tax authorities or courts, but it is likely that the tax authorities will actively seek to apply this concept when challenging tax positions taken by taxpayers in Russian courts. While the intention of this Resolution might have been to combat abuse of tax laws, in practice, there is no assurance that the tax authorities will not seek to apply this concept in a broader sense.

Intercompany dividends are subject to a withholding tax of 0.0% or 9.0% (depending on whether the recipient of dividends qualifies for Russian participation exemption rules), if being distributed to Russian companies, and 15.0% (or lower, subject to benefits provided by relevant double tax treaties), if being distributed to foreign companies. If the receiving company itself pays a dividend, it may offset tax withheld against its own withholding liability of the onward dividend although not against any withholding made on a distribution to a foreign company. Failure to meet the requirements established for application of Russian participation exemption rules may result in additional burdens and costs on our operations.

Moreover, Russian tax legislation in effect as at the date of this Annual Report on Form 20-F does not contain a concept of corporate tax residency (rather, the Russian domestic legislation recognizes the concept of a taxpayer). Russian legal entities and organizations are taxed on their worldwide income while foreign legal entities and organizations are taxed in Russia on income attributable to their permanent establishment and on Russian source income, received by these foreign legal entities and organizations. Some of our non-Russian companies may be treated by the tax authorities as having a permanent establishment in Russia.

 

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We are part of a multi-national group, to which a number of double tax treaties applies. On May 25, 2009, in his budget message, the President of Russia set a goal of introducing legal mechanisms designed to restrict the use of double tax treaties and minimize tax benefits for ultimate beneficiaries who are not residents of the country that is a party to the relevant double tax treaty. Moreover, in August 2011 the Russian Government proposed in its “Major Trends in Russian Tax Policy for 2012, and planned for 2013-2014”, legislative changes concerning an anti-avoidance mechanism with respect to double tax treaty benefits in cases where ultimate beneficiaries of income do not reside in the relevant double tax treaty country. The introduction of such a concept may result in the inability of foreign group entities to claim benefits under double tax treaties through structures which historically were subject to double tax treaty protection in Russia. The Russian tax authorities and courts may apply varying interpretations of the provisions of the double tax treaties that may limit their protection in relation to payments made outside of Russia (including in relation to Eurobonds structures and application of thin capitalization rules). This could have a significant adverse effect on our business, prospects, financial condition and results of operations

Repeated tax audits and extension of liability beyond the limitation period may result in additional tax assessments.

Generally, tax returns in Russia remain open and subject to inspection by tax and/or customs authorities for three calendar years immediately preceding the year in which the decision to conduct an audit is taken. However, the fact that a particular year has been reviewed by tax authorities does not preclude that year from further review or audit during the eligible three-year limitation period by a superior tax authority. On July 14, 2005 the Russian Constitutional Court issued a decision allowing the statute of limitations for tax liabilities to be extended beyond the three-year term set forth in the tax laws if a court determines that the taxpayer has obstructed or hindered a tax inspection. Moreover, amendments to the first part of the Tax Code, effective January 1, 2007, provide for the extension of the three-year statute of limitations if the actions of the taxpayer created insurmountable obstacles for the tax audit. Because none of the relevant terms is defined, tax authorities may have broad discretion to argue that a taxpayer has “obstructed”, “hindered” or “created insurmountable obstacles” in respect of an inspection and to ultimately seek review and possibly apply penalties beyond the three-year term, and there is no guarantee that the tax authorities will not review our compliance with applicable tax law beyond the three-year limitation period. Under such review the relevant tax authorities may conclude that we had significantly underpaid taxes relating to earlier periods, which could have a material adverse effect on our busines, financial condition, results of operations and prospects.

Russian transfer pricing rules have been substantially revised.

Transfer pricing legislation became effective in the Russian Federation on January 1, 1999. This legislation allowed the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of certain types of transactions (“controlled” transactions). There were also special transfer pricing rules for transactions with securities and derivatives. However, the Russian transfer pricing rules were not well-developed and there was littled guidance and court practice, which left wide room for interpretation by the Russian tax authorities and courts.

Following adoption of Federal Law of July 18, 2011 No 227-FZ, the new Russian Transfer pricing rules became effective from January 1, 2012. The new rules are more technically elaborate, detailed and, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development.

The amendments have toughened considerably the previous transfer pricing rules, by, among other things, effectively shifting the burden of proving market prices from the tax authorities to the taxpayer and obliging the taxpayer to keep specific documentation.

Introduction of the new transfer pricing rules may increase the risk of transfer pricing adjustments being made by the tax authorities and, as a result, have a material impact on our business and the results of operations. It will also require us to ensure compliance with the new transfer pricing documentation requirements proposed such rules.

 

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Italian CFC legislation has been extended to EU companies.

Art. 167 of Italian Presidential Decree No. 917/1986 of December 22, 1986, or “Decree No. 917,” provides for the rules of taxation of foreign companies, or “CFCs,” located in certain countries and territories with a privileged tax regime (as identified by Ministerial Decree of November 21, 2001, the “Black List”) that are directly or indirectly controlled by Italian resident individuals, companies and entities, which we refer to in this Annual Report on Form 20-F as the “Italian CFC Legislation.” Under the Italian CFC Legislation, the income of the CFC (as re-calculated pursuant to the Italian tax rules regarding business income) is attributed to, at the end of the financial year of the CFC, the Italian resident controlling entity pro rata to the latter’s ownership in the CFC and separately taxed in Italy at a tax rate equal to the average tax rate of the Italian resident controlling entity, which in any case cannot be lower than 27%.

Following the amendments provided for by Law Decree No. 78 of July 1, 2009, enacted by Law No. 102 of August 3, 2009, the application of the Italian CFC Legislation has been extended also to CFCs that are located in non-Black Listed countries or territories, thus including CFCs located in EU Member States, provided that certain conditions are met. Such new rules apply starting from the financial year 2010. However, there is still significant uncertainty regarding the application of these new rules. Based on the above, some of the foreign companies, including WIND Italy group companies located within the EU, may fall within the scope of application of the new Italian CFC legislation. Accordingly, WIND Italy continues to analyze the possible application developments and interpretations of this legislation.

WIND Italy may be subject to a deferral or to a limitation of the deduction of interest expenses in Italy.

For taxpayers like WIND Italy, Article 96 of Decree No. 917, as amended and restated, provides for the Italian regime of interest expenses deduction, aimed at rationalizing and simplifying the interest expenses deduction for Italian corporate income tax, or “IRES,” purposes. Specifically, the rules allow for the full tax deductibility of interest expense incurred by a company in each fiscal year up to the amount of the interest income of the same fiscal year, as evidenced by the relevant annual financial statements. A further deduction of interest expense in excess of this amount is allowed up to a threshold of 30% of the EBITDA of a company (i.e., “risultato operativo lordo della gestione caratteristica,” or “ROL” calculated as the difference between (i) the value of production -item A of the profit and loss account scheme contained in Article 2425 of Italian Civil Code- and (ii) the costs of production -item B of the profit and loss accounts scheme contained in Article 2425 of Italian Civil Code-, excluding depreciation, amortization and financial leasing installments relating to business assets) as recorded in such company’s profit net loss account. The law provides that the amount of ROL (i) produced as from the third fiscal year following the fiscal year 2007 (i.e., 2010) and (ii) not used for the deduction of the amount of interest expense that exceeds interest income, can be carried forward, increasing the amount of ROL for the following fiscal years. Interest expense not deducted in a relevant fiscal year can be carried forward to the following fiscal years, provided that, in such fiscal years, the amount of interest expense that exceeds interest income is lower than 30% of ROL. Special rules apply to companies participating in the same tax group, allowing, to a certain extent and with certain limitations, to offset the excess interest expenses incurred by an Italian company in the tax group with 30% of ROL of other companies in the same tax group. Subject to certain limitation the 30% of the foreign controlled entities’ ROL may be used to offset any excess interest expenses of Italian companies participating to the tax group. Based on the above rules, WIND Italy currently is not able to deduct all of its interest expenses, though it is able to carry forward accrued and unused deductions to future fiscal years. Furthermore, any future changes in current Italian tax laws or in their interpretation and/or any future limitation on the use of the foreign controlled entities ROL may have an adverse impact on the deductibility of interest expenses for Wind Italy which, in turn, could adversely affect VimpelCom’s and WIND Italy’s financial condition and results of operations.

We operate in an uncertain regulatory environment, which could cause compliance to become more complicated, burdensome and expensive and could result in our operating without all of the required permissions.

The application of the laws of any particular country is not always clear or consistent. This is particularly true in many of the emerging market countries in which we operate where the legislative drafting has not always kept pace with the demands of the marketplace. For more information on the risks associated with emerging markets, see “—Risks Related to Our Markets—Investors in emerging markets, where most of our operations are located, are subject to greater risks than investors in more developed markets, including significant political, legal and economic risks and risks related

 

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to fluctuations in the global economy” below. As a result, it is often difficult to ensure that we are in compliance with changing legal requirements. For example, although the Russian Communications Law regarding license renewals in Russia has been clarified, the licensing procedures (including the re-issuance of licenses, frequencies and other permissions in connection with mergers and the issuance of local and zonal licenses) appear to differ from the procedures under prior law and do not always clearly state the steps that must be followed to obtain new licenses, frequencies, numbering capacity or other permissions needed to operate our business, and do not clearly specify the consequences for violations of the foregoing. If we are found to be involved in practices that do not comply with local laws or regulations, we may be exposed, among other things, to significant fines, the risk of prosecution or the suspension or loss of our licenses, frequency allocations, authorizations or various permissions, any of which could have a material adverse effect on our business, financial condition and results of operations.

The regulators responsible for the control and supervision of communications services in each country in which we operate frequently check our compliance with the requirements of the applicable legislation and our telecommunications licenses. We intend to make all necessary efforts to comply with all such requirements. However, we cannot assure you that in the course of future inspections, we will not be found to be in violation of the applicable legislation. Any such finding could have a material adverse effect on our operations.

In addition, it may be difficult and prohibitively expensive for us to comply with applicable telecommunications regulations related to state surveillance of communications traffic. Full compliance with regulations that allow the state to monitor voice and data traffic may be overly burdensome, expensive and lead to a drop in quality of service. Noncompliance with such regulations may lead to the imposition of fines or penalties on us, or the revocation of our operating licenses. Further, some subscribers may refuse to utilize the services of a telecommunications operator whose networks facilitate state surveillance of communications traffic.

As a result of the uncertainty in the regulatory environment we have experienced and could experience in the future:

 

   

restrictions or delays in obtaining additional numbering capacity, receiving new licenses and frequencies, receiving regulatory approvals for rolling out our networks in the regions for which we have licenses, receiving regulatory approvals for changing our frequency plans and importing and certifying our equipment;

 

   

difficulty in complying with applicable legislation and the terms of any notices or warnings received from the regulatory authorities in a timely manner;

 

   

significant additional costs;

 

   

delays in implementing our operating or business plans; and

 

   

a more competitive operating environment.

Arbitrary action by the authorities may have a material adverse effect on our business.

In countries where we operate, governmental, regulatory and tax authorities have a high degree of discretion and at times exercise their discretion arbitrarily, without a hearing or prior notice, and sometimes in a manner that is contrary to law. Arbitrary, inconsistent or unlawful actions by authorities could have a material adverse effect on our business, financial condition and results of operations.

Developing legal systems in the countries in which we operate create a number of uncertainties for our business.

Many aspects of the legal systems in our countries of operation create uncertainties with respect to many of the legal and business decisions that we make, many of which do not exist in countries with more developed legal systems. The uncertainties we face include, among others, potential for negative changes in laws, gaps and inconsistencies between the laws and regulatory structure, difficulties in enforcement and inconsistency in the judicial interpretation of legislation in similar cases due to an under-developed judicial system.

 

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Lack of independence and experience of the judiciary, difficulty of enforcing court decisions, the unpredictable acknowledgement and enforcement of foreign court judgments or arbitral awards in a number of the countries in which we operate and governmental discretion in enforcing claims give rise to significant uncertainties.

In a number of the countries in which we operate, the independence of the judicial system and its immunity from political, economic and nationalistic influences remains largely untested. Additional factors, such as lack of formal binding effect of judicial precedents, poor availability and organization of legislation and court decisions, slow pace of judicial processes and difficultly in enforcement of court orders, make judicial decisions in many of the countries in which we operate difficult to predict and make effective redress uncertain. Additionally, court claims are often used in furtherance of political aims. We may be subject to such claims and may not be able to receive a fair hearing. Additionally, court orders are not always enforced or followed by law enforcement agencies.

In addition, many of the countries in which we operate are not parties to any multilateral or bilateral treaties with most Western jurisdictions, including the United States and the United Kingdom, for the mutual enforcement of judgments of state courts. Consequently, should a judgment be obtained from a court in any of such jurisdictions, it is highly unlikely to be given direct effect in the courts of such countries. There is also a risk that new legislation in such countries will introduce further grounds for preventing foreign court judgments and arbitral awards from being recognized and enforced.

Laws restricting foreign investment could materially adversely affect our business.

We could be materially adversely affected by existing laws restricting foreign investment or the adoption of new laws or regulations restricting foreign investment, including foreign investment in the telecommunications industry, in the markets in which we operate.

For example, the Russian Foreign Investment Law limits foreign investment in companies that are deemed to be strategic. Under the Russian Foreign Investment Law, a company operating in the telecommunications sector may be deemed strategic if it holds a dominant position in the Russian communications market (except for the Internet services market) or, in the case of fixed-line telecommunications, if the particular company’s market covers five or more Russian regions or covers Russian cities of federal importance. In connection with the adoption of the Russian Foreign Investment Law, amendments were adopted to certain provisions of the Russian Communications Law which provide that with respect to mobile telecommunications, a company will be deemed to have a dominant position for purposes of application of the Russian Foreign Investment Law if its share of the Russian mobile telecommunications market exceeds 25.0%. The Russian FAS previously determined that a group of persons consisting of OJSC VimpelCom and two of its Russian subsidiaries, one of which subsequently merged with and into OJSC VimpelCom, has a dominant position, because their share of the Russian mobile telecommunications market exceeds 25.0%. As a result, OJSC VimpelCom is deemed to be a strategic enterprise and, among other things, any acquisition by a foreign investor of direct or indirect control over more than 50.0% of its voting shares, or 25.0% in the case of a company controlled by a foreign government, requires the prior approval of the Russian authorities pursuant to the Russian Foreign Investment Law. See “—The FAS claim recently brought against two of our strategic shareholders could adversely impact on our business and the governance of our company” above. In the event any future transactions with our shares result in the acquisition by a foreign investor of direct or indirect control over OJSC VimpelCom, such a transaction will require prior approval in accordance with the Russian Foreign Investment Law. As a result, our ability to obtain financing from foreign investors through such transactions may be limited, should prior approval be refused, delayed or require foreign investors to comply with certain conditions imposed by the Government Commission on Control of Foreign Investments in the Russian Federation or the Russian FAS, which could materially and adversely affect our business, financial condition and results of operations.

We are subject to anti-corruption laws in the jurisdictions in which we operate.

We are subject to a number anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, or “FCPA,” and various other anti-corruption laws. Our failure to comply with anti-corruption laws applicable to us, could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations. The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with. Although we regularly review and update our policies and procedures designed to ensure that we, our employees, distributors and other intermediaries comply with the anti-corruption laws to which we are

 

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subject, there is no assurance that such policies or procedures will work effectively all of the time or protect us against liability under these or other laws for actions taken by our employees, distributors and other intermediaries with respect to our business or any businesses that we may acquire. If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations or financial condition and liquidity. Any investigation of any potential violations of such laws could also have an adverse impact on our business, financial condition and results of operations.

Risks Related to Our Markets

The deterioration of the condition of the international economic environment could have a material adverse effect on our business.

In late 2008 and 2009, the economies in our markets were adversely affected by the international economic crisis. Among other things, the crisis led to a slowdown in gross domestic product growth, devaluations of the currencies in Russia and some of the other markets in which we operate and a decrease in commodity prices. Although economic conditions have been improving, the timing of a return to sustained economic growth and consistently positive economic trends is difficult to predict. The recessionary effects and debt crisis in Europe continue to elevate macroeconomic risks. The economic climate is further strained by high energy costs, in large part due to conflicts or social unrest in the Middle East, which can increase our cost of operation, while at the same time discouraging spending by subscribers. The current difficult economic environment and any future downturns in the economies in which we operate could diminish demand for our services, increase our costs, constrain our ability to retain existing subscribers and collect payments from them and prevent us from executing our growth strategy. Adverse economic conditions could also hurt our liquidity and prevent us from obtaining financing needed to fund our development strategy, which could have a material adverse effect on our business, financial condition and results of operations.

When we purchase a company, we record the difference between the sum of the purchase price plus the fair value of noncontrolling interest and the fair value of the net assets acquired as goodwill. On an at least annual basis, we perform an impairment test per cash generating unit. A deterioration in macroeconomic conditions in the countries in which we operate and/or a significant difference between the performance of an acquired company and the business case assumed at the time of acquisition could require us to significantly write down the value of the goodwill. A write down in goodwill could impact the covenants under our debt agreements and could lead to a material adverse effect on our business, financial condition and results of operations.

Investors in emerging markets, where most of our operations are located, are subject to greater risks than investors in more developed markets, including significant political, legal and economic risks and risks related to fluctuations in the global economy.

Most of our operations are in emerging markets. Investors in emerging markets should be aware that these markets are subject to greater risks than more developed markets, including in some cases significant political, legal and economic risks. Emerging market governments and judiciaries often exercise broad, unchecked discretion and are susceptible to abuse and corruption and rapid reversal of political and economic policies on which we depend.

In addition, emerging economies are subject to rapid change and the information set out herein may become outdated relatively quickly. The economies of emerging markets are vulnerable to market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in these markets and materially adversely affect their economies. These developments could severely limit our access to capital and could materially adversely affect the purchasing power of our subscribers and, consequently, our business.

Some of the jurisdictions in which we operate have experienced significant social unrest. For example, OTH is an Egyptian company listed on the Egyptian Stock Exchange. In 2011, there were widespread protests against the government, resulting in a negative impact on the share prices of companies listed on the Egyptian Stock Exchange and resulted in extensive disruption and damage throughout the country to public and private property and infrastructure. Mobile networks and services were also temporarily suspended by government order. The protests resulted in the resignation of Egypt’s long-time president and in significant political reforms. These events and

 

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similar events in other jurisdictions where we operate could adversely affect our business, prospects, financial condition and results of operations. In addition, a number of the jurisdictions in which we operate may present security risks to our local businesses, management and employees, and this may make it more difficult to attract and retain effective management personnel.

Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to consult with their own legal, financial and tax advisors.

Sustained periods of high inflation may materially adversely affect our business.

The countries in which we operate have experienced periods of high levels of inflation since the early 1990s. For example, in Russia, our largest market, inflation increased dramatically following the August 1998 financial crisis, reaching a rate of 84.4% in 1998. Inflationary volatility and pressure on the Russian ruble remains significant, as evidenced by the increase in the inflation rate in 2007 to 11.9% and in 2008 to 13.3%. Although the inflation rate decreased to 8.8% in 2009 and 2010 and 6.1% in 2011, it may increase again in the near future as a result of challenging worldwide economic conditions. We face similar risks in other jurisdictions in which we operate. Certain emerging markets in which we operate have even experienced hyperinflation, such as Zimbabwe where inflation reached several million per cent during 2008 with serious impact on our business in Zimbabwe and results of operations. We cannot guarantee that similar circumstances of hyperinflation will not be experienced in other markets in which we operate in the future.

Our profit margins could be adversely affected if we are unable to sufficiently increase our prices to offset any significant future increase in the inflation rate, which may become more difficult as we attract more mass market subscribers and our subscriber base becomes more price sensitive. Inflationary pressure in Russia and the other countries where we have operations could materially adversely affect our business, financial condition and results of operations.

Social instability in the countries where we operate could lead to increased support for centralized authority and a rise in nationalism, which could harm our business.

Social instability in the countries in which we operate, coupled with difficult economic conditions, could lead to increased support for centralized authority and a rise in nationalism. These sentiments could lead to restrictions on foreign ownership of companies in the telecommunications industry or large-scale nationalization or expropriation of foreign-owned assets or businesses. In most of the countries in which we operate, there is relatively little experience in enforcing legislation enacted to protect private property against nationalization or expropriation. As a result, we may not be able to obtain proper redress in the courts, and we may not receive adequate compensation if in the future the governments decide to nationalize or expropriate some or all of our assets. If this occurs, our business could be harmed.

In addition, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict. The spread of violence, or its intensification, could have significant political consequences, including the imposition of a state of emergency, which could materially adversely affect the investment environment in the countries in which we operate.

If political and economic relations among countries in which we operate deteriorate, our operations could be materially adversely affected.

Political and economic relations among the countries in which we operate are often complex and have in the past resulted in, and may in the future result in conflicts, which may materially adversely affect our business, financial condition and results of operation.

For example, relations between Russia and Ukraine have historically been strained. Ukraine’s economy depends heavily on its trade flows with Russia and the CIS largely because Ukraine imports a large proportion of its energy requirements, especially from Russia. In addition, a large share of Ukraine’s services receipts comprise transit charges for oil, gas and ammonia from Russia. As a result, Ukraine considers its relations with Russia to be of strategic importance. However, relations between Ukraine and Russia have cooled due to disagreements over the

 

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prices and methods of payment for gas delivered by the Russian gas monopoly OJSC Gazprom to, or for transportation through, Ukraine and over the stationing of the Russian Black Sea Fleet (Chernomorskii Flot) on the territory of Ukraine.

If bilateral trade relations were to deteriorate, including if Russia were to stop transiting a large portion of its oil and gas through Ukraine or if Russia halted supplies of gas to Ukraine, Ukraine’s balance of payments and foreign currency reserves could be materially and adversely affected. Any major changes in Ukraine’s relations with Russia, in particular, any such changes adversely affecting supplies of energy resources from Russia to Ukraine or Ukraine’s revenues derived from transit charges for Russian oil and gas, may have negative effects on sectors of the Ukrainian economy which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

The relationship between Russia and Georgia has also been strained due to several ongoing disputes which resulted in military conflict in August 2008 and may lead to military and/or economic conflict in the future. Although our company operates in Ukraine and the CIS through local subsidiaries, governmental officials and consumers may associate our group and our brand with Russia. Any deterioration in political and economic relations between Russia, Ukraine and the countries of the CIS could have a material adverse effect on our business, financial condition and results of operations.

Political and governmental instability could adversely affect the value of investments in Ukraine.

Since obtaining independence in 1991, Ukraine has undergone a substantial political transformation from a constituent republic of the former Union of Soviet Socialist Republics to an independent sovereign democratic state. Governmental instability has been a feature of the Ukrainian political scene and, as a result, Ukraine has experienced fifteen changes of Prime Minister during this period, with various actions and decisions being taken based primarily on political considerations. Historically, a lack of political consensus in the Verkhovna Rada (the “Ukrainian Parliament”) has consistently made it difficult for the Ukrainian government to secure the necessary parliamentary support to implement a variety of policies intended to foster economic reform and financial stability.

On September 30, 2010, the Constitutional Court of Ukraine, or the “CCU,” issued a ruling against the constitutionality of the 2004 constitution amendment law, which was the basis for the constitutional reform of 2006, limiting the powers of the President and transferring certain powers of the President to the Ukrainian Parliament and the Ukrainian government. Pursuant to this ruling, the 2004 constitution amendment law ceased to be effective from September 30, 2010 and the constitution that was in effect before the enactment of the 2004 constitution amendment law resumed legal force from September 30, 2010. Accordingly, following the decision of the CCU, certain current Ukrainian legislation may contradict the constitution of Ukraine and require amendment to be constitutionally valid. This may result in uncertainty in the distribution of powers among Ukrainian state authorities and may lead to further political instability in Ukraine.

Recent political developments have also highlighted potential inconsistencies between the constitution of Ukraine and various laws and presidential decrees. Whilst the long-term consequences of the recent judgment of the CCU in respect of the 2004 constitution amendment law are not yet clear, the decision may result in political instability in Ukraine which, in turn, could impair efforts to implement all the necessary reforms. Furthermore, such developments have raised questions regarding the judicial system’s independence from economic and political influences.

A number of additional factors could adversely affect political stability in Ukraine, including:

 

   

lack of agreement within the factions and amongst individual deputies;

 

   

disputes between factions that form a majority and opposition factions on major policy issues, including Ukraine’s foreign policy;

 

   

court actions taken by opposition parliamentarians against decrees and other actions of the president or the government of Ukraine or the majority factions; and

 

   

court action by the president against parliamentary or governmental resolutions or actions.

 

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No assurances can be given that the political initiatives necessary to achieve reforms will continue, will not be reversed or will achieve their intended aims. These and any other adverse political developments may have negative effects on the economy as a whole and, as a result, on our business, financial condition, results of operations and prospects.

The physical infrastructure in many countries in which we operate is in poor condition and further deterioration in the physical infrastructure could have a material adverse effect on our business.

In many countries in which we operate, the physical infrastructure, including transportation networks, power generation and transmission and communications systems, is in poor condition. In some of the countries in which we operate, including Russia, the public switched telephone networks have reached capacity limits and need modernization, which may inconvenience our subscribers and will require us to make additional capital expenditures. In addition, continued growth in local, long-distance and international traffic, including that generated by our subscribers, and development in the types of services provided may require substantial investment in public switched telephone networks. Any efforts to modernize infrastructure may result in increased charges and tariffs, potentially adding costs to our business. The deterioration of the physical infrastructure harms the economies of these countries, disrupts the transportation of goods and supplies, adds costs to doing business and can interrupt business operations. Further deterioration in the physical infrastructure in many of the countries in which we operate could have a material adverse effect on our business.

The banking systems in many countries in which we operate remain underdeveloped and there are a limited number of creditworthy banks in these countries with which our company can conduct business.

The banking and other financial systems many countries in which we operate are not well developed or regulated, and laws relating to banks and bank accounts are subject to varying interpretations and inconsistent applications. We have attempted to mitigate our banking risk by receiving and holding funds with the most creditworthy banks available in each country. However, in the event of a banking crisis in any of these countries or the bankruptcy or insolvency of the banks from which we receive, or with which we hold, our funds, could result in the loss of our deposits or negatively affect our ability to complete banking transactions in these countries, which could have a material adverse effect on our business, financial conditions and results of operations. In addition, central banks in emerging markets in which we operate may restrict or prevent international transfers (whether to shareholders or third parties), which could result in a material adverse effect on the business condition of our local operations or our ability to realize profits from such operations.

In Russia, one of our key markets, we have in the past and continue to face such banking risks. In Russia, there are a limited number of banks that meet international banking standards and the transparency of the Russian banking sector in some respects lags behind internationally accepted norms. Most creditworthy Russian banks are located in Moscow and there are fewer creditworthy Russian banks in the regions outside of Moscow. Recently, there has been an increase in lending by Russian banks, which many believe has been accompanied by a deterioration in the credit quality of the borrowers. The deficiencies in the Russian banking system, coupled with a decline in the quality of the credit portfolios of Russian banks, may result in the banking sector being more susceptible to the current worldwide credit market downturn and economic slowdown. The global financial crisis that began in the United States in the autumn of 2008 has resulted in decreased liquidity in the Russian credit market and weakened the Russian financial system. Efforts by the Russian government to increase liquidity have been stymied by an unwillingness in the banking sector to lend to other banks and to the real economy. The lack of liquidity and economic slowdown have raised the possibility of Russian corporate defaults and led to bank failures and downgrades of Russian banks by credit rating agencies. More bank failures and credit downgrades may result in a crisis throughout the Russian banking sector. Starting from the fourth quarter of 2008, a majority of the Russian banks experienced difficulties with funding on domestic and international markets and interest rates increased significantly. Some of the banks were unable to service their obligations and were sold to and/or merged into larger banks. Credit ratings of several banks have been lowered and some banks have lost their Central Bank of Russia licenses. The Russian Government has provided liquidity to the banking system and interest rates have been decreasing since the second half of 2009, but major banks are still unwilling or unable to transfer money to the economy in the form of long-term loans. A prolonged or serious banking crisis or the bankruptcy of a number of banks, including banks in which we receive or hold our funds or conduct other transactions necessary for our operations, could negatively impact our ability to complete banking transactions in Russia, which could place severe liquidity constraints on and materially adversely affect our business.

 

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To the extent that we experience labor disputes or work stoppages, our business could be materially adversely affected.

We have in the past and may in the future be subject to labor disputes or work stoppages from employee or trade union action. Any significant labor disputes or work stoppages could have a material adverse effect on our business, financial condition or results of operation.

Countries in which we operate protect the right of employees to set up and join trade unions and to carry on union activities, including appointing workers’ representatives to negotiate with their employer, and to go on strike. Employees of our subsidiaries have gone on strike in the past and, we cannot guarantee that employees will not go on strike in the future. Any work stoppages resulting from employee strikes could hinder our ability to provide our standard level of customer service.

In addition, we have been in the past and are currently party to labor disputes with certain of its employees on an individual basis. While our management believes that none of these disputes are material individually, there can be no assurance that these claims or future claims by employees will not have a material adverse effect on our business, financial condition or results of operations.

Countries in which we operate and entities with which we conduct business may be subject to international sanctions.

Certain countries in which we operate and entities with which we conduct business are, or may in the future be, subject to international sanctions imposed by the European Union and/or the United States (among others). For example, Zimbabwe is subject to international sanctions imposed by the European Union and the United States, among others. There can be no assurance that we will be able to comply with all international sanctions regimes, whether or not there are any changes to such regimes. If we cannot comply with such regimes in the future we may be subject to civil or criminal penalties and fines and would likely be required to cease operations in such jurisdictions, which could adversely affect our business, financial condition and results of operations.

Risks Related to the Ownership of our ADSs

The issuance of a significant number of our shares in the Wind Telecom Transaction and a resulting “market overhang” could adversely affect the market price of our ADSs.

In connection with the completion of the Wind Telecom Transaction, we issued 325,639,827 new common shares and 305,000,000 convertible preferred shares to Weather II. This resulted in the total number of common shares increasing by 25% and the total number of convertible preferred shares increasing by approximately 330%. Weather II may convert such common shares into our ADSs for sale on the NYSE, subject to certain limitations under U.S. securities laws. There are currently 433,532,000 VimpelCom convertible preferred shares outstanding which may be converted into VimpelCom common shares at the option of the shareholder any time between 2.5 years and 5 years after their issuance at a price based on the NYSE price of VimpelCom ADSs, subject to certain limitations under U.S. securities laws. If the convertible preferred shares are converted into common shares they will also become available for trading in the public market. The sale of any of the VimpelCom shares on the public markets or the perception that such sales may occur (commonly referred to as “market overhang”), may adversely affect the market for, and the market price of, VimpelCom’s ADSs.

Various factors may hinder the declaration and payment of dividends.

The payment of dividends is subject to the discretion of VimpelCom’s supervisory board and VimpelCom’s assets consist primarily of investments in its operating subsidiaries. Various factors may cause the supervisory board to determine not to pay dividends. Such factors include VimpelCom’s financial condition, its earnings and cash flows, its capital requirements, contractual restrictions, legal proceedings and such other factors as VimpelCom’s supervisory board may consider relevant.

VimpelCom is a Bermuda company governed by Bermuda law, which may affect your rights as a shareholder or holder of ADSs.

 

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VimpelCom is a Bermuda exempted company. As a result, the rights of VimpelCom’s shareholders are governed by Bermuda law and by VimpelCom’s bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. In addition, holders of ADSs do not have the same rights under Bermuda law and VimpelCom’s bye-laws as registered holders of VimpelCom’s shares. Substantially all of our assets are located outside the United States. It may be difficult for investors to enforce in the United States judgments obtained in U.S. courts against VimpelCom or its directors and executive officers based on civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, under the securities laws of those jurisdictions, or entertain actions in Bermuda under the securities laws of other jurisdictions.

We are not subject to corporate governance requirements under the NYSE rules.

Our ADSs are listed on the NYSE; however, as a Bermuda company, we are not subject to the corporate governance provisions under the NYSE listing rules that are applicable to a U.S. company. The primary difference between our corporate governance practice and the NYSE rules relates to section 303A.01 of the NYSE rules, which provides that each U.S. company listed on the NYSE must have a majority of independent directors, as defined in the NYSE rules. Bermuda corporate law does not require that we have a majority of independent directors. We do not have a majority of independent directors. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements. For more information on the significant corporate governance differences between our corporate governance practices and those followed by U.S. companies under NYSE listing standards, see the section of this Annual Report on Form 20-F entitled “Item 16G—Corporate Governance.”

 

ITEM 4. Information on the Company

Overview

VimpelCom is one of the world’s largest telecommunications service operators, providing voice and data services through a range of traditional and broadband mobile and fixed technologies. The VimpelCom Group includes companies operating in Russia, Italy, Ukraine, Kazakhstan, Uzbekistan, Tajikistan, Armenia, Georgia, Kyrgyzstan, Cambodia, Laos, Algeria, Bangladesh, Pakistan, Burundi and the Central African Republic. We also hold equity shareholdings in companies operating in Vietnam, Canada and Telecel Zimbabwe. The operations of these companies cover a territory with a total population of approximately 864 million. We provide services under the “Beeline,” “Kyivstar,” “djuice,” “banglalink,” “Mobilink,” “Telecel,” “Leo,” “Djezzy,” “Wind” and “Infostrada” brands. As of December 31, 2011, we had 205 million mobile subscribers.

VimpelCom Ltd. is an exempted company limited by shares registered under the Companies Act 1981 of Bermuda on June 5, 2009, and our registered office is located at Victoria Place, 31 Victoria Street, Hamilton HM 10, Bermuda. The VimpelCom Group’s headquarters are located at Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands. Our telephone number is +31 20 797 7200. VimpelCom Ltd. is registered with the Dutch Trade Register (registration number 34374835) as a company formally registered abroad (formeel buitenlandse kapitaalvennootschap), as this term is referred to in the Dutch Companies Formally Registered Abroad Act (Wet op de formeel buitenlandse vennootschappen), which means that we are deemed a Dutch resident company for tax purposes in accordance with applicable Dutch tax regulations.

History and Development

VimpelCom has a rich history which includes its development and expansion throughout Russia and the CIS, then into Asia, Europe, Africa and North America.

Important events in the development of the business are as follows:

 

   

In November 1996, our predecessor OJSC VimpelCom became the first Russian company since 1903 to list shares on the NYSE.

 

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In December 1998, Telenor, Norway’s leading telecommunications company became a strategic partner in OJSC VimpelCom. That same year, OJSC VimpelCom became the first major mobile telecommunications services provider in Russia to offer prepaid tariff plans to our subscribers.

 

   

To accelerate the development of OJSC VimpelCom’s regional GSM license portfolio, in May 2001, OJSC VimpelCom signed an agreement with Alfa Group which purchased strategic ownership interests in OJSC VimpelCom. Telenor also participated in the transaction.

 

   

OJSC VimpelCom’s expansion in Russia accelerated in 2003. In April 2003, OJSC VimpelCom launched operations in St. Petersburg and by the end of that year had 55 regional networks in commercial operation and a total subscriber base in Russia exceeding 10 million.

 

   

In September 2004, OJSC VimpelCom began to implement its strategic plan to expand its operations into the CIS by acquiring 50.0% plus one share of KaR-Tel, a mobile telecommunications services provider with a national GSM license in Kazakhstan. OJSC VimpelCom continued its growth strategy throughout 2005 and 2006 by acquiring 100.0% of URS in Ukraine in November 2005, 60.0% of Limited Liability Company Tacom, or “Tacom,” in Tajikistan in December 2005, 100.0% of each of Bakarie Uzbekistan Telecom Limited Liability Company, or “Buztel,” and Limited Liability Company Unitel, or “Unitel,” in Uzbekistan in January and February 2006, respectively, 51.0% of Limited Liability Company Mobitel, or “Mobitel,” in Georgia in July 2006 and 90.0% of CJSC ArmenTel, or “ArmenTel,” in Armenia in November 2006. In July 2006, OJSC VimpelCom merged Buztel into Unitel.

 

   

In January 2008, OJSC VimpelCom commenced a tender offer to purchase any and all outstanding shares of Golden Telecom Inc.’s common stock. Golden Telecom was a leading facilities-based provider of integrated telecommunications and Internet services in major population centers throughout Russia and other countries of the CIS. The acquisition of 100.0% of Golden Telecom was completed in February 2008. Following the acquisition, OJSC VimpelCom was able to offer a broad portfolio of services in both the fixed-line and mobile markets.

 

   

OJSC VimpelCom started to expand into Southeast Asian markets in 2008. In July 2008, a subsidiary of OJSC VimpelCom acquired a 90.0% stake in Sotelco Ltd., or “Sotelco,” a company holding a GSM 900/1800 license and related frequencies in Cambodia.

 

   

Also in July 2008, OJSC VimpelCom signed an agreement with GTEL, a Vietnamese state-owned enterprise, and its subsidiary GTEL Technical Service and Commercial Joint Stock Company, or “GTEL TSC,” to establish the joint venture company GTEL-Mobile, in which Ararima Enterprises Limited, or “Ararima,” a wholly owned subsidiary of OJSC VimpelCom, received a 40.0% interest. In September 2008, GTEL-Mobile received a GSM-1800 license and frequencies. In April 2011, Ararima acquired an additional 9.0% (minus one share) on a fully diluted basis of GTEL-Mobile, increasing OJSC VimpelCom’s indirect shareholding to 49.0% (minus one share). As part of the agreement, Ararima would subscribe to additional indirectly held dividend preference shares in the years 2012 to 2013, which would increase its economic interest to 65.0%, in exchange for providing GTEL-Mobile with up to US$304.0 million in financing, subject to certain conditions. On April 20, 2012, VimpelCom signed an agreement to sell its entire indirect 49% stake in GTEL Mobile to GTEL Transmit and Infrastructure Service One Member Company Limited, or “GTEL Transmit,” a related party of GTEL. The sale was completed on April 23, 2012. For more information, see “Item 5—Operating and Financial Review and Prospects—Recent Developments.”

 

   

On October 23, 2008, Ararima acquired 49.9% of Morefront, which owned 100.0% of Euroset, the leading mobile handset retailer and dealer for major mobile network operators in Russia.

 

   

In October 2009, Telenor ASA, the parent company of the Telenor Group, and Altimo Holdings, a member of the Alfa Group and the parent company of Eco Telecom Limited, announced that they agreed to combine their ownership of OJSC VimpelCom and Kyivstar, under a new company called VimpelCom Ltd. Kyivstar is a Ukrainian mobile operator, 56.5% of which was owned by subsidiaries of Telenor and 43.5% of which was owned by subsidiaries of Altimo. We refer to the

 

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combination in this Annual Report on Form 20-F as the “VimpelCom Ltd. Transaction.” The VimpelCom Ltd. Transaction involved a series of transactions, including an exchange offer by VimpelCom Ltd. comprising (i) an offer to all holders resident in the United States (including its territories and possessions) of shares of OJSC VimpelCom’s common and preferred stock and to all holders of OJSC VimpelCom’s ADSs, wherever located, referred to in this Annual Report on Form 20-F as the “U.S. Offer,” and (ii) a separate voluntary tender offer to all holders of shares of OJSC VimpelCom’s common and preferred stock, wherever located, referred to in this Annual Report on Form 20-F as the “Russian Offer.” The Russian Offer and the U.S. Offer are collectively referred to in this Annual Report on Form 20-F as the “VimpelCom Ltd. Exchange Offers.” Completion of the VimpelCom Ltd. Exchange Offers was conditioned upon greater than 95.0% of OJSC VimpelCom’s shares, including those represented by ADSs, being validly tendered and not withdrawn, in addition to other conditions.

 

   

On April 21, 2010, all conditions of the VimpelCom Ltd. Exchange Offers were satisfied, and VimpelCom Ltd. acquired approximately 98.0% of OJSC VimpelCom’s outstanding shares, including shares represented by ADSs. Immediately following completion of the VimpelCom Ltd. Exchange Offers, subsidiaries of Telenor and Altimo caused their direct and indirect interests in Kyivstar to be transferred to VimpelCom Holdings B.V., a wholly owned subsidiary of VimpelCom Ltd.

 

   

On May 14, 2010, OJSC VimpelCom’s ADSs were delisted from the NYSE, and on June 2, 2010, OJSC VimpelCom’s shares were excluded from the list of traded securities at the Open Joint Stock Company Russian Trading System Stock Exchange, or “Russian Trading System.”

 

   

On August 6, 2010, VimpelCom Ltd. completed the acquisition of all of OJSC VimpelCom’s shares, including those represented by ADSs, from OJSC VimpelCom’s remaining minority shareholders by way of a squeeze-out process under Russian law commenced on May 25, 2010.

 

   

On October 20, 2010, VimpelCom exercised a call option to acquire from Crowell Investments Limited 50.1% of the issued share capital of Menacrest Limited, which is the parent company of LLC Sky Mobile, or “Sky Mobile,” a mobile operator in Kyrgyzstan holding GSM and 3G licenses to operate over the entire territory of Kyrgyzstan.

 

   

In March 2011, VimpelCom acquired a 78.0% stake in Millicom Lao, a mobile telecommunications operator with operations in the Lao PDR, from Millicom Holding B.V. (Netherlands) and Cameroon Holdings B.V. (Netherlands).

 

   

On April 15, 2011, VimpelCom completed the acquisition of Wind Telecom S.p.A., an international provider of mobile and fixed-line telecommunications and Internet services with operations in Europe (primarily Italy), North America, Africa, the Middle East and Asia. The acquisition of Wind Telecom S.p.A. is referred to in this Annual Report on Form 20-F as the “Wind Telecom Transaction.” Weather Investments II S.à r.l., or “Weather II,” the former owner of Wind Telecom, received 325,639,827 newly-issued VimpelCom Ltd. common shares, 305,000,000 newly-issued VimpelCom Ltd. convertible preferred shares and US$1,495.0 million in cash. The issuance of new VimpelCom Ltd. shares for the acquisition was approved by VimpelCom Ltd. shareholders at a special general meeting on March 17, 2011. As part of the Wind Telecom Transaction, certain assets have been demerged from the Wind Telecom group and transferred back to Weather II. As a result of the Wind Telecom Transaction, VimpelCom acquired operations of Wind Telecom in Algeria, Bangladesh, Pakistan, Burundi, Central African Republic, Italy and equity shareholdings in Canadian and Zimbabwean operations.

 

   

On August 24, 2011, VimpelCom completed a transaction with Crowell to combine our respective shareholdings in Limnotex Developments Limited, or “Limnotex,” the sole shareholder of Kar-Tel, and Menacrest, the sole shareholder of Sky Mobile. As a result of the transaction, Menacrest became a wholly owned subsidiary of Limnotex in exchange for issuance of new shares of Limnotex to VimpelCom Finance B.V., our wholly owned subsidiary, and Crowell. As a result of the restructuring, VimpelCom holds a 71.5% stake in Limnotex and Crowell owns the remaining 28.5%.

 

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For more information on our acquisitions, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Investing Activities” below.

Our capital expenditures include purchases of licenses, new equipment, new construction, upgrades, software, other long-lived assets and related reasonable costs incurred prior to intended use of the noncurrent assets, accounted at the earliest event of advance payment or delivery. Long-lived assets acquired in business combinations are not included in capital expenditures. For more information on our principal capital investments and investing activities, including acquisitions and divestitures of interests in other companies, and method of financing, see the sections entitled “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Investing Activities” and “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Future Liquidity and Capital Requirements.”

Organizational Structure

VimpelCom Ltd. is the holding company for a number of operating subsidiaries and holding companies in various jurisdictions. Our reporting structure is divided into the five following business units, all of which report to our headquarters in Amsterdam:

 

   

the Russia Business Unit;

 

   

the Europe & North America Business Unit;

 

   

the Africa & Asia Business Unit;

 

   

the Ukraine Business Unit; and

 

   

the Commonwealth of Independent States (or “CIS”) Business Unit.

The table below sets forth our operating companies and significant subsidiaries, including those subsidiaries that hold our principal telecommunications licenses, and our percentage ownership interest, direct and indirect, in each subsidiary as of December 31, 2011. Our percentage ownership interest is identical to our voting power in each of the subsidiaries.

 

Subsidiary

   Country
of
Incorporation
     Percentage Ownership
Interest

(Direct and Indirect)

VimpelCom Amsterdam BV

     Netherlands       100%

Wind Telecom S.p.A.

     Italy       100%

Wind Acquisition Holdings Finance S.p.A.

     Italy       100%

Wind Telecomunicazioni S.p.A.

     Italy       100%

VimpelCom Holdings BV

     Netherlands       100%

OJSC VimpelCom

     Russia       100%

“Kyivstar” PJSC

     Ukraine       100%(1)

Limnotex Developments Limited

     Cyprus       71.5%(2)

LLP “KaR-Tel”

     Kazakhstan       71.5%(3)

LLC “Tacom”

     Tajikistan       98.0%(4)

PJSC “Ukrainian RadioSystems”

     Ukraine       100%(5)

LLC “Golden Telecom”

     Ukraine       100%(6)

LLC “Unitel”

     Uzbekistan       100%(7)

LLC “Mobitel”

     Georgia       51.0%(8)

CJSC “ArmenTel”

     Armenia       100%

“Sotelco” Ltd.

     Cambodia       90.0%(9)

LLC “Sky Mobile”

     Kyrgyzstan       50.1%(10)

VimpelCom Lao Co. Ltd.

     Lao PDR       78.0%(11)

Weather Capital S.à r.l.

     Luxembourg       100%

Weather Capital Special Purpose 1 S.A.

     Luxembourg       100%

Orascom Telecom Holding S.A.E.

     Egypt       51.9%(12)

Orascom Telecom Algérie S.p.A.

     Algeria       50.3%(13)

Pakistan Mobile Communications Limited

     Pakistan       51.9%(14)

Orascom Telecom Bangladesh Limited

     Bangladesh       51.9%(15)

 

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(1) Shares Kyivstar holds in its own share capital are excluded for calculation of ownership percentage.
(2) OJSC VimpelCom holds 71.5% indirectly through a wholly owned Dutch holding company.
(3) Limnotex Developments Limited holds 100% directly.
(4) OJSC VimpelCom holds 98.0% indirectly through wholly owned Dutch and BVI holding companies.
(5) OJSC VimpelCom holds 100% indirectly through five Cypriot holding companies.
(6) OJSC VimpelCom holds 100% indirectly through a number of its wholly owned subsidiaries.
(7) OJSC VimpelCom holds 100% indirectly through wholly owned Dutch and BVI holding companies.
(8) OJSC VimpelCom holds 51.0% indirectly through a wholly owned BVI holding company.
(9) OJSC VimpelCom holds 90.0% through a wholly owned Cypriot holding company and a 90.0% owned BVI holding company.
(10) Limnotex Developments Limited holds 100% through its wholly owned Cypriot subsidiary.
(11) OJSC VimpelCom holds 78.0% indirectly through two wholly owned Dutch holding companies.
(12) Weather Capital S.à r.l. holds 1.92% directly and Weather Capital Special Purpose 1 S.A. holds 50.00% plus one share directly.
(13) Orascom Telecom Holding S.A.E. holds 57.5% directly and 39.3% indirectly through two wholly owned Maltese subsidiaries.
(14) Orascom Telecom Holding S.A.E. holds 100% indirectly through two wholly owned Maltese subsidiaries.
(15) Orascom Telecom Holding S.A.E. holds 99.9% indirectly through a Maltese subsidiary.

Description of Our Business

Our Mobile Telecommunications Business

We generally offer the following mobile telecommunications services to our subscribers:

 

   

mobile telecommunications services under contract and prepaid plans for both corporate and consumer segments;

 

   

value added and call completion services;

 

   

our value added services include messaging services, content/infotainment services, data access services, financial value added services (which help customers manage their credit balances), location based services (which monitor subscriber locations), media, content delivery channels and mobile financial services (such as mobile bill payment);

 

   

access to both national and international roaming services which allow our subscribers and subscribers of other mobile operators to receive and make international, local and long distance calls while outside of their home network;

 

   

wireless Internet access; and

 

   

other services.

Our Fixed-Line Telecommunications and Our Fixed Internet Business

We offer voice, data and Internet services to corporations, operators and consumers using metropolitan overlay network in major cities throughout Russia, Italy, Ukraine and the CIS. In Italy, we also use LLU, which allows us to use connections from Telecom Italia’s local exchanges to the customer’s premises.

In our fixed/mobile integrated business structure in Russia, Ukraine and the CIS, fixed-line telecommunications use intercity fiber optic and satellite-based networks. Our fixed business in Russia, Ukraine and the CIS is organized into three categories:

 

   

Business and Corporate Services;

 

   

Carrier and Operator Services, which provide consolidated management of our relationship with other carriers and operators. The two main areas of focus in this line of business are:

 

   

generating revenue by provisioning a specific range of telecom services to other mobile and fixed-line operators and ISPs in Russia and worldwide; and

 

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optimizing costs and ensuring the quality of our long distance voice, Internet and data services to and from subscribers of other telecommunications operators and service providers worldwide by means of interconnection agreements; and

 

   

Consumer Internet Services, which provide fixed-line telephony, Internet access and home phone services (on a VoIP and copper wire basis) to customers in Russia, Ukraine, Uzbekistan, Armenia and Kazakhstan.

In Italy, our fixed-line business uses an integrated network infrastructure with over 21,000 kilometers of fiber optic cable backbone and over 1,300 LLU sites for direct subscriber connections. Our fixed-line business in Italy is organized by the following services:

 

   

Consumer Voice Offerings;

 

   

Corporate Voice Offerings, which provide fixed line voice services, data services, value added services and connectivity services to corporate subscribers, including large corporate subscribers, SMEs and SOHOs; and

 

   

Internet and Data Services, which provide Internet and data transmission services to both consumer and corporate subscribers;

For a description of our operations in each of our five business units, see the sections entitled “Item 4—Information on the Company—Description of Operations of the Russia Business Unit,” “—Description of Operations of the Europe & North America Business Unit,” “—Description of Operations of the Africa & Asia Business Unit,” “—Description of Operations of the Ukraine Business Unit” and “—Description of Operations of the CIS Business Unit.”

Strategy

VimpelCom’s strategy focuses on sustainable profitable growth. Our businesses combine mature, strong cash-generating companies with emerging growth opportunities in a number of regions. We also combine strong and growing positions in both mobile and fixed broadband businesses, which we expect will further support our growth strategy as these services continue to expand across our markets.

We seek to capture profitable growth in mobile data, fixed data and mobile voice, by tailoring our strategy in each individual market according to its development characteristics. Our strategy is based on our belief that profitable growth will be driven by targeting high value customers, bundling services, achieving greater speed and access of data and retaining customers. In data in particular, our focus will be on capturing the growth in this segment of the market by moving away from unlimited plans to tiered pricing, rationally managing traffic and differentiating our services through more sophisticated offerings.

Our strategy to drive growth comprises broadly three types of businesses grouped according to their stages of development:

 

   

In our larger and more mature markets, Italy and Russia, we are focused on increasing profit and cash flow generation. These markets are highly penetrated, but have strong potential for broadband growth both in fixed and in mobile. Here, we will remain focused on reinforcing our solid market positions and sustained cash flow generation.

 

   

We consider as our “growth engine” developing markets in Ukraine, CIS, Bangladesh, Pakistan and Algeria. These markets each have a large potential customer base, high revenue growth from relatively low penetration and significant growth potential for mobile data. In these markets, we will seek to leverage our knowledge and experience in Russia and Italy to capture this growth.

 

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Finally, we have early stage operations, such as in Canada and some Asian and African markets, which would require further investment to reach their full potential. We are performing a contribution analysis of these operations.

Furthermore, we seek to enhance our local competitive positions by sharing experience, knowledge and product offerings throughout the group.

This broader view of the business provides the basis for our strategy, or “Value Agenda.” Our Value Agenda is based on local empowerment and starts with the company’s 205 million customers as of December 31, 2011. At the group level, VimpelCom is a lean organization focused on value creation through enhanced portfolio management, financial structuring and synergies of shared services, such as roaming and procurement. Headquarters will set financial and operating targets and operating units will be responsible for execution on targets through their specific operational value agenda and entrepreneurial spirit.

Our Value Agenda has the following three key pillars:

 

   

Profitable Growth. We aim to drive revenue growth that leads to profitability by focusing on higher value customers, speed of data access as a differentiating factor, and achieving smarter mobile data monetization.

 

   

Operational Excellence. We are focused on cost efficiency programs in both larger and smaller markets, as well as increased focus on customer retention.

 

   

Capital Efficiency. Our goal is to reduce the ratio of our capital expenditure to revenues over time by deploying capital more efficiently, including through centralized procurement management and other methods of realizing greater synergy.

Through this strategy, the company’s financial performance objectives from 2012 to 2014 include:

 

   

Revenue and EBITDA CAGR of approximately mid single digit;

 

   

Capex / Revenue (excluding licenses) below 15% by end of 2014; and

 

   

Net Debt / EBITDA below 2.0 by end of 2014. For related risks, see “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—Substantial leverage and debt service obligations may materially adversely affect our cash flow.”

The company also intends to make dividend payments of at least US$ 0.80 per common share per annum between 2011 and 2013. For more information on our dividend policy, see “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—Policy on Dividend Distributions.”

Competitive Strengths

We believe that we are well positioned to capitalize on opportunities in all our traditional and broadband mobile and fixed-line telecommunications markets. We seek to differentiate ourselves from our competitors by innovative products and high-quality service offerings, specialized customer care and strong, recognized brand names, providing unified technological and IT-procurement.

 

   

Recognized local brand names. We market our mobile services under local brand names in each of our markets. Our “Beeline” brand name is very well established in a number of countries, including Russia (where we introduced the brand in 1993), Kazakhstan, Uzbekistan, Armenia, Tajikistan, Georgia, Kyrgyzstan and Cambodia. Primarily as a result of our innovative marketing and brand licensing efforts, our “Beeline” brand name is among the most recognized brand names in Russia and the CIS. In Ukraine, we market our mobile services primarily under the “Kyivstar,” “Kyivstar Business” and “djuice” brands. In Italy, our “WIND” brand is well established and very well recognized. We also have powerful brands for our operations in Africa & Asia, including “Djezzy,” “Banglalink,” “Mobilink,” “Telecel,” and “Leo.” Our brands are generally very well known in the markets and enjoy “top of mind” brand awareness.

 

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Product and service innovation. In our mobile business, we continue to seek out new products and services to provide our subscribers with faster access and easier usage to be competitive in the markets in which we operate. We continue to develop services oriented towards our prepaid consumer segment, such as allowing customers to stay connected while temporarily accruing a negative account balance and a portfolio of call completion services.

 

   

Pricing. Acknowledging differences in competitive situations and consumer behavior across markets, we undertake a systematic effort involving dedicated analytics and research to develop an optimal pricing structure. This pricing approach ensures that we maximize value from all segments and lets us offer different tariffs and solutions to all market segments and types of companies, including special tariff options and bundles for voice and data services, fixed telephony, internet access and other services.

 

   

Data services. We believe data services are driving market growth, and we are focusing our efforts at winning this segment. We actively developing data services in all markets as part of our pre-paid and post-paid tariff proposals. We also offer universal serial bus, or “USB,” dongles to all customer segments with separate price plans targeted to large screen users.

We now offer a broad portfolio of competitive services in both the fixed-line and mobile corporate data markets that are designed to match the needs of our customers. For our business and corporate clients, we offer a wide range of data services, including wireless office internet solutions and high bandwidth corporate Internet access.

 

   

Specialized customer care. We provide specialized customer service to our different subscriber segments. We believe that our ability to provide specialized customer service has helped us maintain a high level of subscriber satisfaction with our products and services and control churn. We also believe that we have provided particularly strong customer service to our corporate subscribers.

 

   

Broad distribution network. We have large distribution network for mobile and fixed services in markets of our operation. The network is used both for sale purpose as well as for the purpose of customer care, thus providing higher standards of customer service. Our network consists of our own branded shops as well as franchise network, simple retail agreements with local retail players and networks of our strategic retail partners. Proper mix of these channels secures our position in the market at proper costs and provides us a platform for new business growth which is beyond our core business of mobile and fixed.

 

   

Unified, sophisticated mobile network. We are able to provide uniform mobile products and services that we develop at our business units also throughout our group due to our centralization of IT platform which operates throughout our unified mobile network system. We believe that our level of centralization and standardization is unique in the license areas where we operate and that this gives us a competitive advantage and efficiency in developing and rolling out new services. We build our mobile networks with advanced technology from the world’s leading mobile telecommunications equipment suppliers, such as Alcatel-Lucent, Ericsson, Nokia-Siemens Networks, and Huawei in order to provide our subscribers with high-quality, dependable networks capable of offering enhanced value added services and features.

 

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Description of Operations of the Russia Business Unit

Mobile Business in Russia

Description of Mobile Services in Russia

In Russia, we primarily offer our mobile telecommunications services to our subscribers under two types of payment plans: postpaid plans and prepaid plans. As of December 31, 2011, approximately 6.0% of our subscribers in Russia were on postpaid plans and approximately 94.0% of our subscribers in Russia were on prepaid plans.

Call Completion and Value Added Services

We provide all of our customers with a variety of call completion services and value added services:

 

   

Call Completion Services. Our call completion services include two groups of services: “Possibilities with zero” services and “Basic VAS” services, which allow us to increase voice traffic and revenue without causing average price per minute to decrease. Our “Possibilities with zero” group of services helps our prepaid subscribers stay connected even in the event that they have a zero balance in their account with services that include, among others, “Receiving Party Pays,” “Call Me Back” and “Fill Up My Balance.” Our “Basic VAS” services include, among others, caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting.

 

   

Value Added Services. Our value added services include messaging services, content/infotainment services, data access services (on GPRS and 3G basis), financial value added services (which help customers manage their credit balances), location based services (which monitor subscriber locations) media and content delivery channels.

Our messaging portfolio includes short message service, or “SMS,” multimedia messaging service, or “MMS” (which allows subscribers to send pictures, audio and video to mobile phones and to e-mail), voice messaging and mobile instant messaging. Different price offers for messaging services are proposed to different segments of our customers.

We offer our subscribers various types of content/infotainment services, including:

 

   

SMS services (including information services such as news, weather, entertainment chats and friend finder);

 

   

voice services (including referral services);

 

   

downloadable content (downloadable to telephone content, including music, pictures, games and video); and

 

   

ringback tone, or “RBT” (customized ringtones).

Our data access services are offered on GPRS and 3G basis and include access to Internet.

Our media and content delivery channels include RBT, Chameleon (based on CellBroadcast), Interactive Voice Response content sales numbers, USSD-menu (self-care and entertainment portal), STK-menu, WAP-portal (targeted on surfing, downloads sales and enriched information).

We have launched a mobile advertising pilot project together with the company Out There Media using Out There Media’s technological and selling resources for delivery of advertising messages to mobile phones.

Roaming

As of December 31, 2011, VimpelCom’s Russian Business Unit had active roaming agreements with 565 GSM networks in 213 countries, respectively, in Europe, Asia, North America, South America, Australia and Africa. In addition, as of December 31, 2011 we provided to our Russian subscribers GPRS roaming with 417 networks, in 168 countries. Our Russian Business Unit’s roaming agreements now cover all major roaming destinations, and we continue developing roaming services for our Russian subscribers.

 

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Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our subscriber while on the host’s network. We pay the host operator for the roaming services and then bill the amount due for the provision of roaming services on our subscriber’s monthly bill.

In 2003, OJSC VimpelCom became the first Russian mobile company to launch a customized application for mobile network enhanced logic, or “CAMEL,” an intranetwork prepaid roaming service. This service allows prepaid subscribers to automatically receive access to roaming services provided they have a positive account balance. The CAMEL service allows us to implement real time cost control, provide more dynamic service to our clients and reduce the number of delinquent subscriber accounts caused by roaming. As of December 31, 2011, we provided our Russian subscribers CAMEL roaming through 212 operators in 125 countries.

As of December 31, 2011, we also had domestic roaming agreements with 11 regional GSM providers in Russia, which provide roaming for subscribers in more than 10 cities across Russia, including small towns and settlements.

USB Modems

We provide our prepaid customers with wireless Internet access through GPRS/EDGE and HSDPA networks. The service was commercially launched in September 2008 in Russia. We currently offer Internet access through USB modems in every region of Russia, and our subscribers benefit from 3G speeds in all regions (1,317 cities) in Russia as of December 31, 2011. We offer special wireless Plug&Play-USB modems, which provide our customers with a convenient tool for Internet access. In addition to providing Internet access, the USB modems have other functionalities such as balance top-up, tariff changing and easy management of other services in USB-modem interface.

Mobile Telecommunications Licenses in Russia

GSM Licenses

We hold super-regional GSM licenses for seven out of the eight Russian super-regions. In total, our super-regional GSM licenses cover approximately 96.0% of Russia’s population and permit us to operate a unified dual band GSM-900/1800 network. The following tables summarize the principal terms of our licenses, including the license areas and expiration dates. We have filed or will file applications for renewal for all of our licenses that expire in 2012.

 

    

Expiration Date

Moscow

   April 28, 2013

Central and Central Black Earth Region

   April 28, 2013

North Caucasus

   April 28, 2013

North-West(1)

   September 12, 2012

Siberian

   April 28, 2013

Ural(2)

   November 14, 2012

Volga

   April 28, 2013

 

(1) Our GSM license for the North-West super-region stipulates which GSM standard applies to the territories covered by the license. The GSM-900/1800 standard applies to the following territories: the city of Saint Petersburg and Leningrad region. The GSM-1800 standard applies to the following territories: Kareliya Republic, Nenetskiy Autonomous Region, Arkhangelsk region, Vologda region, Kaliningrad region, Murmansk region, Novgorod region and Pskov region.
(2) Our GSM license for the Ural super-region stipulates which GSM standard applies to the territories covered by the license. The GSM-900/1800 standard applies to the following territories: Komi Republic, Udmurtskaya Republic, Kirov region, Kurgan region, Sverdlovsk region, Yamal Nenets autonomous district, the city of Kudymkar, Kudymkar metropolitan region, Yus’vinsky metropolitan region, Yurlinsky metropolitan region, Kochevsky metropolitan region, Kossinsky metropolitan region and Gaynsky metropolitan region of Permskiy Krai. The GSM-1800 standard applies to the following territories: Orenburg region, Tyumen region, Chelyabinsk region, Hanty-Mansiysky autonomous district—Yugra and Permskiy Krai (not including the city of Kudymkar, Kudymkar metropolitan region, Yus’vinsky metropolitan region, Yurlinsky metropolitan region, Kochevsky metropolitan region, Kossinsky metropolitan region and Gaynsky metropolitan region).

 

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We do not currently hold a GSM super-regional license for the Far East super-region of Russia. We currently hold GSM-1800 licenses in the following regions of the Far East super-region: Amur region, Kamchatka Krai (excluding Koryakskiy Autonomous Region), Khabarovsk Krai, Sakhalin region, Irkutsk region (GSM-900/1800) (excluding Ust-Ordynskiy Buryatskiy autonomous region, an administrative-territorial unit of special status), Koryakskiy Okrug of Kamchatka Krai, Chukotskiy autonomous region, Ust’-Ordynskiy Okrug of Irkutsk region (GSM-900/1800), Evreyskaya autonomous region (GSM-900/1800), Sakha Republic-Yakutiya, Magadan region, Primorskiy Krai (GSM-900/1800), Zabaykalskiy Krai and Amur region (GSM-900) according to conditions established by the State Radio Frequency Commission, or “SRFC.” These licenses expire on various dates between 2012 and 2021 and we plan to file applications for renewal of all of our licenses prior to expiration.

In addition to the seven super-regional GSM licenses, we hold GSM licenses for the Kaliningrad region, which is located within the North-West super-region, and the Orenburg region, which is located within the Ural super-region.

3G Licenses

On April 20, 2007, the Federal Communications Agency announced that OJSC VimpelCom was awarded one of three Universal Mobile Telecommunications System, or “UMTS,” licenses in Russia. The license was issued on May 21, 2007. Under the license terms we are required to install a total of 6,096 3G base stations throughout Russia by the end of the fifth year from the date of issuance of the license. The license expires on May 21, 2017.

For additional information relating to the risks relating to the 3G license award, see “Item 3—Key Information—D. Risk Factors—Risks Related to Our Industry—Our failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially adversely affect our business.”

Competition—Mobile Business in Russia

The Russian mobile telecommunications industry has grown rapidly over the past decade as a result of increased demand by individuals and newly created private businesses. Increased demand for mobile telecommunications services is largely due to the expansion of the Russian economy and a corresponding increase in disposable income; declining tariffs and costs of handsets and accessories, which have made mobile telecommunications services more affordable to the mass market subscriber segment; advertising, marketing and distribution activities, which have led to increased public awareness of, and access to, the mobile telecommunications market; and improved service quality and coverage.

The table below indicates the estimated number of mobile subscribers, mobile penetration rates and annual subscriber growth rates in Russia.

 

Period

   Subscribers
(in  millions)
     Penetration
Rate
    Annual
Subscriber
Growth
 

As of December 31, 2011

     229.5         164.1     4.2

As of December 31, 2010

     220.4         157.3     5.3

As of December 31, 2009

     209.2         148.7     11.4

 

Source: For subscribers and penetration rates, Informa Telecoms & Media. © Informa UK Limited 2012. All rights reserved.

The Russian mobile telecommunications market is highly concentrated. Industry analysts estimate that the top three mobile operators, MTS, MegaFon and OJSC VimpelCom, collectively held approximately 82.3% of the mobile market in Russia as of December 31, 2011 (according to Informa Telecoms & Media). Competition for subscribers in Russia is intense as a result of greater market penetration, consolidation in the industry, the growth of current operators and new technologies, products and services. As a result of increased competition, mobile providers are utilizing new marketing efforts, including aggressive price promotions, to retain existing subscribers and attract new ones.

We compete with at least one other mobile operator in each of our license areas, and in many license areas we compete with two or more mobile operators. Competition is based primarily on local tariff prices, network coverage, quality of service, the level of customer service provided, brand identity and the range of value-added and other subscriber services offered.

 

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The following table shows our and our primary mobile competitors’ respective subscriber numbers in Russia as of December 31, 2011:

 

Operator

   Subscribers in
Russia

(in  millions)
 

MTS

     70.0   

MegaFon

     60.8   

OJSC VimpelCom

     57.2   

Tele2

     20.6   

 

Source: For all companies except OJSC VimpelCom, Informa Telecoms & Media. © Informa UK Limited 2012. All rights reserved.

MTS. One of our primary competitors in Russia is MTS. According to Informa Telecoms & Media, as of December 31, 2011, MTS had approximately 70.0 million subscribers in Russia, representing a market share of 30.5%. It has a greater share of the high value subscriber market and more frequency allocations than we do, which provides MTS with a potential advantage in the quality of its GSM-900/1800 service. MTS reports that it holds licenses to operate mobile networks in almost all of the regions in Russia.

MegaFon. In addition to MTS, we also compete with MegaFon, the second largest mobile operator in Russia in terms of the number of subscribers. According to Informa Telecoms & Media, as of December 31, 2011, MegaFon had approximately 60.8 million subscribers, representing a market share of 26.5%. MegaFon holds GSM-900/1800 licenses to operate in all regions of Russia. In 2003, a member of the Alfa Group acquired CT Mobile, which owns approximately 25.1% of MegaFon’s common stock. For more information on the Alfa Group’s ownership interest in MegaFon, please see the section of this Annual Report on Form 20-F entitled “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—VimpelCom’s strategic shareholders may pursue different development strategies from us and from one another in the regions in which we operate, and this may hinder our ability to expand and/or compete in such regions and may lead to a deterioration in the relationship among our strategic shareholders.”

Tele2. Tele2 has been operating in Russia since 2003 and is now considered to be a significant player in the Russian telecommunications market. According to Informa Telecoms & Media, as of December 31, 2011, Tele2 had approximately 20.6 million subscribers, respectively, representing a market share of 9.0%. It currently provides GSM mobile services in 35 regions of Russia, including St. Petersburg, Leningrad, Arkhangelsk, Belgorod, Bryansk, Vladimir, Vologda, Voronezh, Kaliningrad, Kaluga, Kemerovo, Kirov, Kostroma, Kursk, Lipetsk, Murmansk, Nizhny Novgorod, Novgorod, Novosibirsk, Omsk, Orel, Pskov, Rostov, Ryazan, Smolensk, Tambov, Tver, Tomsk, Tula, and Chelyabinsk, as well as the Krasnodar Territory and the republics of Adygei, Komi, Udmurtia and Karelia.

Other Competitors in Russia. In addition to MTS and MegaFon, which operate in all of the regions where we operate, and Tele2, we compete with a number of local telecommunications companies. The Russian government recently completed the restructuring of Rostelecom, a subsidiary of Svyazinvest, the state-controlled telecommunications company, by means of a merger of Svyazinvest’s regional subsidiary telecommunications operators into Rostelecom. These subsidiaries include, among others, Uralsvyazinform, Volgatelecom and Sibirtelecom. Svyazinvest group also owns 100% of SkyLink, a mobile data and voice operator. We compete with Rostelecom in the Ural super-region. We also compete with Closed Joint Stock Company “Middle Volga Interregional Association of Radio and Telecommunication Systems,” or “SMARTS,” a company that holds licenses, either directly or indirectly through joint ventures, for GSM-900 or GSM-1800 networks in the Volga license area, certain parts of the Central and Central Black Earth license area, the Ural license area and the North Caucasus license area.

Marketing and Distribution—Mobile Business in Russia

In Russia, we offer our subscribers several national prepaid and contract tariff plans, each offering a different benefit and targeting a certain type of subscriber (such as business users, high-ARPU subscribers, families or young, active subscribers). We also offer a number of local tariff plans. Our tariff plans in Russia are almost exclusively Russian ruble-based but there are a limited number of U.S. dollar linked price plans (based on a fixed exchange rate).

 

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We divide our primary target subscribers in Russia into four groups:

 

   

key/national accounts, for which monthly revenue from mobile and fixed line services exceeds US$10,000;

 

   

large accounts, for which monthly revenue from mobile and fixed line services exceeds US$2,000 or companies having high revenue potential;

 

   

SME subscribers, for which monthly revenue from mobile and fixed line services is less than US$2,000; and

 

   

mass market subscribers.

We also offer specific business value added services and voice tariff plans with discounts and special pricing for our key/national accounts, which include all multi-regional companies and government institutions. The revenues from our key/national accounts are included in the total revenues for our business and corporate services division.

The typical corporate subscriber pays on a contract basis for our fixed and mobile services. We provide our corporate subscribers with a range of additional value added services, including specialized customer service, tailored pricing arrangements and access to sophisticated technological options, such as individual corporate wireless networks.

For USB-modem customers, we offer special tariffs that were developed for Internet access purposes with closed voice service. Tariffs differ by subscriber needs. In regions in which we use a 3G network, subscribers benefit from lower tariffs and higher speeds. We implemented several unlimited tariffs and started sales of data-tariffs without USB-modems with attractive prices for Internet access.

Customer Loyalty Programs

We recognize the need to continuously build and increase the loyalty of our customer. Accordingly, we have developed marketing activities specifically designed to promote customer loyalty. We actively use targeted marketing to increase customer loyalty and services consumption (ARPU) in all segments of mobile and fiber to the building, or “FTTB,” mass marketing services. We apply data mining analysis to predict the propensity of churn for each subscriber, which allows us to increase efficiency of churn reduction by means of targeted marketing campaigns.

In Russia, our loyalty programs are designed to retain our existing subscribers, thereby reducing churn, and increasing customer spending, both in B2C and B2B. In 2006, we launched a loyalty family program called “Malina” in the Moscow license area with other vendors and service providers. Through a variety of incentives, this program aims to decrease churn among our mass market subscribers, increase usage of “Beeline” services and attract target market subscribers from our competitors. We also launched the Data Warehouse program, which allows us to provide cross-partner programs in which we analyze Malina members’ activities with other program partners. In 2007, Hi-Light Club, our loyalty program for high ARPU clients (launched in March 2005) became a nationwide program and is being developed as a centralized program managed from Moscow. Hi-Light Club offers benefits to its members in 37 cities. In 2008 we launched “My company” and “How are you” loyalty campaigns to decrease churn among our business clients.

Fixed Business in Russia

Description of Fixed Services in Russia

Business and Corporate Services

In Russia, we provide of a wide range of telecommunication and information technology and data center services, such as network access and hardware and software solutions, including configuration and maintenance,

 

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software as a service, or “SaaS,” and an integrated managed service. We operate a number of competitive local exchange carriers, or “CLECs,” that own and operate fully digital overlay networks in a number of major Russian cities. Our services cover all major population centers in Russia.

Our customers range from large multinational and Russian corporate groups to Russian small and medium enterprises and high-end residential buildings in major cities throughout Russia.

Local Access Services. Our company provides business customers with local access services by connecting the customers’ premises to its fiber network, which interconnects to the local public switched telephone network, or “PSTN,” in major metropolitan areas in Russia.

International and Domestic Long Distance Services. Our company offers international long distance, or “ILD,” services to its customers via its Federal Transit Network, or “FTN,” which covers the entire territory of Russia and also includes eight international communications transit nodes across Russia.

Our company provides domestic long distance, or “DLD”, services primarily through its FTN, proprietary and leased capacity between major Russian cities and through interconnection with zonal networks and incumbent networks. It also offers very small aperture terminal, or “VSAT,” satellite services to customers located in remote areas.

Dedicated Internet and Data Services. Our company provides our business customers with dedicated access to the Internet through our access and backbone networks. We also offer traditional and high-speed data communications services to business customers who require wide area networks, or “WANs,” to link geographically dispersed computer networks. In addition, our company provides private line channels that can be used for both voice and data applications. Our company offers IP virtual private network, or “IP VPN,” service (based on multiprotocol label switching, or “MPLS,” which is one of the most popular data services on the corporate market. We also offer customers the ability to enter into service level agreements, which ensure the quality of our service.

Leased Channels. Our company provides corporate clients with the ability to rent channels with different high speed capacities. These “leased channels” are dedicated lines of data transmission.

Value Added Services. Our company offers an increasing range of value added services, including data center services, such as co-location, web hosting, audio conference, service level agreement, or “SLA,” and toll free (800) numbers, domain registration and corporate mail services. We also offer access to a variety of financial information services including access to S.W.I.F.T., Reuters, Bloomberg and all Russian stock exchanges. Our company has one of the biggest call centers in Russia that provides services for business clients.

Fixed Mobile Convergence. Based on our fixed and mobile networks, our company offers fixed-to-mobile convergence services to corporate clients providing use of their mobile phone as an extension of their private branch exchange, or “PBX.” In 2010, we continued the expansion of our fixed mobile convergence services into 17 new cities in Russia, including Krasnodar, Novokuznetsk, Yaroslavl, Chelyabinsk and Kaliningrad. In 2010, we also signed a contract with Open Joint Stock Company “Russian Railways”, the Russian national railway corporation for fixed mobile technological network, or “FMTN,” services.

Corporate Services. We also offer to our corporate customers IPTV services, certain Microsoft Office packages (SaaS), videoconferencing services and sale, rental and technical support for telecommunications equipment.

Managed Services. We offer our corporate clients packages of integrated services that include fixed telephony and Internet access, along with the additional services such as virtual PBX, and security services, such as firewall, distributed denial of service, or “DDos,” protection and local area network, or “LAN.” This product allows customers to access their systems from various locations.

Equipment Sales. Our company offers and sells equipment manufactured by Cisco Systems, Alcatel-Lucent, Avaya, Panasonic, Nokia, Motorola, Apple, BlackBerry and other manufacturers. As part of its turnkey approach, our company also offers custom solutions and services for the life cycle of the equipment, including its design, configuration, installation, consulting and maintenance.

 

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Mobile VPN. We offer to our corporate customers secure remote access to corporate services, databases and corporate applications. Remote access can be organized through different mobile devices, including USB modems, tablet PCs and smartphones.

IP-Addresses. We provide to our corporate customers IP-address services, which help to identify devices connected to mobile Internet or corporate network.

Carrier and Operator Services in Russia

Our carrier and operator services division in Russia provides a range of carrier and operator services, including voice, Internet and data transmission over our own networks.

In an effort to create a single unified transport network for our mobile and fixed telecommunications services by December 31, 2008, we transferred the majority of our international and domestic long distance voice traffic to our own backbone from other Russian long distance carriers. This allowed us to reduce long distance voice traffic termination cost rate by 3.0% in 2010 as compared to 2009 and by 2.4% in 2009 as compared to 2008. In 2011 long distance cost rate increased by 1.9% as compared to 2010 due to significant change in traffic mix. In 2011, approximately 99.0% of our long distance traffic was routed via our own backbone.

Historically, we have provided high volumes of international and domestic voice call termination for Russian telecommunications operators, as well as voice call termination to Russia, Ukraine, the CIS and Baltic states for international telecommunications operators. After the demonopolization of the long distance telephony market in Russia in 2006, we received a new type of license for international and national communications services and built an FTN of 11 new international and domestic long distance voice switches to meet regulatory requirements for the activation of the new license. By the end of 2008, our FTN had expanded, consisting of 8 international and 21 domestic long distance switches. This allowed us to improve our status on the international and domestic long distance markets in Russia by providing services that are competitive with those offered by leading telecommunications providers in Russia. This infrastructure has allowed us to achieve significant traffic growth. International traffic volumes transferred by our FTN increased by 16.0% in 2011 as compared to 2010, by 14.0% in 2010 as compared to 2009 and by more than 25.0% in 2009 as compared to 2008.

Regulatory changes in 2006 introduced new models of inter-operator tariffs to the Russian voice traffic transmission market. There are three types of fixed-line voice services operators, local, zonal and long distance, which are determined in accordance with licenses held by an operator. According to regulations, every long distance voice call originating from a fixed-line subscriber in Russia and/or terminating with a fixed-line subscriber in Russia should be transmitted via all three levels of voice network. Every long distance call that originates or terminates with a mobile user must be transmitted on at least two levels of voice network. As a universal carrier and service provider, we combine all three levels of licenses and voice networks within Russia. We have a number of our own zonal networks and our own local networks in the most populated regions of Russia.

Our carrier and operator services division also provides domestic and international IP transit services to ISPs in Russia, Ukraine, the CIS and Baltic states. Smaller ISPs can connect to our IP backbone and then use its network to access the Internet. Our IP backbone is a native IP/MPLS network with 220 Gbps infrastructure and more than 130 access points in Russia. Top Russian content providers such as “Mail.ru” and “Odnoklassniki.ru” have facilities which are located in our data centers and have Internet access via our IP backbone. More than 450 ISPs have an IP exchange with our network as full IP transit customers. We have global traffic exchange points in London, Frankfurt, Amsterdam, Stockholm and New York. These factors allow us to provide ISPs with hi-level bandwidth and connectivity to both Russian and global Internet segments.

Our carrier and operator services customers include foreign and Russian telecommunications operators and carriers.

Voice Services. For international operators, including traditional incumbents, mobile and VoIP operators, we provide call termination to fixed and mobile destinations in Russia, Ukraine, and the CIS and Baltic states. For Ukrainian and CIS operators, we provide call termination to Russian and international fixed and mobile destinations. For Russian operators we provide international, domestic, zonal and local voice call transmission services.

 

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Internet Services. Our carrier and operator services division provides IP transit service to Russia, Ukraine, and the CIS and Baltic states and other operators throughout the world. Russian, Ukrainian and CIS operators require global Internet connectivity. International operators require connectivity to the Russian Internet segment. In addition, our carrier and operator services division provides co-location services in our data centers to content providers.

Data Services. We offer three types of data services: private networks, local access, and domestic and international channels.

We have our own local network nodes in the majority of business and trade centers in the largest cities of Russia. Other operators access those business and trade centers by ordering from our local channels that connect to their network nodes.

We have interconnection agreements with international global data network operators who provide one-stop shopping for worldwide data network services for multinational companies. Under these interconnection agreements we provide MPLS-based IP VPN, local, domestic and international private lines, equipment and equipment maintenance in Russia.

We also provide high-speed domestic and international channels to international and Russian operators to sell excess backbone network capacity.

Consumer Internet Services in Russia

In Russia, we offer fixed-line broadband and wireless Internet access and dial-up services. One of our strategic goals is to develop broadband services based on the most up-to-date engineering solutions. Currently, we are focused on developing local infrastructure in order to bring fixed broadband Internet access services to major Russian cities.

Additional FTTB Services

FTTB IPTV. We launched the FTTB IPTV service in Russia in January 2009. In May 2009 we enhanced and relaunched the product under the “Beeline TV” brand. Currently the Beeline TV product is run in 34 regions. In 87 cities of the 34 regions, we provide IPTV service. As of December 31, 2011, we had approximately 570,100 IPTV subscribers. Our service has two unique market features: first, all set-top-boxes, or “STBs,” are high definition, or “HD,” technology compatible which allows us to broadcast HD content to every one of our customers. Second, we provide STBs with digital video recorder, or “DVR,” functions, which allow users to watch TV content on-demand and to pause and rewind live television.

Wireless Broadband Internet Access. On March 1, 2007, Golden Telecom launched commercial operation of its WiFi network, offering prepaid Internet access to the mass market under the “Golden WiFi” brand. Since September 22, 2008, the service has been provided under “Beeline WiFi” brand. According to iKS Consulting, Beeline WiFi is the world’s largest metropolitan wireless network and includes the greater part of Moscow’s city center and many other areas of the city. As of December 31, 2011, our company had installed more than 12,000 WiFi access nodes in Moscow. Our most recognized partners in providing WiFi services are Domodedovo and Sheremetyevo Airports, McDonalds, Starbucks, Coffee-House, MEGA and IKEA trade centers. We also provide EDGE technology wireless broadband services through Kyivstar’s GSM network in Ukraine.

Licenses for Fixed Business in Russia

The tables below set forth the principal terms of the fixed-line, data and long distance licenses which are important to our operations (other than mobile operations) in Russia. We have filed or will file applications for renewal for all of our licenses that expire in 2012.

 

License Type

 

Region

 

Expiration Dates (Earliest/Latest)

Local Communications Services excluding local communications services using payphones and multiple access facilities  

Moscow

St. Petersburg

Ekaterinburg

Nizhny Novgorod

 

April 28, 2016 / August 30, 2016

April 28, 2016 / March 9, 2017

February 16, 2016

October 5, 2015 / March 9, 2017

 

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  Khabarovsk   October 31, 2015
  Novosibirsk   March 9, 2017
  Rostov-on-Don   March 9, 2017
  Krasnodar   December 31, 2014 / October 1, 2015
Local Communications Services   Moscow   September 21, 2016
using multiple access facilities   St. Petersburg   September 21, 2016
  Novosibirsk   March 9, 2017
  Nizhny Novgorod   February 27, 2013 / March 9, 2017
  Khabarovsk   March 9, 2017
  Ekaterinburg   July 20, 2015
  Rostov-on-Don   March 26, 2013
  Krasnodar   April 18, 2013
Leased Communications Circuits   Moscow   April 28, 2016 / July 5, 2016
Services   St. Petersburg   April 28, 2016/ July 5, 2016
  Novosibirsk   November 12, 2013 / July 5, 2016
  Nizhny Novgorod   November 12, 2013 / July 5, 2016
  Rostov-on-Don   November 12, 2013 / July 5, 2016
  Khabarovsk   August 25, 2015 / July 5, 2016
  Ekaterinburg   November 12, 2013
  Krasnodar   April 17, 2013 / August 18, 2013
Voice Communications Services in   Moscow   May 25, 2016
Data Transmission Networks   St. Petersburg   August 1, 2012 / April 16, 2017
  Novosibirsk   August 1, 2012
  Ekaterinburg   September 5, 2013
  Nizhny Novgorod   August 1, 2012 / January 27, 2016
  Rostov-on-Don   August 1, 2012
  Khabarovsk   April 18, 2013
  Krasnodar   April 18, 2013
International and National   Russian Federation   December 13, 2012
Communications Services   Moscow   November 21, 2015
Telematic Services   St. Petersburg   August 1, 2012 / November 21, 2015
  Novosibirsk   August 1, 2012
  Nizhny Novgorod   August 1, 2012 / December 23, 2015
  Rostov-on-Don   August 1, 2012
  Khabarovsk   June 26, 2012
  Ekaterinburg   September 5, 2013
  Krasnodar   September 14, 2015 / November 17, 2016
Intra-zonal Communications Services   Moscow   February 16, 2016 / November 24, 2016
  St. Petersburg   February 16, 2016
  Novosibirsk   February 16, 2016
  Ekaterinburg   February 16, 2016
  Nizhny Novgorod   February 16, 2016
  Rostov-on-Don   February 16, 2016
  Khabarovsk   February 16, 2016
  Nizhny Novgorod   October 5, 2015
  Krasnodar   December 12, 2015
Data Transmission Services   Moscow   July 5, 2016
  St. Petersburg   August 1, 2012 / April 28, 2014
  Ekaterinburg   September 5, 2013
  Novosibirsk   August 1, 2012
  Nizhny Novgorod   August 1, 2012 / December 23, 2015
  Rostov-on-Don   August 1, 2012
  Khabarovsk   September 14, 2015
  Krasnodar   April 17, 2013 / September 14, 2015
Communications Services for the   Moscow   December 6, 2012
Purposes of Cable Broadcasting   St. Petersburg   December 6, 2012
  Novosibirsk   December 6, 2012
  Ekaterinburg   December 6, 2012
  Nizhny Novgorod   December 6, 2012
  Rostov-on-Don   December 6, 2012
  Khabarovsk   December 6, 2012
  Krasnodar   August 27, 2016
Communications Services for the   Krasnodar   September 14, 2016
Purposes of TV Broadcasting    

 

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Competition—Fixed Business in Russia

Business and Corporate Services

Our fixed telecommunications business marketed as “Beeline Business” competes principally on the basis of unique convergent services and bundles, installation time, network quality, geographical network reach, customer service, range of services offered and price. We face significant competition from other service providers, including:

 

   

Rostelecom, a subsidiary of Svyazinvest, the state-controlled telecommunications company, for services in St. Petersburg and all of Russian regional cities;

 

   

Comstar-UTS, which has been merger into MTS, for services to corporate customers and the SME market;

 

   

TransTelecom, owned by the Russian Railways, for corporate data networking services across Russia;

 

   

Synterra, which owns Peterstar (one of the leading fixed-line operators in St. Petersburg, providing convergent mobile and fixed services, which merged with MegaFon on February 1, 2011); and

 

   

more than 180 other small operators in the regions.

Carrier and Operator Services

For voice services, our main competitors are long distance carriers Rostelecom, TransTelecom and OJSC “Multiregional TransitTelecom.” For IP transit and capacity services, our main competitors are Rostelecom, TransTelecom and MegaFon. In wholesale data networking we also compete with Orange.

Consumer Internet Services

In terms of end-user Internet penetration, the consumer Internet access business in Russia is divided between two clusters of markets: the first one consists of Moscow and St. Petersburg, the second comprises all other Russian regions. While the market for consumer Internet access is already saturated in Moscow and in St. Petersburg, in other regions the end-user Internet penetration remains quite low and has still been increasing dramatically.

The basic technologies of Internet access in Russia include: fixed broadband Internet access (comprising asymmetric digital subscriber line, or “ADSL,” Ethernet, Docsis and other regional home networks), wireless broadband Internet access (including WiFi, WiMax, 3G, CDMA) and dial-up.

Competition for subscribers in Moscow is intense and we expect it to increase in the future as a result of wider market penetration, consolidation of the industry, current operators growth and appearance of new technologies, products and services. As a result of increasing competition, Internet providers are utilizing new marketing efforts, i.e., aggressive price promotions, in order to retain existing subscribers and attract new ones.

Our main competitors in the fixed broadband market in Russia are Rostelecom, a subsidiary of the state-controlled telecommunications provider, Svyazinvest, Comstar UTS, Acado, Er-Telecom and various local home network providers. Competition is based primarily on network coverage, local tariff prices, Internet connection speed, services quality, customer service level, brand identity and the range of value added and other subscriber services offered.

Marketing and Distribution—Fixed Business in Russia

Business and Corporate Services

We utilize a direct sales force in Moscow, operating both with fixed and mobile corporate customers and supported by specialists in technical sales support, marketing, customer service and end-user training. In addition, we employ a team of regional sales managers and a dedicated sales force in each of our regional branch offices, in addition to having sales incentive plans with our regional partners.

We train our employees to provide a high level of customer service. In the typical case, we offer our services at competitive prices in comparison with incumbent local / national operators and other alternative

 

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operators in the market. We base our pricing on research results, market price level, competition in all regions, and customer expectations learned through direct feedback from our new and existing clients. Additionally, we monitor price levels for similar services in other countries around the world. Our large customers may be eligible for volume discounts at defined revenue thresholds. We also apply a discount policy within cross-sales (selling convergence fixed and mobile services to the same client).

While pricing competition remains a factor, especially for voice services, many corporate data networking customers place more value on network coverage, reliability and the ability to design, install and maintain LANs and WANs. These customers often require integrated solutions, including connections to offices located in different cities. To meet these requests, we currently offer a range of services aimed to provide installation and maintenance of customers’ equipment and local networks in Moscow and other regions. We currently provide full network support for a number of key clients, and we are actively working on new products which we believe will allow us to provide a whole range of managed services including managed IP VPN, managed PBX, managed customer premises equipment, or “CPE,” managed security, cloud services (including virtual machines, dedicated servers, disaster recovery and virtual data center services), managed storage and managed workplaces.

Consumer Fixed Internet Services

Fixed Broadband Internet Access. We offer a wide range of FTTB services tariffs targeted to different customer segments. There are four unlimited tariff plans with monthly fees but different speeds for active Internet users. There is also a special tariff for mobile customers with certain preferences. We also provide a range of value added services such as static IP address, trusted payment, antiviruses (Kasperskiy and Dr.WEB) and WiFi routers.

FTTB IPTV. TV service is provided on a monthly fee basis. STBs can be rented or bought by customers. We also have launched the following value added services for TV: Video On Demand (with a library of more than 3,000 items), web-on-TV (together with Yandex—largest Russian web portal), Facebook, Rutube and other services, such as a recommendation engine (a STB reminds customer about the start of a customer’s regularly viewed TV shows). Also, STB can record TV shows that may be interesting for the customer based on their viewing history.

xDSL Services. For xDSL services, our company offers an unlimited tariff plan and tariff plans that depend on traffic volume and connection speed.

Wireless Broadband Internet Access. Our company offers WiFi tariff plans that include unlimited usage plans and plans that charge by usage. Our company also offers special prices for mobile and FTTB users.

Dial-up Internet Access. Currently, our company offers prepaid tariff plans for all mass market services. Customers can purchase scratch cards from points of sale, pay through an electronic payment system or make a payment at one of our sales offices. We use our distribution network to communicate with our subscribers and for trade marketing activities. Moscow and regional subscribers can call their call centers for customer and technical support.

Pay TV (Cable TV) Services. We offer two tariff plans: “Social” for customers who need basic TV channels (10-12 channels) and “Commercial” with 45-55 TV channels.

Description of Operations of the Europe & North America Business Unit

Our Europe & North America Business Unit consists primarily of our operations in Italy under our wholly owned subsidiary WIND Italy. The Europe & North America Business Unit also includes our equity investment in Globalive Investment Holding Corp., which owns a GSM operator in Canada, which we refer to in the Annual Report on Form 20-F as “WIND Canada.” Italy and Canada are the only countries in Europe & North America in which we have operations.

 

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Mobile Business in Europe & North America

Description of Mobile Services in Europe & North America

Mobile Telecommunications Services

In Europe & North America, we primarily offer our mobile telecommunications services under two types of payment plans: postpaid plans and prepaid plans. As of December 31, 2011, approximately 6% of our subscribers in Italy were on postpaid plans and approximately 94% of were on prepaid plans. As of December 31, 2011, approximately 34% of WIND Canada’s subscribers were on postpaid plans and 66% were on prepaid plans.

Consumer Voice Offerings. In Italy, we provide a variety of consumer voice offerings tailored to specific market segments. Our voice offerings can be upgraded with a variety of option plans and value added services. Prepaid consumer subscribers can choose from tariff plans in which their pre-paid credit is deducted on a per minute basis at a billing rate per minute, or on a monthly basis at a flat rate per month. In addition to tariff plans similar to those offered to pre-paid subscribers, we offer a number of all-inclusive flat rate monthly tariff plans to contract and pre-paid consumer subscribers that include a set amount of calling minutes, SMSs and gigabytes of mobile Internet access for a fixed monthly fee.

In Canada, WIND Canada offers a variety of voice services, which include simple plans and feature-rich service plans targeting “Value Plus” customers, typically with an unlimited voice component.

Corporate Voice Offerings. In Italy, we provide corporate voice services to large corporate subscribers, small and medium enterprises, or “SMEs,” and small office/home offices, or “SOHOs,” with our corporate voice offerings. For large corporate customers, who often solicit tenders for their mobile telephone requirements on a competitive basis, we offer customized services tailored to their specific requirements. For SME and SOHO subscribers, we offer more standardized products, such as all-inclusive tariff plans that offer customers a set amount of calling minutes, SMSs and gigabytes of mobile Internet access for a fixed monthly fee. We also offer a variety of add on options to its standard corporate voice offerings.

In Canada, WIND Canada has not yet targeted the corporate market as the operation is in the early growth stage. The core focus of WIND Canada is on the consumer market with knock on benefits in the small office / home office market including all inclusive voice and data tariff plans, special international and roaming add-ons.

Consumer and Corporate Data and Value Added Service Offerings. In Italy, we provide a variety of mobile data services and value added services for telephone and computer to our consumer and corporate subscribers. The majority of our data and value added service offerings are available over our GSM and UMTS networks, while certain services, such as video call, are limited to our UMTS network. We generally charge for data services and value added services on either a per kilobyte or a per minute of use basis. Certain data services and value added services require payment of an additional set up fee by the subscriber in order to gain access to the service.

In Italy, we offer the following data services and value added services:

 

   

Mobile Internet. Our mobile subscribers can connect their mobile phones to the Internet using GSM, GPRS or UMTS technologies.

 

   

PC Mobile Internet. Our mobile subscribers can connect their mobile phones to a computer to be used as a modem to browse the Internet using GSM, GPRS or UMTS technologies.

 

   

BlackBerry. We offer our BlackBerry services to corporate, SME and consumer subscribers.

 

   

SMS and MMS. SMS offerings provide users with information such as news, sports, weather forecasts, horoscopes, finance and TV programming information, as well as a selection of games, ring tones, a chat service for subscribers as well as services specifically targeted to students. MMS provides multimedia (photo, video and sound) content, such as sports events, news, gossip, music and a chat service.

 

   

Additional Content Options: We offer a number of options that allow users to download content.

 

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In Canada, WIND Canada offers a variety of data products and value added services ranging from mobile internet, mobile broadband USB modems, BlackBerry and social media add-ons. Value added services include text, multimedia messaging, web portal, voice mail and call control features, and premium apps through various content providers.

International Roaming. Our mobile subscribers in Italy can use our mobile services, including SMS, MMS and data services (on GPRS, EDGE, 3G, HSDPA networks) where available, while roaming in other countries. Roaming coverage outside Italy is provided through our roaming agreements with approximately 440 international operators.

WIND Canada’s subscribers can also use its services while roaming in other countries through its roaming arrangements with approximately 25 direct roaming agreements in 22 countries; via dual international mobile subscriber identification, or “IMSI,” we have 607 networks in 210 countries available through Telecom Italia Sparkle; and 437 networks available in 197 countries through WIND Italy.

Handset Offerings. We offer our subscribers in Italy a broad selection of handsets and Internet devices, which we source from a number of suppliers, including Nokia, Samsung, RIM, Sony Ericsson, LG, Huawei and Alcatel. The Italian market is a predominantly prepaid market and, as a result, mobile operators generally have provided limited handset subsidies, generally only to higher value subscribers.

WIND Canada offers subsidized handsets to qualifying customers under the TAB and TAB+ handset program along with amortizing loyalty credits. WIND Canada offers a large range of handsets including Android, BlackBerry and Windows 7 smartphones.

Mobile Telecommunications Licenses in Europe & North America

WIND Italy has a license to provide mobile telephone services in Italy using digital GSM 1800 and GSM 900 technology. This license expires in 2018 and thereafter may be renewed by the relevant authorities. WIND Italy acquired a UMTS license in 2001. WIND Italy’s UMTS license was expected to expire on December 31, 2021, but during September 2009, WIND Italy obtained an eight-year extension, and accordingly its UMTS license is now expected to expire in 2029, and thereafter may be renewed for an additional seven years by the relevant authorities. Pursuant to the terms of the UMTS license, WIND Italy has coverage in all Italian regional capitals.

In March 2009, the Italian Ministry for Economic Development announced a tender for the assignment of rights of use for the frequencies in the 2100 MHz band, divided into three 5 MHz bandwidth blocks. WIND Italy participated in this tender and was awarded a 5 MHz block of UMTS spectrum for approximately €89.0 million in June 2009 for a term corresponding to the term of the original UMTS license. In September 2009, the Italian Ministry of Economic Development formally assigned the right of use for such frequencies.

In 2011, the Italian Ministry for Economic Development announced a tender for the assignment of rights of use for the frequencies in 800, 1800, 2000 and 2600 MHz band. All of WIND Italy’s four main telecom operators Telecom Italia, Vodafone, Wind Italy and H3G won frequencies. WIND Italy obtained 2 blocks at 800 MHz and 4 blocks at the 2600 MHz band.

WIND Canada holds 30 separate spectrum licenses in the AWS band in Canada covering a population of approximately 23 million Canadians. These licenses cover all of Canada except for the Province of Quebec. The bandwidth of such spectrum is 10MHz across most of Canada, with 20MHz in Southern Ontario and the Yukon, North West Territories and Nunavut. These licenses were obtained on March 13, 2009, and expire March 12, 2019 (with a high expectation of renewal).

 

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Competition—Mobile Business in Europe & North America

The mobile telecommunication market in Italy in which WIND Italy operates is characterized by high levels of competition among service providers. WIND Italy expects this market to remain competitive in the near term, and competition may be exacerbated by further consolidation and globalization of the telecommunications industry.

In the Italian mobile telecommunications market, Telecom Italia, operating under the “TIM” brand name, Vodafone Italy, operating under the “Vodafone” brand name, and Hutchison 3G, operating under the “3” brand name, are currently our principal competitors. Telecom Italia and Vodafone have well established positions in the Italian mobile market and each has a greater market share than we do. Hutchison 3G has been aggressively seeking new customers through the use of handset subsidies, which are not customarily offered in the Italian market.

Telecom Italia, as the incumbent in the market, has the advantage of long standing relationships with Italian customers. Vodafone is well positioned in the market and is perceived as having a technologically-advanced and reliable network in the market. Certain of our competitors also benefit from greater levels of global advertising or stronger brand recognition than we do.

The four network operators in Italy offer mobile telecommunications services to approximately 92.4 million registered subscribers as of December 31, 2011, representing a penetration rate of approximately 152% of the Italian population. As of December 31, 2011 there were 18 MVNO/ESPs providing services in the Italian market, with an aggregate market share of approximately 4.5%. Penetration is distorted by the widespread use of multiple SIM cards by individual users. The market is mostly prepaid.

As of December 31, 2011, excluding MVNOs, Telecom Italia had a market share of 34.9%, followed by Vodafone with 32.4%, WIND Italy with 22.8% and Hutchison 3G with 9.9% based on our internal estimates.

Telecom Italia’s commercial strategy in 2011 focused on market share recovery through a new aggressive pricing strategy after having implemented price increases in 2008, strong advertising investments and restructuring of its sale channels. Vodafone in 2011 focused on fixed to mobile substitution, repositioning on prepaid segment and a “value for money” offer strategy that often deemphasizes quality. Due to its international network and brand recognition, Vodafone also has a large share of the corporate subscriber market. In 2011, Hutchison 3G continued to implement an aggressive commercial strategy based on low pricing and handset subsidies, particularly in the market for contract subscribers, and focused on cost savings measures.

The Canadian market is dominated by Rogers, Bell and Telus, which together hold over 90% of wireless market share (including their respective flanker brands—Fido, Virgin and Koodo). The Canadian market is over 70% contract customers due to the dominant presence of three-year contracts that include large subsidies on handsets.

Marketing and Distribution—Mobile Business in Europe & North America

In Italy, we market our mobile, Internet, fixed line voice and data offerings by employing a multibrand strategy of the WIND and Infostrada brands in their respective markets. Each of the WIND and Infostrada brand logos incorporates the distinctive “W” WIND logo, enabling cross product brand identification. We also advertise our mobile, fixed line and Internet products to consumers as the “Smart Fun” choice, emphasizing the quality, convenience and price of our products. On occasion, we also sponsor concerts, television programs and sporting events. WIND Italy is the main sponsor of the AS Roma football club, providing sponsorship for all games until June 30, 2013. Since 2007, WIND Italy has produced the WIND Music Award, a music show which airs on Italia 1 and which grants awards to the best selling musicians of Italy.

In Italy, we utilize a wide range of media to advertise its consumer mobile and consumer fixed line services. In advertising consumer mobile services, we use television, billboards, radio, print media (including newspapers and magazines) and third party websites. We market our broadband services using television, telemarketing and over the Internet. In advertising consumer fixed line voice services, we focus on television, telemarketing and local press, and also advertise on the radio and other third party websites (including Google and web affiliation programs).

 

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For our corporate subscribers in Italy, we use different marketing strategies depending on the nature and size of a customer’s business. For large corporate subscribers and SMEs, our marketing efforts are more customized and institutional in nature, and include one on one meetings and presentations, local presentations and presentations at exhibitions. We also advertise in the media. For the SOHO market, we advertise in the professional and general press and use airport billboards. For all corporate subscribers, we emphasizes an integrated approach focusing on all three of our mobile, fixed line voice and broadband capabilities. Starting in 2010, we launched the “WIND Business” offer to target professionals and small businesses.

In Italy, we sell consumer mobile products and services, including SIM cards, scratch cards, WIND branded and unbranded handsets through a significant number of points of sale. As of December 31, 2011, in Italy we had 160 WIND owned stores and approximately 454 exclusive franchised outlets operating under the WIND name. We opened a second flagship WIND store in June 2011 in a high profile location in Rome, following the opening of the first flagship store in June 2010 in central Milan. WIND Italy also utilizes 1,358 non-exclusive points of sale, 840 electronic chain store outlets and approximately 4,538 other points of sale in smaller towns throughout Italy managed by SPAL S.p.A., our largest distributor in Italy in terms of points of sale. We also sell a portion of our consumer services online through WIND Italy’s www.155.it website.

Sales to large corporate subscribers in Italy are made by a dedicated in house corporate sales team, whereas sales to SMEs and SOHOs are undertaken by agents. In addition, we recently launched an online store aimed at business customers for the direct sale of mobile products and services known as “WIND Business Shop” on the WIND Italy website.

In Canada, WIND Canada offers service contract and prepaid plans targeting “Value Plus” customers in Canada, typically with an unlimited voice component. WIND Canada has increasingly focused on contract customers that represent higher ARPU, lower churn, higher lifetime value with less competitive intensity than the prepaid segment where other new entrant activity is concentrated. As of December 31, 2011, WIND Canada had 211 WIND Canada-branded locations of which are 70 exclusive dealer partnerships and a total of 453 points of sale through various mass market retail arrangements.

Fixed Business in Europe & North America

Description of Fixed Services in Europe & North America

In Italy, we offer a wide range of direct and indirect fixed line voice services, Internet broadband and narrowband (dial up) data services. We offer these services to both consumer and corporate subscribers.

Our fixed line direct and indirect voice customer base in Italy consisted of approximately 3.1 million subscribers as of December 31, 2011. Our direct subscribers are mainly comprised of LLU subscribers.

Our indirect subscribers in Italy consist of wholesale subscribers, carrier selection and carrier pre-selection subscribers. Wholesale voice services allow us to set up an exclusive commercial relationship with customers located outside its direct service coverage areas through leases of the lines from Telecom Italia under wholesale terms and conditions. With carrier pre-selection, subscribers select WIND Italy as their “regular” carrier and WIND Italy arranges with Telecom Italia for automatic switching to its network without subscribers having to enter an access code. WIND maintains a billing relationship with the subscriber in carrier pre selection for charging all traffic costs. With carrier selection, subscribers dial a predefined access code to select WIND’s network for outgoing calls on a per call basis.

In Canada, WIND Canada operates fixed line businesses under numerous brands. As of December 31, 2011, WIND Canada had approximately the following numbers of fixed line customers: 500,000 casual call customers; 100,000 long distance subscribers; 2,000 hotels, hospitals and universities; and 5,000 small and medium businesses. WIND Canada’s fixed line services include long distance, operator services, billing clearinghouse services, reservation-less conferencing and VoIP to small and medium-sized businesses.

 

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Internet and Data Services

In Italy, we offer a wide array of Internet and data transmission services to both consumer and corporate subscribers. We offer narrowband and broadband access to consumer and corporate subscribers, although we no longer actively market our narrowband services.

In the broadband access market in Italy, we offer our products directly through LLU and indirectly through wholesale bitstream access services. We offer broadband to both direct and indirect subscribers, so long as the line is ADSL or ADSL 2+ capable.

We also offer fixed line voice and broadband services in Italy through bundled offerings such as “TuttoIncluso” and “Absolute ADSL” packages which, for a fixed monthly fee, provide subscribers with a fixed-line voice service and unlimited connectivity to broadband. In addition, we offer “Super TuttoIncluso”, a bundled offering with a fixed-line voice service, unlimited connectivity to broadband and a mobile post-paid SIM.

Consumer Voice Offerings

Throughout Italy, we provide traditional analog voice telephone service, or “PSTN access,” digital fixed line telephone service, or “ISDN access,” and value added services, such as caller ID, voicemail, conference calls, call restriction, information services and call forwarding. However, an increasing number of our subscribers in Italy subscribe to bundled fixed line voice and Internet broadband offerings.

Corporate Voice Offerings

In Italy, we provide PSTN, ISDN and VoIP fixed line voice services, data services, value added services and connectivity services to corporate subscribers, including large corporate subscribers, SMEs and SOHOs.

For larger corporate subscribers in Italy, we typically tailor our offerings to the needs of the subscriber and, where applicable, to competitive bidding requirements. We offer our large corporate subscribers direct access to our network through microwave links, direct fiber optic connections or, where we do not offer direct access, via LLU, dedicated lines leased from Telecom Italia. We also offer large corporate subscribers national toll free and shared toll. We typically offer its SME and SOHO off the shelf plans rather than bespoke offerings.

In Italy, our offerings tailored to SME and SOHO subscribers include “TuttoIncluso Aziende” providing three to eight voice lines with ADSL internet access and “WIND Impresa” providing six to 60 voice lines with SHDSL internet access. The “WIND Impresa” offering provides a combined service for renting, running and maintaining telephone switchboards. In addition, the “WIND Business One Office” offering was launched in February 2011 targeting businesses that are registered for VAT and having one or two fixed-lines (analogue or ADSL) and at least one SIM card. In June 2011, we extended the “WIND Business One Office” offering to also include five new tariff plans. We also offer a complete range of value added services such as Static IP, Dominion Level II and the Evolved Email and Messaging services.

Licenses—Fixed Business in Europe & North America

In Italy, our fixed line services are provided pursuant to a 20 year license obtained from the Italian Ministry of Economic Development in 1998. This license expires in 2018.

In Canada, WIND Canada has a basic international telecommunications service, or “BITS,” license, which expires on June 30, 2019, with no cost for renewal. In addition, WIND Canada has been authorized as a CLEC.

Competition—Fixed Business in Europe & North America

In the Italian fixed line voice market, the incumbent, Telecom Italia, maintains a dominant market position. Telecom Italia benefits from cost efficiencies inherent in its existing telecommunications infrastructure over which it provides its fixed line coverage. As the former sole Italian telecommunications provider, Telecom Italia also benefits from customer recognition and familiarity as well as consumer reluctance to leave for another provider. In addition to Telecom Italia, Swisscom and Vodafone have entered the fixed line Internet, voice and data markets by buying out Fastweb S.p.A. and the Italian business of the Swedish carrier Tele2 (successively rebranded TeleTu), respectively. We expect that the fixed line telecommunications market will remain competitive as a result of the

 

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presence of international competitors, the introduction and growth of new technologies, products and services, the declining number of fixed line subscribers due to continued fixed to mobile substitution, continued migration from narrowband (dial up) to broadband usage and regulatory changes (for example, in relation to LLU tariffs) in the Italian market, all of which may exert downward pressure on prices or otherwise cause our fixed line subscriber base in Italy to contract, thereby impacting our revenues and profitability.

Four service providers, Telecom Italia, WIND Italy, Vodafone/TeleTu and Fastweb accounted for approximately 94% of the total broadband services actually accessed in the Italian market as of December 31, 2011.

As of December 31, 2011, Telecom Italia had approximately 7.1 million broadband subscribers in Italy, representing a market share of approximately 52.9% of broadband retail connections, followed by WIND Italy with approximately 2.1 million broadband subscribers, representing a market share of approximately 15.8% of broadband retail connections and by Vodafone/Tele2, with approximately 1.8 million broadband subscribers representing a market share of approximately 13.1% of broadband retail connections. Fastweb had approximately 1.6 million active broadband subscribers, representing a market share of approximately 11.8% of broadband retail connections. All other operators had in the aggregate approximately 0.9 million broadband subscribers, representing a market share of approximately 6.4% of broadband retail connections.

The Canadian fixed line telecom market was approximately $23.7 billion in revenue in 2010 and is dominated by five incumbent local exchange carriers, or “ILECs,” and five incumbent cable companies. The ILECs provide a full range of fixed line services including local access, long distance, data and private line and service the full range of customer segments including consumer, small and medium business, enterprise and wholesale. The cable companies typically provide home phone and high speed internet services to consumers. Total market share of fixed line revenues of the ten largest companies is in excess of 90% in terms of revenue. The remainder of the market is comprised of resellers including WIND Canada.

Marketing and Distribution—Fixed Business in Europe & North America

In Italy, we market our fixed line voice, broadband and data services primarily through WIND Italy’s “Infostrada” brand.

In Italy, our principal source of sales to fixed line consumer voice subscribers is telephone sales made through WIND Italy’s call centers, both through outbound telephone sales and inbound calls to the call center. We also utilize outbound sales agencies to acquire business and consumer customers.

In addition, a significant and growing proportion of our fixed-line sales in Italy are made through WIND Italy’s mobile distribution network with a dedicated Infostrada section manned by specialized sales persons in each store. In the consumer internet access market, the Infostrada website is a key distribution channel, enabling subscribers to register for internet access over the internet.

In Italy, we utilizes sales agencies, WIND Italy’s call centers and a direct sales force to target sales of fixed line voice and Internet services to corporate subscribers.

We also offer bundled services in Italy that combine our mobile, Internet, fixed line voice and data services with an integrated infrastructure and network coverage.

In Canada, WIND Canada’s consumer fixed line services are sold direct to consumers through marketing and call centers. WIND Canada’s business and wholesale fixed line services are primarily sold through a direct sales force and secondarily through a small number of sales agents.

Description of Operations of the Africa & Asia Business Unit

Our Africa & Asia Business Unit covers our operations in Algeria, Burundi, Central African Republic, Pakistan, Bangladesh, Cambodia and Laos, as well as the operations of our associate GTEL Mobile in Vietnam (until April 23, 2012, when that asset was sold) and Telecel in Zimbabwe, or “Telecel Zimbabwe,” in which we have an equity investment.

 

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Mobile Business in Africa & Asia

Description of Mobile Services in Africa & Asia

In Africa & Asia, we generally offer our subscribers mobile telecommunications services under contract and prepaid plans. In Algeria, we also offer hybrid plans. In Vietnam, GTEL Mobile only offers prepaid plans. As of December 31, 2011, we had the following percentages of contract and prepaid subscribers:

 

   

In Pakistan, approximately 1.6% of our subscribers were on postpaid plans and approximately 98.4% were on prepaid plans.

 

   

In Bangladesh, approximately 5.2% of our subscribers were on postpaid plans and approximately 94.8% were on prepaid plans.

 

   

In Cambodia, all of our subscribers were on prepaid plans.

 

   

In Laos, approximately 1.0% of our subscribers were on postpaid plans and approximately 99.0% were on prepaid plans.

 

   

In Vietnam, all of our subscribers were on prepaid plans.

 

   

In Algeria, approximately 2.9% of our subscribers were on postpaid plans, approximately 1.6% were on hybrid plans and approximately 95.5% were on prepaid plans.

 

   

In Zimbabwe, approximately 0.3% of our subscribers were on postpaid plans and approximately 99.74% were on prepaid plans.

 

   

In Burundi, approximately 0.1% of our subscribers were on postpaid plans and approximately 99.9% were on prepaid plans.

 

   

In the Central African Republic, approximately 0.1% of our subscribers were on postpaid plans and approximately 99.9% were on prepaid plans.

Call Completion Services and Value Added Services

In Africa & Asia, we generally provide our customers a variety of value added services, including the following:

 

   

basic value added services, including caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting;

 

   

messaging services, including SMS, MMS (which allows subscribers to send pictures, audio and video to mobile phones and to e-mail) and mobile instant messaging;

 

   

content/chat/infotainment services, which vary depending the country of the subscriber;

 

   

data access services (on GPRS and EDGE, and in certain countries, 3G); and

 

   

RBT.

Roaming

In Africa & Asia, our operations generally have active roaming agreements covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. Our roaming arrangements vary according to the countries in which we operate, but generally cover all major roaming destinations.

 

   

In Pakistan, as of December 31, 2011 we had active roaming agreements with 310 GSM networks in 143 countries. In addition, as of December 31, 2011 we provided GPRS roaming with 147 networks in 93 countries. As of December 31, 2011, we provided our subscribers CAMEL roaming through 39 operators in 43 countries.

 

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In Bangladesh, as of December 31, 2011 we had active roaming agreements with 329 GSM networks in 112 countries. In addition, as of December 31, 2011 we had GPRS roaming facility in 204 networks in 61 countries. We provide our subscribers in Bangladesh CAMEL roaming through 64 operators in 23 countries as of December 31, 2011. We also offer inflight and maritime roaming with Emirates Airlines and Malaysian Airlines.

 

   

In Cambodia, as of December 31, 2011 we had active roaming agreements with 138 GSM network in 101 countries. We also have active roaming agreements with 89 GPRS networks in 64 countries and CAMEL roaming with 33 operators in 27 countries as of December 31, 2011.

 

   

In Laos, as of December 31, 2011 we had active roaming agreements with 164 networks in 103 countries. We provide DATA roaming cover to 66 networks in 42 countries as of December 31, 2011. Inbound roaming has played a key role among our roaming operation in Laos. As of December 31, 2011, we had roaming agreements with 240 roaming partners, accommodating roamers from 118 countries with more than 93 with DATA roaming.

 

   

In Vietnam, as of December 31, 2011 we had active roaming agreements with 114 GSM networks in 68 countries. We also provided GPRS roaming services to 54 networks in 39 countries as of December 31, 2011. GTEL Mobile provided subscribers CAMEL roaming through agreements with 20 GSM networks in 15 countries as of December 31, 2011.

 

   

In Algeria, as of December 31, 2011 we had active roaming agreements with 391 GSM networks in 149 countries and GPRS roaming with 138 networks in 79 countries. We also provided our subscribers in Algeria CAMEL roaming through 111 operators in 69 countries as of December 31, 2011.

 

   

In Zimbabwe, as of December 31, 2011 we had active roaming agreements with 162 networks in 85 countries. We also had 99 agreements with Telecel as the VPMN via the Link 2 One hub and VRS hub and 17 agreements with Telecel as the HPMN via the Link 2 One hub and VRS hub. We opened up CAMEL unilaterally to our inbound roamers and we currently have four unilateral partners in Botswana, Egypt, India and Zambia.

 

   

In Burundi, as of December 31, 2011 we had roaming agreements with 251 networks in 112 countries. We provide our subscribers in Burundi CAMEL roaming through five operators in five countries as of December 31, 2011.

 

   

In the Central African Republic, as of December 31, 2011 we had active roaming agreements with 217 GSM networks in 105 countries. As of December 31, 2011, we provided our Central African subscribers CAMEL roaming through three operators in three countries. We also had a national roaming agreement with Moov, which provided roaming for subscribers in three cities in the Central African Republic as of December 31, 2011.

Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our subscriber while on the host’s network. We pay the host operator for the roaming services and then bill the amount due for the provision of roaming services on our subscriber’s monthly bill.

USB Modems. In Africa & Asia, we generally offer our customers wireless Internet access through GPRS/EDGE networks using special Plug&Play-USB modems. In Burundi, Laos and Zimbabwe we offer 3G services. In addition to providing Internet access, USB modems generally provide other functionalities such as balance top-up, tariff changing and easy management of other services in USB-modem interface. Our businesses in Pakistan do not offer USB modem services.

 

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Mobile Telecommunications Licenses in Africa & Asia

In Africa & Asia, our mobile telecommunications services are provided pursuant to licenses in the countries in which we operate. The following is a summary of the key terms of our licenses in Africa & Asia:

 

   

In Pakistan, we hold 2G, WLL, Long Distance and International licenses for the entire territory of Pakistan and for Azad Jammu Kashmir & Gilgit Baltastan. The 2G licenses will expire in 2022.

 

   

In Bangladesh, we hold a 2G license for the entire territory of Bangladesh. The license will expire in 2026.

 

   

In Cambodia, we hold 2G, WLL, ISP and VoIP licenses for the entire territory of Cambodia. Each of these licenses will expire in 2042.

 

   

In Laos, we hold 2G, 3G, WLL, ISP, WIMAX and IGW licenses for the entire territory of Laos. The 2G license will expire in 2022, while the 3G license was issued in September 2011 and is renewed on annual basis.

 

   

In Vietnam, we hold a 2G license, a one-year 4G trial license and a VoIP license, in each case for the entire territory of Vietnam. The 2G license will expire in 2023.

 

   

In Algeria, we hold 2G, ISP and VSAT licenses for the entire territory of Algeria. The 2G license will expire in 2016.

 

   

In Zimbabwe, we hold 2G, 3G, ISP/IAP, International Gateway and Long Distance carrier licenses for the entire territory of Zimbabwe. The 2G and 3G licenses will expire in 2013.

 

   

In Burundi, we hold 2G, 3G, WLL and WIMAX licenses for the entire territory of Burundi. The 2G and 3G licenses will expire in 2014.

 

   

In the Central African Republic, we hold 2G, 3G ,WLL, ISP and VoIP licenses for the entire territory of the Central African Republic. The 2G and 3G licenses will expire in 2038.

Competition—Mobile Business in Africa & Asia

Pakistan

The Pakistani telecommunications sector experienced exponential growth over the past ten years due to a variety of reasons. The advent of several new operators to the market has increased the level of competition and resulted in an overall drop in prices making it more affordable for consumers to own mobile lines. Additionally, the continuous investment in network expansion carried on by operators provided a higher percentage of the Pakistani population with access to mobile services as compared to before. The availability, affordability and ease of use of handsets also contributed to the growth of the overall mobile industry.

According to the Pakistan Telecommunications Authority, there were approximately 112.9 million subscribers in Pakistan as of December 31, 2011, representing a penetration rate of approximately 65.8%.

The Pakistani mobile telecommunications market has five main operators: Mobilink, Telenor Pakistan, Ufone, Warid and Zong. Telenor Pakistan is a member Telenor Group and has been operating commercially in the market since 2005. Ufone is a member of the Etisalat Group and started operations in 2001. Warid is a joint venture between Abu Dhabi Group and SingTel Group and started its operations in 2004. Zong is fully owned by China Mobile and is the fastest growing mobile telecommunications provider in Pakistan.

The below table shows the number of subscribers per operator as of December 31, 2011:

 

Operator

   Subscribers in
Pakistan
 

Mobilink (VimpelCom)

     34.2   

Telenor

     28.1   

Ufone

     21.4   

Warid

     15.3   

Zong

     13.9   

 

Source: The Pakistan Telecommunications Authority

 

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Bangladesh

The mobile telecommunications industry has been introduced late in Bangladesh. Since GrameenPhone (GP) hit the market with its GSM technology in 1997, the industry has grown rapidly. In the last decade the penetration increased from 0.8% (in 2002) to 51% in 2011. Increased demand for mobile telecommunications services is largely due to the expansion of the Bangladeshi economy and a corresponding increase in disposable income; declining tariffs which have made mobile telecommunications services more affordable to the mass market subscriber segment; advertising, marketing and distribution activities, which have led to increased public awareness of, and access to, the mobile telecommunications market; and improved service quality and coverage.

According to the Bangladesh Telecommunications Regulatory Commission, there were approximately 85.4 million subscribers in Bangladesh as of December 31, 2011, representing a penetration rate of approximately 51%.

The Bangladeshi mobile telecommunications market is highly concentrated. The top three mobile operators, Grameenphone, Banglalink and Robi, collectively held approximately 89.4% of the mobile market in Bangladesh as of December 31, 2011 (according to the Bangladesh Telecommunications Regulatory Commission). In addition to Grameenphone and Robi, we also compete with Airtel, Citycell and Teletalk. Grameenphone is a public limited company listed on the Dhaka and Chittagong Stock Exchanges. Grameenphone has two main shareholders, namely Telenor Mobile Communications AS (55.80%) and Grameen Telecom (34.20%). Robi Axiata Limited is a joint venture company between Axiata Group Berhad, Malaysia and NTT DOCOMO INC, Japan. Airtel Bangladesh Ltd. is a launched commercial operations in 2007. Warid Telecom International LLC, an Abu Dhabi based consortium, sold a majority 70% stake in the company to India’s Bharti Airtel Limited In January 2010. Citycell (Pacific Bangladesh Telecom Limited) was the first mobile communications company of Bangladesh and is the only CDMA (Code division multiple access) network operator in the country. Citycell is currently owned by Singtel with 45% stake and the rest 55% owned by Pacific Group and Far East Telecom. Teletalk Bangladesh Limited is a Public Limited Company of Bangladesh Government, the state-owned telephone operator, which launched its operations in 2004.

The following table shows our and our primary mobile competitors’ respective subscriber numbers in Bangladesh as of December 31, 2011:

 

Operator

   Subscribers  in
Bangladesh

(in millions)
 

Grameenphone

     36.5   

Banglalink (VimpelCom)

     23.8   

Robi

     16.1   

Airtel

     6.0   

Citycell

     1.8   

Teletalk

     1.2   

 

Source: The Bangladesh Telecommunications Regulatory Commission.

Cambodia

Despite the presence of eight mobile operators in Cambodia, the market has low mobile penetration. The market is characterized by fierce competition, low per minute prices as well as multiple SIMs subscribers. Demand for mobile phones services has been witnessed in the explosive growth in subscribers year over year as declining tariffs and low cost handsets dominate the market.

According to the Informa Telecoms & Media, there were approximately 13.3 million subscribers in Cambodia as of December 31, 2011, representing a penetration rate of approximately 87.1%.

In the Cambodian telecommunications market, we compete mainly with Metfone, CellCard, Smart and Hello.

 

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The following table shows our and our primary mobile competitors’ respective market shares in Cambodia as of December 31, 2011:

 

Operator

   Market Share  

Metfone

     33.1

CellCard

     25.1

Smart

     14.9

Hello

     12.9

Sotelco (VimpelCom)

     7.6

 

Source: Informa Telecoms & Media for all companies except Sotelco. © Informa UK Limited 2012. All rights reserved.

Laos

The Lao telecommunications market is very competitive with aggressive promotions, low per minute price and SIM spinners. Two of the 4 market players claim more than 60% of the market. With penetration rate less than 50% as of December 31, 2011, the market is still rapidly expanding, as evidenced by the growth in subscribers year over year as tariffs decline and handsets become more affordable.

According to the Informa Telecoms & Media, there were approximately 4.1 million subscribers in Laos as of December 31, 2011, representing a penetration rate of approximately 63.0%.

The Lao mobile telecommunications market has four operators: Unitel, VimpelCom operating through our subsidiary VimpelCom Lao Co., Lao Telecom and ELT. Unitel is a joint venture between Viettel Global Joint Stock Company (Viettel Global) and Lao Asia Telecom (LAT). Lao Telecom (LTC) is jointly owned by the Lao Government (51%) and Shinawatra International Public Company Limited (49%). ETL is 100% controlled by the Lao Government (under the Ministry of Communication, Transport, Post and Construction).

The following table shows our and our primary mobile competitors’ respective market shares in Laos as of December 31, 2011:

 

Operator

   Market Share  

Unitel

     38.8

Lao Telecom

     33.7

ETL

     12.9

VimpelCom Lao Co. (VimpelCom)

     9.8

 

Source: Informa Telecoms & Media for all companies except VimpelCom Lao Co. © Informa UK Limited 2012. All rights reserved.

Vietnam

The Vietnamese mobile telecommunications market is characterized by fierce competition, low per minute prices as well as multiple SIMs subscribers. Increased demand for mobile telecommunications services has been evidenced by the strong growth in subscribers year over year as declining tariffs and low cost handsets dominate the market.

According to the Informa Telecoms & Media, there were approximately 115.8 million subscribers in Vietnam as of December 31, 2011, representing a penetration rate of approximately 128.6%.

In the Vietnamese mobile telecommunications market, our associate GTEL Mobile competes with four operators: Viettel, Mobifone, Vinaphone and Vietnamobile.

The following table shows our and our primary mobile competitors’ respective market shares in Vietnam as of December 31, 2011:

 

Operator

   Market Share  

Viettel

     37.4

Mobifone

     28.4

Vinaphone

     23.6

Vietnamobile

     4.9

GTEL Mobile (VimpelCom)

     2.6

 

Source: Informa Telecoms & Media for all companies except GTEL Mobile. © Informa UK Limited 2012. All rights reserved.

 

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Algeria

The mobile industry in Algeria has grown rapidly over the past 10 years as a result of increased demand by individuals and newly created private businesses. Demand for mobile services is largely due to the expansion of the Algerian economy. Innovative services and declining tariffs have made mobile services more appealing to the mass market subscriber segment, while advertising, marketing and distribution activities and improved service quality and coverage, have led to increased public awareness of, and access to, the mobile telecommunications market.

According to Informa Telecoms & Media, there were approximately 35.7 million subscribers in Algeria as of December 31, 2011, representing a penetration rate of approximately 99.4%.

In Algeria, there are three mobile operators: Djezzy operating through our subsidiary OTH; Mobilis, a subsidiary of Algeria’s incumbent, Algerie Telecom; and Nedjma, a subsidiary of Qtel-owned Wataniya. Algerie Telecom launched its Mobilis GSM network in April 1998 and was the only operator until the second GSM license was awarded to OTA in July 2001, for a period of 15 years. OTA launched under the Djezzy brand in February 2002. Wataniya Telecom Algeria was awarded the third GSM license in December 2003. Competition is based primarily on local and international tariff prices, network coverage, quality of service, the level of customer service provided, brand identity and the range of value added and other subscriber services offered.

Subscriber growth in Algeria’s mobile market is expected to slow down, and the attention is expected to shift to maintaining or improving the average revenue per user which has continued to decline under intensifying price competition between the three networks. The operators have entered the underdeveloped internet market by launching basic mobile data services, but the licensing of third-generation spectrum has been delayed, which has made it difficult for them to fully compete in the broadband sector. However, 3G licenses are now expected to be issued in 2012.

Competition for subscribers in Algeria is intense and competition is expected to increase in the future as a result of greater market penetration and new technologies, products and services. As a result of increased competition, mobile providers are utilizing new marketing efforts, including aggressive price promotions, to retain existing subscribers and attract new ones.

The following table shows our and our competitors’ respective subscriber numbers in Algeria as of December 31, 2011:

 

Operator

   Subscribers in
Algeria
(in  millions)
 

Djezzy (VimpelCom)

     16.6   

Mobilis (AMN)

     10.8   

Nedjma (WTA)

     8.3   

 

Source: Informa Telecoms & Media. © Informa UK Limited 2012. All rights reserved.

Zimbabwe

The mobile industry in Zimbabwe has grown rapidly over the past couple of years. Subscriber numbers have tripled from less than two million at the end of 2008 to approximately 9.6 million at the end of 2011. Unfulfilled demand, initially for voice and increasingly for data services, is one of the main drivers of growth for mobile communications in Zimbabwe. Advertising, marketing and distribution activities and improved coverage have led to increased public awareness of, and access to, the mobile telecommunications market in Zimbabwe.

According to Informa Telecoms & Media, there were approximately 9.6 million subscribers in Zimbabwe as of December 31, 2011, representing a penetration rate of approximately 74.4%.

The mobile telecommunications market in Zimabwe has three licensed network operators Econet Wireless Zimbabwe, Telecel Zimbabwe, and Netone Zimbabwe. Telecel Zimbabwe is jointly owned by our subsidiary Telecel Globe and the Empowerment Corporation. Econet Wireless Zimbabwe is a subsidiary of the Econet Wireless telecommunications group. Netone Zimbabwe is a private company wholly owned by government.

 

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The following table shows our and our competitors’ respective subscriber numbers in Zimbabwe as of December 31, 2011:

 

Operator

   Subscribers in
Zimbabwe

(in millions)
 

Econet

     5.9   

Telecel (VimpelCom)

     1.5   

Netone

     1.7   

 

Source: Informa Telecoms & Media for all companies except Telecel. © Informa UK Limited 2012. All rights reserved.

Burundi

The mobile industry in Burundi has grown rapidly in recent years. According to Informa Telecoms & Media, subscriber numbers have increased from 1.0 million at the end of 2009 to approximately 2.2 million subscribers at the end of 2011, representing a penetration rate of approximately 25.3%.

The mobile telecommunications market in Burundi has main network operators: Leo Burundi, Econet Wireless, Africell Tempo, SMART Lacell, and Onatel. Leo Burundi is our subsidiary.

The following table shows our and our competitors’ respective subscriber numbers in Burundi as of December 31, 2011:

 

Operator

   Subscribers  in
Burundi
 

Leo Burundi (VimpelCom)

     1.2   

Econet Wireless

     0.4   

Africell Tempo

     0.2   

SMART Lacell

     0.1   

Onatel Burundi

     0.3   

 

Source: Informa Telecoms & Media for all except Leo Burundi. © Informa UK Limited 2012. All rights reserved.

Central African Republic

The Central African Republic mobile telecommunications industry has grown quite rapidly over the past 3-4 years as a result of increased coverage and the drop in the price of handsets. While we see healthy demand in urban centers, increased growth in the usage of telecommunication services in rural areas has been largely hampered by the limited purchasing power of the population at large and the poor logistical infrastructure in the country. The rural zones of the Central African Republic lack roads, electricity, distributor networks and financial networks (banks) for the collection and safekeeping of cash. Much of the country is considered insecure from a personal safety perspective. These issues directly affect our distribution, network rollout and site maintenance activities in the provinces.

According to the Informa Telecoms & Media, there were approximately 1.1 million subscribers in the Central African Republic as of December 31, 2011, representing a penetration rate of approximately 24.3%.

The Central African mobile telecommunications market we compete with three other operators: Orange, Moov and Azur. Orange is a member of the France Telecom group. Moov is a subsidiary of Atlantique Telecom, which is in turn a subsidiary of ETISALAT (Emirates Telecommunications Corporation), the incumbent and leading provider of telecommunications in the UAE. Azur belongs to the Bintel Group, based out of Lebanon.

The following table shows our and our primary mobile competitors’ respective subscriber numbers in the Central African Republic as of December 31, 2011:

 

Operator

   Subscribers
(in  millions)
 

Telecel CAR (VimpelCom)

     0.4   

Orange

     0.2   

Azur

     0.2   

Moov

     0.1   

 

Source: Informa Telecoms & Media for all companies except Telecel CAR. © Informa UK Limited 2012. All rights reserved.

 

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Marketing and Distribution—Mobile Business in Africa & Asia

In Africa & Asia, we generally offer our subscribers contract and prepaid tariff plans, each offering different benefits and targeting a certain type of subscriber. We also generally offer our subscribers a wide range of value added services to choose from and loyalty reward schemes. Below is a summary of our sales and distribution arrangements in the various countries in which we operate:

 

   

In Pakistan, we offer a portfolio of tariffs and products designed to cater to the needs and requirements on specific market segments, including mass market subscribers, youth subscribers, personal contract subscribers, SOHOs (with one to five employees), SMEs (with six to 50 employees) and enterprises (with more than 50 employees). We offer corporate subscribers several postpaid plan bundles, which include on-net minutes, variable discount for closed user group, or “CUG,” and follow-up minutes based on bundle commitment. Our sales channels include 20 company stores, a direct sales force of 280 employees, 424 franchise stores, 170 direct selling representatives, or “DSRs,” and over 200,000 third party retailers.

 

   

In Bangladesh, we offer our subscribers several national prepaid, contract and hybrid tariff plans, each offering a different benefit and targeting a specific type of subscriber. We divide our primary target subscribers into five categories: high value subscribers (for the top 20% of our high ARPU generating subscribers); public call offices (a telephone facility in a public place providing calling-card-based domestic and international telecom services), enterprises (for companies with 15 or more employees), SME accounts (for companies with one to 15 employees) and mass subscribers. We also offer specific business value added services and special pricing based on volume and contractual commitment, which include Fleet Tracking and Bulk SMS. We provide our large enterprise accounts with specialized customer service and enterprise relationship management. We distribute our mobile services and products through 8 of our own shops, a direct sales force of 331 (277 permanent and 54 temporary) employees, telemarketing through 65 representatives and approximately 30,000 SIM retailers and over 120,000 airtime retailers.

 

   

In Cambodia, we divide our offerings into the following types of pricing plans: local, international, tourist and Internet. All price plans are based on prepaid concept. Local price plans include plans for heavy users, handset packages and closed user groups for families and communities. Most tariffs are quoted in US dollars. We distribute our mobile services and products through two exclusive distributors, approximately 10,000 SIM sellers and approximately 22,000 airtime sellers wholesale distributors.

 

   

In Laos, we offer pricing plans for contract, prepaid and internet services for residential and corporate subscribers. Local price plans include plans for heavy users, handset packages and closed user groups for families and communities. Most tariffs are quoted in the local currency. We distribute our mobile services and products through seven exclusive distributors, 83 retail sales officers and 580 promoters.

 

   

In Vietnam, we only offer prepaid plans, which include plans for heavy users, handset packages and closed user groups for families and communicates. Most tariffs are quoted in local currency. We distribute our mobile services and products through 15 exclusive distributors, 34 traditional distributors, 86 authorized shops and 200 branded trade counters.

 

   

In Algeria, we offer several contract and prepaid tariff plans, each offering a different benefit and targeting a certain type of subscriber. Our postpaid plans are targeted at our business subscribers and include “Djezzy Business” and “Business Control.” Our postpaid plans for residential subscribers include “Djezzy Classic” and “Djezzy Control.” Our prepaid plans for residential subscribers include “Djezzy Carte” and “Allo.” We also have a loyalty program called “Imtiyaz,” which gives customers bonus points depending on their usage. Bonus points can be exchanged for voice and messaging services or products. We also have an “Imtiyaz Elite” for our high value customers, which offers additional benefits. We sell our mobile telecommunication services through indirect channels (distributors) and through our “Djezzy” branded shops, of which there were 87 as of December 31, 2011. Our nine exclusive national distributors cover all the 48 Wilayas and are distributing our products through 19,000 authorized points of sales. We also had a pool of more than 4,000 agents in a call center as of December 31, 2011. This pool of agents combines a series of in-sourced and outsourced agents that are directly managed by OTA management.

 

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In Zimbabwe, we focus on providing our customers high-tech mobile phone products at affordable prices. We have an array of value added products that reward customers in a higher ARPU tier. We run a non-exclusive national indirect distribution model using super dealers across the country (regionally controlled), and street resellers. As of December 31, 2011, we used 124 super dealers and more than 5000 street resellers. We have eight regional offices and own shops in seven regions and a booth in the international airport.

 

   

In Burundi, we have a channel partner network to distribute our products and services across the country including isolated rural areas. As of December 31, 2011, the network consists of six super distributors nationwide, eight branded company owned and company operated service centers nationwide, 120 sub-distributors and 11,500 non-specialized independent retail outlets.

 

   

In the Central African Republic, we offer subscribers several national contract and prepaid plans, each offering a different benefit and targeting a specific type of customer. We divide our primary target subscribers into the following groups: contract accounts (for wealthier Central Africans and foreigners, NGOs, multilateral organizations and business people); corporate floats (prepaid accounts created under one main corporate account) and prepaid or mass subscribers. We distribute our products and services through seven of our own shops, 115 registered dealers and numerous informal street resellers.

Fixed Business in Africa & Asia

Our fixed business in Africa & Asia is limited to our operations in Pakistan, Laos, Burundi and the Central African Republic. We do not offer fixed services in other countries in which we operate in Africa & Asia.

Description of Fixed Services in Africa & Asia

In Pakistan, our Mobilink Broadband & Carrier Division, or “BCD” provides internet, data and value added services over a wide range of access media, covering major cities of Pakistan. BCD offers a variety of package offerings and choices of access media backed by a domestic backbone network spread across Pakistan. Our fixed services include domestic and international long distance services, point-to-point leased lines, dedicated internet services through our access network, virtual private network, or “VPN,” services, value added services, such as web hosting, email hosting and domain registration, DSL and xDSL services, WiMax services, VSAT services, Metro Fiber, which provides last mile access to the enterprise sectors in Karachi, Lahore and Islamabad and P2P radios for connecting to the BDC network. Our customer portfolio includes individual subscribers and public and private organizations in major cities throughout Pakistan. These organizations include large to small size organizations in major sectors of Pakistan’s economy. In Pakistan, we are one of the four companies with a domestic fiber backbone. Our long haul network is spread over 6,400 km across Pakistan with 74 POPs located in major cities.

In Laos, we offer WiMax covering few cities with low uptake. We launched WiMax in 2008, which is only available in the capital Vientiane. We have 500 customers subscribed on WiMax service. Fiber was launched in June 2010. Fiber and microwave connectivity is available in many regions including major cities: Pakxe, Savannakhet, Vang Vieng, and Luang Prabang. Currently there are nine customers subscribed to our fiber connectivity.

In Burundi, we offer WiMax 16d fixed broadband services using Alvarion equipment. As of December 31, 2011, we provided broadband access to approximately 300 entities including corporates, SMEs, NGOs, embassies, universities, schools, internet cafes, and high-net worth individuals in Burundi.

In the Central African Republic, we offer limited fixed services, which include dedicated and shared Internet connections using WiMax.

 

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Fixed Business Licenses in Africa & Asia

We maintain the required licenses for our fixed-line operations in Africa & Asia. In Burundi, we have a WiMax license, which is valid until April 2016.

Competition—Fixed Business in Africa & Asia

In Pakistan, our fixed line business faces significant competition from other providers of fixed corporate services, carrier and operator services and consumer internet services.

In Pakistan, our main competitors for fixed corporate services are Pakistan Telecommunication Corporation, or “PTCL,” Multinet, Wateen, Supernet, Cybernet, Nexlinx and Nayatel. Our main competitors for carrier and operator services are PTCL, Wateen, Worldcall, Wi-Tribe, and Telenor Pakistan. Our main competitors for consumer internet services are PTCL, Wateen, World Call, Wi-Tribe and Qubee.

In Burundi, our main competitor for fixed services is CBINET.

In the Central African Republic, our main competitors for fixed services are Orange and Moov.

Marketing and Distribution—Fixed Business in Africa & Asia

In Pakistan, our BCD utilizes a direct sales force for corporate customers. We employ a team of regional sales managers in three different regions (South, Central and North) supported by dedicated sales force and account managers. For consumer DSL, we use direct sales channels, indirect sales channels and telesales. Our telesales operate in Lahore in Central Region with a team of telesales executives led by a sales manager. BCD offers WiMax services to the consumer market only in Karachi, through direct and indirect sales channels and telesales led by a sales manager. Direct sales are supported by a dedicated sales force of business development officers. Indirect sales are supported by retail business development officers which offer services through our franchise network. Our telesales channel also offer WiMax services.

 

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In Burundi, we have a small dedicated direct sales force for our fixed services. Most sales are made through our fully owned shops in the country’s capital city Bujumbura.

In the Central African Republic, we have a small dedicated direct sales force for our fixed services. Most sales are made through our fully owned shops in the country’s capital city Bangui.

Description of Operations of the Ukraine Business Unit

Mobile Business in Ukraine

Description of Mobile Services in Ukraine

Mobile Voice Services

As of December 31, 2011, approximately 8.1% of our subscribers in Ukraine were on postpaid plans and approximately 91.9% of our subscribers in Ukraine were on prepaid plans.

Call Completion and Value Added Services

In Ukraine, we offer the same call completion and value added services as in Russia. For a description of these services, see “Item 4—Information on the Company—Description of Operations of the Russia Business Unit—Mobile Business in Russia—Description of Mobile Services in Russia—Call Completion and Value Added Services.”

Roaming

As of December 31, 2011, Kyivstar provided voice roaming on 403 partner networks in 195 countries, GPRS roaming on 295 networks in 151 countries and CAMEL roaming on 127 networks in 94 countries.

USB Modems

In Ukraine, we provide our subscribers with wireless Internet access through GPRS/EDGE networks. The service, which was commercially launched in 2008 offers subscribers special wireless USB modems, which provide a simple way to access the Internet throughout Ukraine without access to fixed-line broadband or a long-term contract. Subscribers receive a discounted USB modem and SIM card with a pre-installed special Internet rate data plan.

Mobile Telecommunications Licenses in Ukraine

In Ukraine, we hold 900 MHz (GSM) and 1800 MHz (GSM) cellular licenses for operation throughout the territory of Ukraine (telecommunications services license). These licenses were received on October 5, 2011 with the term for 15 years each. We have also obtained a range of national and regional-scale licenses for use of RFR in the referred standards (frequencies licenses). In addition, we provide local, long-distance and international fixed telecommunications services throughout the territory of Ukraine, according to respective licenses. Our network covers all large and small cities and in excess of 28,000 villages, all the main national and regional roads, and a majority of the sea and river coasts of Ukraine (i.e., it covers the territory where 99.9% of Ukraine’s population lives).

Competition—Mobile Business in Ukraine

Despite repeated requests from the leading Ukrainian operators, including Kyivstar, 3G launch in Ukraine had been blocked by the Ukrainian regulators until 2005, when the Ukrainian government issued its first and only 3G license to Ukrtelecom, Ukraine’s state-owned fixed-line operator. Kyivstar, MTS and Astelit were refused 3G licenses by the Ukrainian government in 2006. The Ukrainian government subsequently announced plans to hold a tender to auction one 3G license. However, the proposed auction has been postponed indefinitely.

 

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According to Informa Telecoms & Media, as of December 31, 2011, there were approximately 53.0 million subscribers in Ukraine, representing a penetration rate of approximately 117.3%. There are currently three mobile operators with national coverage in Ukraine: Kyivstar, Mobile TeleSystems—Ukraine, or “MTS Ukraine,” and LLC Astelit. Kyivstar and PJSC “Ukrainian RadioSystems,” or “URS,” were unified under the brand Kyivstar following the VimpelCom Ltd. Transaction.

The following table shows our and our primary mobile competitors’ respective subscribers in Ukraine as of December 31, 2011:

 

Operator

   Subscribers
(in  millions)
 

Kyivstar (VimpelCom)

     24.8   

MTS Ukraine

     19.2   

Astelit

     7.1   

 

Source: Informa Telecoms & Media for all companies except Kyivstar. © Informa UK Limited 2012. All rights reserved.

Kyivstar and MTS Ukraine

The market share for Kyivstar (including URS) in Ukraine as of December 31, 2011 was 46.8%, as calculated by dividing our subscribers in Kyivstar (including URS) by Ukraine total subscribers base. Kyivstar competes primarily with MTS Ukraine, which had a market share of 36.3% as of December 31, 2011. MTS Ukraine, which is 100.0% owned by MTS, operates a GSM-900/1800 network in Ukraine. MTS Ukraine also received a CDMA-450 license in 2006. Kyivstar operates a dual-band GSM-900/1800 network covering more than 95.0% of Ukraine’s population.

Other Competitors in Ukraine

We also compete with Astelit, which operates throughout Ukraine and, according to Informa Telecoms & Media, and which had approximately 7.1 million subscribers as of December 31, 2011, representing a market share of 13.4%. We also compete with Trimob, a company which was separated from Ukrtelecom to provide services under 3G license, which had approximately 0.84 million subscribers as of December 31, 2011, representing a market share of 1.6%, and with Telesystems Ukraine, which had 0.82 million subscribers as of December 31, 2011, representing a market share of 1.5%.

Marketing and Distribution—Mobile Business in Ukraine

In Ukraine, we offer several prepaid and contract tariff plans, each one targeted at a different type of subscriber.

We divide our primary target subscribers into three large groups:

 

   

youth;

 

   

business (subdivided into SME subscribers and large business subscribers); and

 

   

mass market subscribers.

The Ukrainian mobile market operates primarily on prepaid plans. However, contract subscribers tend to generate higher average revenues for our company than prepaid subscribers generate. To attract more contract subscribers, we have differentiated our service levels to provide higher customer service to our contract subscribers, such as direct access to customer service agents on a dedicated contract subscriber customer service line, in addition to our initiatives to increase the flexibility and accessibility of the payment methods offered to contract subscribers.

Customer Loyalty Programs

In Ukraine, to promote brand loyalty we use program “Kyivstar club” which provide monthly bonus. Bonus is the percent of the amount spent by the subscriber on conversation during a month. The amount of bonus depends on the term of using the mobile communication service. The longer one stays with Kyivstar, the larger is bonus.

 

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Fixed Business in Ukraine

Description of Fixed Services in Ukraine

Business and Corporate Services

Our company has constructed and owns a 26,157 kilometer fiber optic network, including 5,070 kilometers in cities of Ukraine and 1,207 kilometers in the Kyiv region, which is interconnected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine and to our gateway. Our company provides data and Internet access services in approximately 97 metropolitan cities in Ukraine.

Our fixed-line services include corporate Internet access, VPN services, data center, contact center, fixed telephony and number of value added services. Internet access services include connection to the Internet via ADSL, symmetrical and ethernet interfaces at speeds ranging from 256 kbps to 2.5 gbps. Our company provides standard and advanced fixed telephony value added services, such as convergent fixed-mobile closed user groups. Fixed voice services are available in 28 major cities of Ukraine.

In order to reduce our dependency on other fixed-line operators, we have been building our own transmission capacity between the base station network and the mobile switching centers, consisting of fiber optic cable and radio links. Between our base stations and base station controllers, we use mini links operating at 8 and 23 GHz, where capacity is not constrained. We are built dedicated fiber optic networks in larger cities, such as Kyiv, Kharkiv, Odesa, Dnipropetrovsk, Lviv, Donetsk, Vinnytsya, Khmelnytskyy, Zaporizhzhya, Simferopol and Mykolaiv. As of December 31, 2011, we owned approximately 26,157 kilometers of fiber optic cable and leased a negligible amount. For the last two years, we have already had our own fiber optic cable network that is sufficient to meet most of our transmission requirements without any leased capacity.

Local Access Services. Our company provides local access services to corporate customers by connecting their premises to our fiber optic network, which interconnects to the local PSTN in 28 major Ukrainian cities.

International and Domestic Long Distance Services. Our company provides outgoing international voice services to business customers through its international gateway and direct interconnections with major international carriers. DLD services are primarily provided through our own intercity transmission network and through interconnection with Ukrtelecom’s and other operators’ networks. Our company also holds an international license that enables it to provide international voice and data services to its business and corporate customers.

Dedicated Internet and Data Services. Our company provides a private line service, VPN services, an integrated voice and data ISDN connection, frame relay, broadband digital subscriber line and dedicated Internet services.

Information Services. Our company provides telecommunications services to financial and banking companies, such as S.W.I.F.T., access to processing centers, news services to companies such as Reuters, as well as conduits to airline reservation systems in Ukraine. Our data center provides server co-location and hosting services for news agencies and financial and entertainment services providers.

Call Center Services. Our company launched its call center services in 2002 and is one of the main market players in providing telemarketing, actualization and hot line services for corporate clients in Kyiv. In 2011 we launched additional call center services, including virtual office and sales outsourcing for corporate clients.

Mass Market Services. Our company offers telephone and Internet broadband access services (through FTTB or ADSL) for mass market customers.

Carrier and Operator Services

Our joint carrier and operator services division in Ukraine provides local, international and intercity long distance voice traffic transmission services to Ukrainian fixed-line and mobile operators on the basis of its proprietary DLD/ILD network as well as IP Transit and data transmission services through our own domestic and international fiber optic backbone and IP/MPLS data transmission network.

 

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We derive most of our carrier and operator services revenue in Ukraine from voice call termination services to our own mobile network, and other local and international destinations. We have more than 100 national interconnections in cities in Ukraine through which we terminate traffic of our subscribers and generate revenues from call termination on our networks. We have 40 international interconnections with international partners for voice call termination and IP transit services.

Consumer Internet Services

In Ukraine, we offer the same spectrum of fixed-line and wireless Internet access and dial-up services as in Russia. We began providing fixed broadband services in Ukraine in 2008 and as of December 31, 2011 provided services in 138 cities in Ukraine. In connection with this service, we have been engaged in project to install FTTB for fixed broadband services in approximately 46,000 residential buildings in 138 cities, providing over 64,000 access points.

Licenses for Fixed Business in Ukraine

The tables below set forth the principal terms of the licenses which are important to our fixed business in Ukraine.

 

License Type

  

Region

  

Expiration Date

International communication

   All territory of Ukraine    August 18, 2019

Long-distance communication

   All territory of Ukraine    August 18, 2019

Local communication

   All territory of Ukraine    August 29, 2015

Competition—Fixed Business in Ukraine

Business and Corporate Services

In the voice services market for business customers, we compete with Ukrtelecom, Datagroup, Vega, and a number of other small operators. The provision of Internet and data services is not licensed in Ukraine. As a result, there is a high level of competition, with more than 400 Internet service providers, or “ISPs,” in Ukraine. Our main competitors in the corporate market for data are Ukrtelecom, Volia, Vega and Datagroup.

In the fast growing residential broadband Internet market, we face competition from Ukrtelecom and from Volya-Cable in Kyiv, as well as from strong local players in other cities.

Carrier and Operator Services

In Ukraine, carrier and operator services market competitors include Ukrtelecom, Ucomline (Farlep-Optima), Velton and Datagroup.

Consumer Internet Services

Our main competitors in Ukraine are Volia and Ukrtelecom. From December 31, 2010 to December 31, 2011, we significantly increased the number of broadband subscribers in Ukraine by 98.2%.

Marketing and Distribution—Fixed Business in Ukraine

Business and Corporate Services

Our company emphasizes high customer service quality and reliability for its corporate large accounts while at the same time focusing on the development of its SME offerings. We sell to corporate customers through a direct sales force and various alternative distribution channels such as IT servicing organizations and business center owners, and to the SME through dealerships, direct sales, own retail and agent networks.

 

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We use a customized pricing model for large accounts which includes, among other things, service or tariff discounts, volume discounts, progressive discount schemes and volume lock pricing. We use standardized and campaign-based pricing for SME customers.

Consumer Fixed Internet Services

Our marketing strategy is focused on attracting new subscribers. We offer several tariff plans, each one targeted at a different type of subscriber. Advertising campaigns use primarily ATL (TV, outdoor, press, radio, Internet), and sometimes BTL. We also sell services through direct sales and in 1-2-1 activities.

Fixed Broadband Internet Access. We offer a wide range of FTTB services tariffs targeted to different customer segments. There are four unlimited tariff plans with monthly fees but different speeds for active Internet users (up to 80 Mbps).

xDSL Services. For xDSL services, our company maintains service with an unlimited tariff plan and tariff plans that depend on traffic volume and connection speed.

Dial-up Internet Access. Customers can pay for the services through banks. Revenue generated from dial-up service is insignificant and shows a steady decrease as this technology is phased out.

Description of Operations of the CIS Business Unit

Mobile Business in the CIS

Description of Mobile Services in the CIS

Mobile Voice Services

As of December 31, 2011, approximately 3.0% of our subscribers in the CIS were on postpaid plans and approximately 97.0% of our subscribers in the CIS were on prepaid plans.

Call Completion and Value Added Services. In the CIS, we offer the same call completion and value added services as in Russia (except for location based services). For a description of these services, see “—Description of Operations of the Russia Business Unit—Mobile Business in Russia—Description of Mobile Services in Russia—Call Completion and Value Added Services.”

Roaming. In the CIS, we have roaming arrangements with a number of other networks, which vary by country of our operations.

 

   

In Kazakhstan, as of December 31, 2011 we provided voice roaming on 453 networks in 169 countries, GPRS roaming on 249 networks in 97 countries and CAMEL roaming on 159 networks in 80 countries.

 

   

In Uzbekistan, as of December 31, 2011 we provided voice roaming on 411 partner networks in 169 countries, GPRS roaming on 228 networks in 110 countries and CAMEL roaming on 147 networks in 78 countries.

 

   

In Armenia, as of December 31, 2011 we provided voice roaming on 512 partner networks in 210 countries, GPRS roaming on 286 networks in 142 countries and CAMEL roaming on 169 networks in 93 countries.

 

   

In Tajikistan, as of December 31, 2011 we provided voice roaming on 171 networks in 94 countries, GPRS roaming on 126 networks in 76 and CAMEL roaming in 67 networks on 47 countries.

 

   

In Georgia, as of December 31, 2011 Mobitel provided roaming on 94 partner networks in 47 countries, GPRS roaming on 50 networks in 25 countries and CAMEL roaming on 31 networks in 24 countries.

 

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In Kyrgyzstan, as of December 31, 2011 we provided roaming on 345 partner networks in 126 countries, GPRS roaming on 55 networks in 38 countries and CAMEL roaming on 43 networks in 30 countries.

USB Modems

In Kazakhstan, we provide subscribers wireless Internet access over GPRS/EDGE/UMTS networks. Our UMTS/HSPA network was commercially launched in December 2010. The wireless Internet services that we offer include small screen Internet (data services & options in regular voice price plans) and large screen Internet (special internet price plans bundled with USB-modem or without modem for PC and note/netbooks).

In Uzbekistan, we provide subscribers wireless Internet access over GPRS/EDGE/UMTS networks. The UMTS/HSPA services were commercially launched in 2008, and the majority of the network was constructed in 2010. As of December 31, 2011, we provided UMTS services in 12 large cities. We provide internet services both for small- and large-screen Internet. For small screen subscribers we have begun to integrate mobile services of popular social networks (Twitter, Facebook, etc). We partially subsidize USB-modems to reach highest user penetration. USB-modems are locked for the Beeline network so that they only work within our network.

In Armenia, we provide subscribers wireless Internet access over GSM/GPRS/EDGE/UMTS networks. UMTS services were commercially launched in 2009. For small screen subscribers we launched data bundles and began to integrate mobile services of popular social networks (Twitter, Facebook, etc.) USB-modems were commercially launched in July 2009. Subscribers receive a USB modem and SIM card with a pre-installed special Internet rate data plan.

In Tajikistan, USB-modems were launched in January 2008. We provide our subscribers with wireless Internet access via GSM/EDGE and UMTS networks. We provide Internet services both for small and large screen Internet. In the first quarter of 2011, the usage of non-voice services GPRS Internet megabytes increased due to new Internet tariffs that Tacom offered.

In Georgia, USB-modems were commercially launched for prepaid customers in June 2009 and modem traffic exceeded 1 million megabytes between June 2010 and March 2011.

In Kyrgyzstan, we provide our subscribers with wireless Internet access through GPRS/EDGE/UMTS networks. Our UMTS network in Kyrgyzstan was launched in December 2010. USB-modems were commercially launched for prepaid and contract customers in November 2009.

Mobile Telecommunications Licenses in the CIS

In Kazakhstan, we hold national GSM-900/1800 and UMTS licenses for the entire territory of Kazakhstan. These licenses are unlimited by term.

In Uzbekistan, we hold a national license for GSM-900/1800, UMTS and LTE covering the entire territory of Uzbekistan. This license expire on August 6, 2016.

In Armenia, we hold GSM-900/1800 and UMTS licenses for the entire territory of Armenia. These licenses expire on March 3, 2013.

In Tajikistan, we hold national GSM-900/1800, UMTS and LTE licenses for the entire territory of Tajikistan. These licenses expire on July 13, 2015, June 18, 2014 and December 9, 2015, respectively.

In Georgia, we hold GSM-1800 and E-GSM licenses for the entire territory of Georgia. These licenses expire on July 27, 2013 and January 2018, respectively.

In Kyrgyzstan, we hold national GSM-900/1800 and UMTS licenses for the entire territory of Kyrgyzstan. These licenses expire on May 30, 2016 and October 23, 2015, respectively.

 

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Competition—Mobile Business in the CIS

Kazakhstan

According to Informa Telecoms & Media, there were approximately 22.4 million subscribers in Kazakhstan as of December 31, 2011, representing a penetration rate of approximately 141.6%.

The following table shows our and our primary mobile competitors’ respective subscriber numbers in Kazakhstan as of December 31, 2011:

 

Operator

   Subscribers
(in  millions)
 

GSM Kazakhstan

     10.9   

KaR-Tel (VimpelCom)

     8.4   

AlTel

     1.5   

Mobile Telecom Service

     1.4   

 

Source: Informa Telecoms & Media for all companies except Kar-Tel. © Informa UK Limited 2012. All rights reserved.

Uzbekistan

According to Informa Telecoms & Media, as of December 31, 2011, there were approximately 23.8 million subscribers in Uzbekistan, representing a penetration rate of approximately 84.7%.

The following table shows our and our primary mobile competitors’ respective subscribers in Uzbekistan as of December 31, 2011:

 

Operator

   Subscribers
(in  millions)
 

MTS-Uzbekistan

     9.3   

Ucell

     7.8   

Unitel (VimpelCom)

     6.4   

Perfectum Mobile

     0.5   

UzbekMobile

     0.1   

 

Source: Informa Telecoms & Media for all companies except Unitel. © Informa UK Limited 2012. All rights reserved.

Armenia

According to Informa Telecoms & Media, as of December 31, 2011, there were approximately 3.9 million subscribers in Armenia, representing a penetration rate of approximately 127.1%.

The following table shows our and our primary mobile competitor’s respective subscribers in Armenia as of December 31, 2011:

 

Operator

   Subscribers
(in  millions)
 

K-Telecom

     2.4   

ArmenTel (VimpelCom)

     0.8   

Orange Armenia

     0.8   

 

Source: Informa Telecoms & Media for all companies except ArmenTel. © Informa UK Limited 2012. All rights reserved.

Tajikistan

According to Informa Telecoms & Media, as of December 31, 2011, there were approximately 7.1 million subscribers in Tajikistan, representing a penetration rate of approximately 98.4%.

 

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The following table shows our and our primary mobile competitors’ respective subscribers in Tajikistan as of December 31, 2011:

 

Operator

   Subscribers
(in  millions)
 

Babilon Mobile

     2.7   

Indigo

     2.2   

Tacom (VimpelCom)

     1.0   

TK Mobile

     0.5   

TT-Mobile

     0.6   

 

Source: Informa Telecoms & Media for all companies except Tacom. © Informa UK Limited 2012. All rights reserved.

Georgia

According to Informa Telecoms & Media, as of December 31, 2011, there were approximately 4.9 million subscribers in Georgia, representing a penetration rate of approximately 117.9%.

The following table shows our and our primary mobile competitors’ respective subscribers in Georgia as of December 31, 2011:

 

Operator

   Subscribers
(in  millions)
 

Geocell

     2.2   

Magticom

     1.5   

Mobitel (VimpelCom)

     0.8   

Aquafone

     0.3   

A-Mobile

     0.2   

 

Source: Informa Telecoms & Media for all companies except Mobitel. © Informa UK Limited 2012. All rights reserved.

Kyrgyzstan

According to Informa Telecoms & Media, as of December 31, 2011, there were approximately 5.9 million subscribers in Kyrgyzstan, representing a penetration rate of approximately 105.2%.

The following table shows our and our primary mobile competitors’ respective subscribers in Kyrgyzstan as of December 31, 2011:

 

Operator

   Subscribers
(in  millions)
 

Alfa Telecom (Megacom)

     2.5   

Sky Mobile (VimpelCom)

     2.4   

AkTel

     0.8   

 

Source: Informa Telecoms & Media for all companies except Sky Mobile. © Informa UK Limited 2012. All rights reserved.

Marketing and Distribution—Mobile Business in the CIS

All our mobile operations in CIS divide their primary target subscribers into five large groups:

 

   

large account corporate subscribers (business market);

 

   

SME subscribers (business market);

 

   

high ARPU subscribers (consumer market);

 

   

youth segment (consumer market); and

 

   

mass market subscribers.

In Kazakhstan, we offer more than ten different regional and nationwide tenge-based tariff plans for the consumer market and more than ten different tenge-based tariff plans for its business segment, each targeted at a different type of subscriber. In order to promote further growth of our subscriber base, we seek to offer a number of advanced services to the corporate and mass market subscribers with high ARPU, while at the same time providing lower priced services for the more cost-sensitive mass market subscribers.

 

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In Uzbekistan, we offer different prepaid tariff plans in two currencies (U.S. dollars and Uzbek soms), each one offering a different benefit and targeting a certain type of subscriber. Through our GSM network in Uzbekistan, we offer a number of advanced services to the corporate and high-value subscribers, while at the same time providing low-priced services for the more cost-sensitive mass market subscribers.

In Armenia, we offer several dram-based prepaid and contract tariff plans, each one targeted at a different type of subscriber. As of December, 2011, 19% of ArmenTel subscriber base use postpaid plans.

In Tajikistan, we offer several U.S. dollar-based and Tajik somoni-based prepaid and contract tariff plans, each one targeted at a different type of subscriber.

In Georgia, we offer seven national lari-based prepaid tariff plans and more than ten contract-based postpaid tariff plans for its SME and large account corporate customers.

In Kyrgyzstan, we offer more than 10 price plans.

Customer Loyalty Programs

We have loyalty programs in each of the CIS countries in which we operate, except Tajikistan where we plan to launch our loyalty program in 2012.

We used target marketing campaigns based on a number of factors, including strong churn prediction analytics. We launched about 10 TM campaigns monthly for churn prevention and subs reactivation with total reach of 10% of most churn risk subscribers.

Fixed Business in the CIS

Description of Fixed Services in CIS

Business and Corporate Services

Kazakhstan. We focus on small and medium businesses in the cities of Kazakhstan, offering services, including, high-quality, high-speed Internet, telephony and data transmission. We also offer specialized services for multi-national corporations and financial institutions. We provide the following services for corporate customers:

 

   

hi-speed Internet access (including fiber optic lines, wireless technology, WiMax and satellite technology);

 

   

local, long-distance, international telephony (including traditional telephony, IP and session initiation protocol (SIP) telephony);

 

   

data transmission services (including leased lines (point-to-point) and IP VPN);

 

   

organization of satellite channels by VSAT; and

 

   

organizational services for integrated corporate networks (including integrated network voice and data services).

Uzbekistan. Our company is an integrated provider of a large range of telecommunication services available on the Uzbek market, such as network access and hardware and software solutions, including configuration and maintenance. Our company has its own basic fiber-optical digital network in the cities of Tashkent, Zarafshan and Uchkuduk which is longer than 200 kilometers, and copper cables (so-called “last mile”), which are longer than 250 kilometers that allow users to connect and to render services practically in any region of Uzbekistan. We provide the following services for corporate and individual customers:

 

   

hi-speed Internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards;

 

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quality telephone communication services, based on copper wires and the modern digital fiber-optic network;

 

   

dedicated lines of data transmission;

 

   

dedicated line access, and fixed mobile convergence.

Armenia. Our company is an integrated provider of a large range of telecommunication services available on the Armenian market, such as PSTN-fixed and IP telephony, Internet, data transmission and network access, as well as domestic and international voice termination, TCP/IP international transit traffic services. We operate a national network. We provide the following services for corporate and individual customers:

 

   

local telephony services;

 

   

international and domestic long distance services;

 

   

dedicated Internet and data services (including fiber optic lines and ADSL); and

 

   

voice over data services

Carrier and Operator Services

Kazakhstan. We have several interconnection agreements with mobile and fixed-line operators in Kazakhstan under which KaR-Tel provides traffic termination services.

Uzbekistan. We interconnection agreements with Uzbektelecom, the incumbent fixed and mobile services provider in Uzbekistan, through which all national and international traffic is routed, and six other operators in Uzbekistan.

Armenia. Our subsidiary ArmenTel is the Armenian incumbent mobile and fixed-line operator. ArmenTel operates a national network and local networks in almost in every city of Armenia. In Armenia, we provide domestic and international voice termination, intercity and local leased channels and IP transit.

Tajikistan. In Tajikistan, we have interconnection agreements with 15 local operators. Under the interconnection agreements, we provide voice call termination to our own network. We also have a license to provide international communications in Tajikistan which allows our subsidiary there to interconnect with OJSC VimpelCom directly.

Georgia. In Georgia, our subsidiary Mobitel has interconnection agreements with ArmenTel and OJSC VimpelCom, and 22 agreements with local operators. Under these agreements Mobitel provides voice call termination to its own network.

Consumer Internet Services in the CIS

In Kazakhstan, Uzbekistan and Armenia, we offer the same spectrum of fixed-line broadband and wireless Internet access and dial-up services as in Russia. In Armenia, we offer PSTN-fixed and IP telephony services, as well as fixed broadband Internet access based on ADSL technology and dial-up services and wireless Internet access based on CDMA technology.

 

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Licenses—Fixed Business in CIS

The tables below set forth the principal terms of the fixed-line, data and long distance licenses which are important to our operations (other than mobile operations) in the CIS. We have filed or will file applications for renewal for all of our licenses that expire in 2012.

 

License Type

 

Countries, Companies

  

Expiration Date

Local Communication Services   Uzbekistan, “Buzton”    July 5, 2016
  Kazakhstan, “2 Day Telecom”    Unlimited
  Kazakstan, “TNS+”    Unlimited
  Kyrgezstan, “Sky Mobile”    April 20, 2017
  Armenia, “Armentel’    March 3, 2013
International and National Communications Services   Armenia, “Armentel”    March 3, 2013
  Uzbekistan, “Buzton”    January 15, 2015
  Uzbekistan, “Unitel”    March 28, 2026
  Uzbekistan, “Unitel”    April 24, 2026
  Kyrgezstan, “Sky Mobile”    May, 30, 2016
  Tajikistan, “TAKOM”    August 11, 2016
  Tajikistan, “TAKOM”    September 7, 2016
Telematic Services  

Tajikistan, “TAKOM”

Kyrgezstan, “Sky Mobile”

  

July 24, 2012

August 04, 2015

Data Transmission Services   Uzbekistan, “Buzton”    August 30, 2016
  Uzbekistan, “Unitel”    July 22, 2015
  Kazakhstan, “KaR-Tel”, “TNS+”, “2Day Telecom”    Unlimited
  Tajikistan, ‘TAKOM”    December 12, 2015
  Kyrgezstan, “Sky Mobile”    May, 30, 2016

Competition—Fixed Business in the CIS

Business and Corporate Services

Kazakhstan. We are a fast growing alternative Internet service provider in Kazakhstan, where we compete primarily with state-owned provider, Kazakhtelecom (whose holding group includes Nursat, Sygnum, Kepter Telecom, Online.kg, Radio Tell, GSM Kazakhstan and Vostok Telecom), KazTransCom, TransTelecom, owned by the Kazakhstan Temir Zholy (railways), Astel (a leader in the provision of satellite services) and several other small operators in the regions.

Uzbekistan. We operate large independent fixed-line services in Uzbekistan, where we offer a full spectrum of integrated telecommunication services. In Uzbekistan, we compete with the state-owned provider, Uzbektelecom, East Telecom, Sarkor Telecom, Sharq Telecom and EVO. There is a high level of competition in the capital city of Tashkent. The Internet market in the regions remains undeveloped.

Armenia. We are the largest fixed-line services operator in Armenia, where we offer a broad spectrum of fixed-line services to government, corporate and private customers across Armenia. There are more than 14 active operators in Armenia. The largest operators are Armenian Datacom Company (ADC), CrossNet, U!Com, GNC-Alfa and FiberNet. There is a consolidation of rival companies through strategic partnerships, mergers and acquisitions. In 2011 the largest Russian fixed operator Rostelecom acquired telecommunication network services operator GNC-Alfa.

In 2009, the following fourteen companies with which we compete were granted fixed-line technology licenses: (Internet service providers) iCON, Armenian Datacom Company, Cornet-AM, Bionet, Web, Hi-Tech Gateway Inc., Arminco, Softlink; Netsys, Xalt, Crossnet; (restaurant complex) Complex Dzoraghbyur; AATVQ

 

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CJSC and Ardnet LLC. In 2010, three more companies were granted fixed-line technology licenses: Griar Telecom, U!Com (a telecommunications company which offers universal solutions) and GNC-Alfa (a telecommunication network services operator). In 2010, Crossnet and Arminco began providing fixed-line services.

Consumer Internet Services

The basic technologies of Internet access in the CIS include: fixed broadband Internet access (comprising ADSL and Ethernet); wireless broadband Internet access (including 3G, CDMA, WiFi); and dial-up. Our main competitor in Kazakhstan is Kazakhtelecom. Our main competitors in Uzbekistan are UzNet, Sarkor, TPS, SharqStream and Evo. Our main competitors in Armenia are Orange, VivaCell, U!Com and “Armenian Datacom Company” CJSC. Competition in the CIS is based primarily on penetration, price, included traffic and speed of connection.

From December 31, 2010 to December 31, 2011, we significantly increased the number of broadband subscribers in Kazakhstan, Armenia and Uzbekistan by 403.1%, 97.6% and 50.6%, respectively.

Marketing and Distribution—Fixed Business in CIS

Kazakhstan. The main direction of development is revenue and subscriber base growth by means of expansion of transport infrastructure, strengthening the position in the market and focusing on development of Internet data services and introduction of data center services.

Uzbekistan. Focus on growth of large corporate clients subscriber base by means of increasing cross sales share, FMC Data services, Internet access.

Armenia. Focus on subscribers’ retention and ARPU lift by means of increasing share of cross sales, new services development for business segment: Internet access FOLC, Data services, development of Cloud services (HIS, IaaS, SaaS).

Seasonality

Our mobile telecommunications business is subject to certain seasonal effects. Generally, revenues from our contract and prepaid tariff plans tend to increase during the December holiday season, and then decrease in January and February. Mobile revenues are also higher in the summer months, when roaming revenue increases significantly as subscribers tend to travel during these months. Guest roaming revenue on our networks also grows in this period.

Our fixed telecommunications business is also subject to certain seasonal effects. Among the influencing factors are the number of working days during periods and periods of vacations. Generally, our revenues from our fixed telecommunications business are lower when there are fewer working days in the period or a greater number of subscribers are on vacation, such as during the summer months. In Russia, for example, due to the large number of public holidays in January, May and November, we see relatively low level of services usage in these months.

Equipment and Operations

Mobile Telecommunications Equipment and Operations

Mobile Telecommunications Network Infrastructure

GSM, 3G technologies are based on an “open architecture,” which means that equipment from any supplier can be added to expand the initial network. Our GSM/GPRS/EDGE networks, which use Alcatel-Lucent, Ericsson, Huawei, Motorola and Nokia Siemens Networks equipment, are integrated wireless networks of base station equipment, packet core equipment and digital wireless switches connected by fixed microwave transmission links, fiber optic cable links and leased lines. We manage all major suppliers centrally to leverage the whole group and ensure we receive on an ongoing basis the best commercial terms possible. We make supplier selection decisions based on a total cost of ownership, seeking to optimize network operations and provide the best value end customer experience. In Ukraine, we have constructed and currently operate our own national dual band GSM 900/1800 MHz network.

 

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The table below sets forth certain information on our network equipment as of December 31, 2011.

 

     Base
Stations(*)
     Base
Station
Controllers(*)
     Switches(*)  

Russia

     42,940         751         283   

Europe & North America

     23,327         346         65   

Ukraine

     14,691         163         174   

Africa & Asia

     29,700         840         119   

CIS

     11,810         181         81   

 

* Includes 3G equipment.

Site Procurement and Maintenance

We enter into agreements for the location of base stations in the form of either leases or cooperation agreements that provide us with the use of certain spaces for our base stations and equipment. Under these leases or cooperation agreements, we typically have the right to use premises located in attics or on top floors of buildings for base stations and space on roofs of buildings for antennas.

New Technology

We continue to move toward a high-speed broadband connection environment deploying new technologies in fixed and mobile networks. We are also introducing new network technologies aimed to improve the service quality, optimize network usage and increase investment efficiency, such as step-by-step migration to next generation architecture, “direct tunneling” (which provides the possibility to cope with fast growing data traffic at lower cost and smooth evolution to flat All-IP network architecture), tandem free operation, or “TFO,” transcorder free operation, or “TrFO,” and other related technologies. TFO and TrFO are the technologies that remove voice transcoding operations during the call so the voice quality can be improved and resources in media gateways could be saved. All mentioned technologies are being implemented in commercial networks in Russia after testing to ensure the quality of the network.

We actively investigated emerging LTE technology in recent years, and launched three pilot LTE networks in CIS countries (these were first launched full-fledged live market pilot of LTE on post-Soviet territory). We are also testing LTE network equipment from leading vendors at our test zone in Moscow to enable fast and high quality implementation of LTE network in Russia once license and frequencies are obtained. In Italy, we have been awarded two blocks of 800MHz spectrum and four blocks of 2,600MHz spectrum following the completion of the 4G competitive spectrum auction initiated by the Italian Ministry for Economic Development. This additional spectrum in Italy will enable us to further enhance our indoor data service coverage and to utilize high performance LTE/4G technology once such spectrum becomes available to use, which is expected to occur in late 2012 in relation to the 2,600 MHz spectrum and 2013 in relation to the 800MHz spectrum.

We are also implementing 3G HSPA and HSPA+ protocols on our mobile network. To support radio interface expansion, we are continuously upgrading mobile backhaul with high speed IP and hybrid microwaves, connecting NodeBs to fiber.

To support rapidly growing data traffic, we have installed dense wavelength division multiplexing, or “DWDM”, equipment on our Russian backbone and in some CIS countries. We are also implementing an expansion of our IP backbone network to support movement to an all-IP network architecture.

For a discussion of the risks associated with new technology, please see the section of this Annual Report on Form 20-F entitled “Item 3—Key Information—D. Risk Factors—Risks Related to Our Industry—Our failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially adversely affect our business.”

 

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Fixed-line Telecommunications Equipment and Operations

Fixed-line Telecommunications Network Infrastructure

Russia

Our transport network carries voice, data and Internet traffic of mobile network, FTTB and our fixed customers. The backbone of our transport network is our optical cable network. The main fiber ring and Urals ring of our network connect the major cities in the European part of Russia, Urals and Western Siberia. The total length of our optical cable network reaches 24,300 kilometers. Our protected optical line connects Moscow and St. Petersburg, and passes to Stockholm, London and Frankfurt. Two independent optical lines connect our optical networks in Russia and Ukraine. We have also built a second cross boundary line in Kazakhstan, which connects our Russian network to our networks in Kazakhstan, Uzbekistan and to Asian telecommunications operators.

Our regional transport networks are based on synchronous digital hierarchy, or “SDH,” and metropolitan ethernet network, or “MEN,” technology. We have built local SDH networks in more than 100 cities of Russia. We have also built the interregional (so-called “zone”) transport networks that connect our sites in small towns and countryside. The total length of regional fiber cables constructed within the cities is 36,960 kilometers and the total length of our zonal fiber cables is 16,400 kilometers. The MEN network is constructed in more than 56 cities which provide our customers with IP VPN services, voice services and access to Internet.

Our fixed voice network has three levels—local, regional (zone) and federal. The local voice networks, constructed in 89 cities, provide customers with fixed voice services. Our local network in Moscow is integrated into telephone network and connected to 146 transit and local node of telephone urban set, or “UTN.” We have completed construction of zone networks in 54 Russian regions, which helps us to minimize payments to incumbent local operators for voice transit. Our Federal transit network consists of eight international transit exchanges, 14 intercity communications transit exchanges installed in each of the federal districts of Russia, and connection points (access nodes) located in each region of Russia. The network provides mobile and fixed customers with long-distance voice services and minimizes our costs of traffic.

Our IP/MPLS data network carries IP traffic of the mobile network and FTTB and lets us provide our customers with IP VPN services. Our data network core runs at a speed of 320 gigabits per second, or “Gbps.” Our Internet network is one of the largest in Russia. We have interconnection with major international and Russian ISPs.

Italy

In Italy, we have an integrated network infrastructure providing high capacity transmission capabilities and extensive coverage throughout Italy. Our mobile and fixed line networks are supported by 21,548 kilometers of fiber optic cable backbone in Italy and 4,531 kilometers of fiber optic cable MANs as of December 31, 2011. Our network in Italy uses a common system platform, which is referred to as the “intelligent network,” for both our mobile and fixed line networks.

As of December 31, 2011 we had 1,329 LLU sites for direct subscriber connections, and had interconnections with 613 SGUs (local exchange interconnection in which customers are connected in local loop), which allows us to provide carrier pre-selection and carrier selection access for indirect subscribers throughout Italy, as well as wholesale services.

In Italy, our Internet network consists of an aggregated data network with more than 168 points of presence, or “POPs.” Our POPs are made up of 112 ATM/Frame Relay POPs, 56 IP POPs, broadband remote access servers for ADSL direct and indirect access Internet services and virtual private network corporate services, more than 10 network access servers for dial up access Internet services and EDGE routers for direct Internet access corporate services. We currently have 105 EDGE routers for broadband x play services and an Internet MPLS hierarchical backbone connecting all IP points of presence and the main national and international operators.

Ukraine

Our transport network is designed to provide a full spectrum of telecommunication services for corporate and enterprise customers, including: Private Leasing Channel, voice, IP voice, L2VPN, IP VPN, and Internet access.

Our transport network is based on our optical cable network utilizing DWDM, SDH and IP/MPLS equipment. The DWDM and SDH networks connect all the main regional and mid-sized cities of Ukraine including

 

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Kiev, Kharkov, Dnepropetrovsk, Donetsk, Zaporozye, Lvov, Odessa, Lugansk, Poltava, Sumy, Kirovograd, Kherson, Chernovtsi, Cherkassi, Vinnitsa, Zhitomir, Nikolaev Chernigov, Kherson, Uzgorod, Lutsk, Rovno, Ivano-Frankovsk, Ternopol, Khmelnitskiy, Simferopol, Sevastopol, Yalta, Kremenchug, Krivoy Rog and Mariupol. All our DWDM and SDH optical networks are fully ring-protected. Our core IP/MPLS network is fully mesh-protected and connects all the main regional cities of Ukraine. The total length of our fiber optic cables is 26,157 kilometers. We have SDH and Ethernet interconnections with major European carriers in Russia, Poland, Hungary, Romania, Slovakia and Belorussia.

Our interregional and metro transport networks are based on our optical cable and microwave systems utilizing SDH, PDH, Ethernet and IP/MPLS technologies. We have deployed metro SDH and IP/MPLS optical networks in more than 50 cities of Ukraine. The total length of fiber cables constructed within the cities is 6,277 kilometers.

Our IP/MPLS data network carries IP traffic of the mobile network and FTTB, allowing us to provide L2VPN, IP VPN and Internet services. We have interconnections with major European ISPs in Poland (Telia), Hungary (Level3), Germany (Telia, L3), Russia (Sovintel). We are interconnected with Ukrainian local ISP—Volia, Ukrtelecom (planned) and have internet exchanges with UA-IX, DE-CIX, Datagroup, Vega, Eurotranstelecom.

Kyivstar’s fixed voice network is based on softswitch technology (Huawei) with dual homing for MGC and it has combined local-transit functionality. It is possible to use PRI, SIP/VoIP, H.323/VoIP connections for fixed business users and provide local and long-distance transit of voice services. The local voice networks, constructed in 19 cities of all regions of Ukraine, provide customers with fixed voice services. Our local network in Kyiv is integrated into the telephone network and connected to seven transit and local nodes of UTN. Similarly, Kyivstar’s fixed network is connected on local level in other regional centers of Ukraine providing 47 connections to transit and local nodes. International transit of fixed voice services are provided by two international transit exchanges in Kyiv which are integrated with the existing Kyivstar mobile network. The network provides mobile and fixed customers with long-distance voice services and minimizes our costs of traffic.

We also have the separate fixed network of Golden Telecom Ukraine, or “GTU.” It has three levels structure—local (class 5), long-distance and transit (class 4) and international. GTU fixed local voice networks, constructed in 25 cities throughout Ukraine, provide customers with fixed voice services. GTU’s local network in Kyiv is integrated into the telephone network and connected to two transit and local nodes of UTN. Similarly, GTU’s fixed network is connected on local level in other regional centers of Ukraine providing 25 connections to transit and local nodes. International transit of fixed voice services are provided by one international transit exchange in Kyiv. The network provides mobile and fixed customers with long-distance voice services and minimizes GTU costs of traffic.

Kazakhstan

Our subsidiaries TNS-Plus LLP and 2Day Telecom LLP provide a wide spectrum of fixed-line telecommunications services, including Internet access, ADSL, FTTB, WiFi, WiMax, VoIP, VPN and VSAT. TNS-Plus LLP owns more than 6,260 kilometers of fiber optic main lines across Kazakhstan, which are based on Ericsson SDH and Huawei SDH/DWDM equipment. As of December 31, 2011, we had approximately 57,500 subscribers connected via FTTB technology in Kazakhstan.

Uzbekistan

Our subsidiary Buzton’s network provides international telephony and Internet access through JSC Uzbektelecom. Buzton’s network consists of 63 nodes situated all over Uzbekistan. The main technologies of access network are ADSL (14,152 ports) and FTTB (746 buildings). Our main line in Tashkent is based on fiber-optic equipment. The network also includes long-leased channels and local fiber-optic networks in Tashkent, Zarafshan and Uchkuduk.

Armenia

ArmenTel’s fixed infrastructure covers all districts of Armenia with a full set of equipment (international gateway, digital-analog exchanges, Internet protocol digital subscriber line access multiplexers, or “DSLAMs,”

 

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copper wire access network, fiber-optic backbone network, data network). Its network consists of 126,960 ADSL ports and 138 exchanges of which 80 are digital. Our company provides interconnection with international operators and national mobile operators in Armenia. ArmenTel’s CDMA Wireless Local Loop network is used to provide fixed telephone services to rural customers.

FTTB

Our company is rolling out FTTB networks in Russia, Ukraine and the CIS. Technically, FTTB offers higher transmission speed, more bandwidth and better security compared to all existing xDSL and other quasi-broadband solutions. In Russia, where the local loop has not been unbundled and the quality of copper lines is generally poor, construction of fiber networks helps to create alternative high quality access to subscribers’ apartments.

As of December 31, 2011, we had approximately 2.0 million subscribers connected to our FTTB network in Russia. The network operates in 104 cities across Russia (96) and the CIS (8). We have the largest FTTB network in Moscow and the core broadband market in Russia. Our management has experience in an efficient rollout of fiber optic networks in densely populated metropolitan areas.

Call Centers

We handle the majority of our customer contacts through call centers. As of December 31, 2011, we had 14 call centers in Russia, four in Ukraine, six in the CIS, one in Cambodia and one in Vietnam. Our call centers support a wide range of services, products and devices, including mobile, FTTB, Residential Broadband, IP TV and iPhones.

Intellectual Property

We rely on a combination of trademarks, service marks and domain name registrations, copyright protection and contractual restrictions to establish and protect our technologies, brand name, logos, marketing designs and Internet domain names. We have registered and applied to register certain trademarks and service marks in connection with our mobile telecommunications businesses. We have also registered and applied to register certain trademarks and service marks with the World Intellectual Property Organization in order to protect them in certain countries of the CIS.

Our registered trademarks and service marks include our brand name, logos and certain advertising features. Our copyrights are principally in the area of computer software for service applications developed in connection with our mobile and fixed-line network platform. We have copyrights to some of the designs we use in marketing and advertising our mobile services.

Properties

We currently lease our headquarter offices in Amsterdam, the Netherlands, and generally lease property for administrative and other purposes in the countries in which we are located.

In Russia, we own a series of five buildings consisting of approximately 24,000 square meters at 10, Ulitsa 8 Marta in Moscow. We use these buildings as an administrative office, technical center warehouse and operating facility. In addition, we own a series of six buildings on Lesnoryadsky Pereulok in Moscow, constituting approximately 15,500 square meters, that are used as an administrative office, warehouse and operating facility. These buildings also house the main switches for our Moscow GSM-900/1800 network and our main and reserve IT centers. We also have offices at 4, Krasnoproletarskaya Street, in the center of Moscow. It consists of three leased administrative buildings of approximately 32,400 square meters. We also own a portion of a building in the center of Moscow on Ulitsa 1st Tverskaya Yamskaya consisting of approximately 3,000 square meters that we use as a subscriber service center, administrative and sales office. We also own office buildings in some of our regional license areas and lease space on an as-needed basis.

 

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In Italy, we own certain sites where some of our telecommunications network equipment is located, including 287 radio centers (including towers, concrete rooms for equipment, and approximately 160 sites and the land where the radio centers are located), 586 towers (from 15 meters up to 70 meters) and approximately 1,000 other minor towers.

In Ukraine, we own a series of building consisting of 34,068 square meters at Degtyarivska, 53 in Kyiv. We use these buildings as an offices, print-center, sales center and car park. In addition, we own a set of buildings at Gagarina 103 in Dnipropetrovsk, consisting of 16,398 square meters, that we use as a switching center, garage and offices, a building at Vyshgorodska, 21 in Kyiv, consisting of 2,354 square meters, that we use as a switching center, a building at Bugaivska, 3 in Odesa, consisting of 8,600 square meters, that we use as administrative office and technical center, a building at Shelushkova, 96 in Zhytomyr, consisting of 1,966 square meters, that we use as a switching-office center, a building in Rovno, consisting of 1,426 square meters, that we use as a switching-office center, a building at Gorkogo, 84 in Chernigiv consisting of 1,177 square meters, that we use as switching-office center, a building at Keletska, 54B, consisting of 1,406 square meters, that we use as a switching-office center, a building at Gogolya, 413 in Cherkasy, consisting of 1,702 square meters (including garage), that we use as a switching-office center and garage and a building at Artema, 169k in Donetsk, consisting of 2473 square meters, that we use as a offices and technical center. We also own office buildings in some of our regional license areas and lease space on an as-needed basis.

In Pakistan, our subsidiary PMCL owns a number of properties consisting over 28,000 square meters, in Karachi, Lahore and Islamabad. The properties are all associated with its operations and include call centers, data centers, office buildings and switching stations.

For a description of certain telecommunications equipment that we own, please see “—Equipment and Operations—Mobile Telecommunications Equipment and Operations—Mobile Telecommunications Network Infrastructure” and “—Equipment and Operations—Fixed-line Telecommunications Equipment and Operations—Fixed-line Telecommunications Network Infrastructure” above.

Legal Proceedings

FAS Claim

Our company has been named as a third party in a recent claim brought by the FAS against two of our strategic shareholders, Telenor East and Weather II, in the Moscow Arbitration Court. Under Russian law, a person named as a third party to a claim is generally a person potentially interested in the case whose rights and obligations can be affected by the claim. OOO Altimo and Altimo Coöperatief have also been named as third parties.

The claim was filed by FAS on the alleged basis that Telenor East’s February 15, 2012 purchase (the “Purchase”) of 234 million preferred shares in our company from Weather II violated relevant Russian law because Telenor East, as a company controlled by a foreign state (the Kingdom of Norway), may not exercise control over a Russian entity having strategic importance for the national defense and state security (such as our Russian subsidiary, OJSC VimpelCom). FAS is asking the Moscow Arbitration Court to (a) invalidate the share purchase agreement between Telenor East and Weather II of February 15, 2012, which provided for the Purchase; (b) invalidate the option agreement between Telenor East and Weather II of February 15, 2012, which provides for call and put options under which Telenor East could acquire an additional 71 million preferred shares in our company from Weather II extending into January 2016; (c) oblige Telenor East to return the preferred shares to Weather II; and (d) oblige our company, Telenor East and Altimo Coöperatief to enter into a shareholders agreement on substantially the same terms as the VimpelCom Shareholders Agreement, which recently terminated.

In connection with the above claim, FAS filed a separate motion seeking interim relief from the Moscow Arbitration Court to (a) prohibit our company and our subsidiary, VimpelCom Holdings, from voting our shares, representing 100.0% of the outstanding shares, in OJSC VimpelCom; (b) prohibit Telenor East and Weather II from changing the management bodies of our company (which includes our supervisory board); and (c) prohibit Telenor East and Weather II from exercising their rights under their option agreement of February 15, 2012. On April 24, 2012, the Moscow Arbitration Court granted FAS’s above-requested interim relief in part only. The court rejected the Russian regulator’s request to completely prohibit our company and VimpelCom Holdings from voting our shares in OJSC VimpelCom. The injunction order states that our company and VimpelCom Holdings are prohibited from voting our shares at shareholder meetings of OJSC VimpelCom to: (i) change the OJSC VimpelCom board of directors, and (ii) approve major transactions and interested party transactions, as such terms are defined under Russian law. The injunction order does not, however, prohibit our company and VimpelCom Holdings as shareholders of OJSC VimpelCom from exercising our other shareholder rights, including, among other things, rights to approve the OJSC VimpelCom annual accounts, to appoint OJSC VimpelCom’s external auditor, to approve dividend payments by OJSC VimpelCom and to re-elect the current OJSC VimpelCom board members. The court did grant the requested interim relief pertaining to Telenor East and Weather II set out in clauses (b) and (c) above.

 

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For information on the risks related to the FAS claim, see “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—The FAS claim recently brought against two of our strategic shareholders could adversely impact on our business and the governance of our company.”

Telenor Arbitration

In a letter dated January 9, 2011, Altimo Holdings, a member of the Alfa Group, wrote to VimpelCom stating that an affiliate of Altimo Holdings owns shares in Orascom sufficient in value for the Wind Telecom Transaction to be treated as a “Related M&A Transaction” under the VimpelCom Shareholders Agreement. The VimpelCom Shareholders Agreement provided that the issuance of VimpelCom shares in a Related M&A Transaction is not subject to any pre-emptive rights for Altimo or Telenor. At its meeting on January 16, 2011, the VimpelCom supervisory board concluded that the Wind Telecom Transaction should be regarded as a Related M&A Transaction and therefore is not subject to any pre-emptive rights for either Altimo or Telenor under the VimpelCom Shareholders Agreement. The supervisory board approved the Wind Telecom Transaction by a vote of six to three. The three Telenor nominees on the supervisory board voted against the Wind Telecom Transaction. The three Altimo nominees on the supervisory board and the three independent members of the supervisory board voted for the Wind Telecom Transaction.

On January 28, 2011, Telenor commenced arbitration proceedings against each of Altimo Holdings, Altimo Coöperatief (subsidiary of Altimo), and VimpelCom Ltd. for the stated purpose of enforcing its alleged pre-emptive rights under the VimpelCom Shareholders Agreement with respect to VimpelCom shares to be issued in the Wind Telecom Transaction. We refer to the arbitration proceedings in the Annual Report on Form 20-F as the “Arbitration Proceedings.”

On February 7, 2011, Telenor commenced proceedings in the English Commercial Court (the “Court”) seeking an injunction (the “Injunction Request”) which, if granted, would have prevented VimpelCom from proceeding with the special general meeting of its shareholders on March 17, 2011, at which the Wind Telecom Transaction was proposed for approval, until after the arbitration tribunal reached a final decision in the Arbitration Proceedings, unless VimpelCom authorized and issued to Telenor its alleged pre-emptive shares on the basis that the Wind Telecom Transaction was not a “Related M&A Transaction” under the VimpelCom Shareholders Agreement. The hearing of the Injunction Request took place on February 25, 2011. On March 1, 2011, the Court handed down its judgment in which it refused to grant the Injunction Request. VimpelCom, Altimo Holdings, Altimo Coöperatief and Weather II gave various undertakings to the Court (the “Undertakings”) intended to (a) ensure that Telenor will receive its pre-emptive shares should the tribunal in the Arbitration Proceedings ultimately find in Telenor’s favor and (b) protect Telenor’s voting stake from dilution below 25% plus one share between the closing of the Wind Telecom Transaction and the resolution of the Arbitration Proceedings.

In the Arbitration Proceedings, Telenor specifically sought an award (a) declaring that the Wind Telecom Transaction was not a “Related M&A Transaction”; (b) declaring that VimpelCom, Altimo Holdings and Altimo Coöperatief breached the VimpelCom Shareholders Agreement by declaring the Wind Telecom Transaction to be a “Related M&A Transaction” and denying Telenor its pre-emptive rights in connection with the Wind Telecom Transaction; (c) compelling VimpelCom, Altimo Holdings and Altimo Coöperatief to take all actions necessary to permit Telenor to exercise its pre-emptive rights in connection with the Wind Telecom Transaction; (d) declaring that Altimo Holdings and Altimo Coöperatief, through their actions and inaction in connection with the Wind Telecom Transaction, failed to exercise their pre-emptive rights and may not claim any such rights; (e) directing that, during the pendency of the Arbitration Proceedings, the Undertakings would remain in force and granting such other and additional interim relief as would preserve Telenor’s rights as a shareholder in VimpelCom and as a party to the VimpelCom Shareholders Agreement; (f) granting Telenor all appropriate relief in respect of all violations by Altimo Holdings, Altimo Coöperatief and VimpelCom of the VimpelCom Shareholders Agreement and New York

 

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law, so as to place Telenor in the position it would have been had such violations not occurred, and ruling that Altimo Holdings and Altimo Coöperatief would not benefit in any manner from their improper conduct; (g) awarding Telenor damages for the harm caused by violations by Altimo Holdings, Altimo Coöperatief and VimpelCom Ltd. of the VimpelCom Shareholders Agreement and New York law, in an amount to be determined by the tribunal in the Arbitration Proceedings; (h) awarding Telenor its costs and disbursements in respect of the Arbitration Proceedings and the proceedings before the Court, including its reasonable attorneys’ and experts’ fees, in accordance with Article 38 of the UNCITRAL Arbitration Rules; and (i) awarding Telenor such other and further relief as the tribunal in the Arbitration Proceedings deemed just and proper.

Our shareholders approved the Wind Telecom Transaction at the special general meeting of shareholders held on March 17, 2011.

On April 15, 2011, Altimo announced that in connection with the closing of the Wind Telecom Transaction, it intended to take measures to trigger the termination of the VimpelCom Shareholders Agreement. On June 6, 2011, Altimo announced that it entered into an agreement to sell 123,600,000 of our convertible preferred shares to Forrielite, a company based in Cyprus, whose beneficial owner is Oleg Kiselev, a Russian investor. On June 10, 2011, we received a notice from Altimo that it had completed the sale of 123,600,000 convertible preferred shares, which reduced its voting rights in our company to below 25%, and as a result the VimpelCom Shareholders Agreement would terminate six months following the date of such notice.

On October 31, 2011, Telenor amended its statement of claims in the Arbitration Proceedings to add claims challenging Altimo’s attempt to terminate the VimpelCom Shareholders Agreement.

After a final hearing before the arbitration tribunal in January 2012, on February 15, 2012, Telenor notified the tribunal in the Arbitration Proceedings that it was withdrawing all of its claims against VimpelCom, Altimo Holdings and Altimo Coöperatief. On March 8, 2012, the tribunal dismissed all claims in the Arbitration Proceedings with prejudice and confirmed the vacation of the Undertakings as of the date of Telenor’s withdrawal.

According to Telenor’s February 15, 2012 press release, Telenor withdrew its claims because it purchased 234,000,000 of Weather II’s VimpelCom convertible preferred shares (the “Preferred Sale Shares”), thus raising Telenor’s share of VimpelCom’s outstanding voting shares to 36.4%. As part of the acquisition of the Preferred Sale Shares, Telenor undertook, in the event there is a general meeting of VimpelCom’s shareholders held during the six-month period between February 15, 2012 and August 15, 2012 and the agenda of such meeting includes a proposal for the election of a supervisory board, to vote its and its affiliates’ VimpelCom common shares and convertible preferred shares at such a general meeting, after ensuring the election of three of Telenor’s candidates, in favor of the election of two candidates proposed or nominated by Weather II. Telenor also undertook to exercise all rights as a shareholder and through its participation on VimpelCom’s supervisory board to cause the supervisory board to be composed of eleven members. These undertakings automatically expire without any further action on August 14, 2012.

On February 15, 2012, Telenor and Weather II also agreed to a series of put and call options with respect to the VimpelCom convertible preferred shares retained by Weather II and any future convertible preferred shares of VimpelCom that are issued to or acquired by Weather II or any of its affiliates or related parties. Telenor and Weather II agreed to the following put and call options:

 

   

Weather II may exercise a put option with respect to its remaining 71,000,000 VimpelCom convertible preferred shares and put those shares to Telenor or its designees at any time from August 15, 2012 until approximately three months prior to the VimpelCom convertible preferred shares’ expiration and redemption by VimpelCom on April 15, 2016 (the “Weather Put Option”);

 

   

Telenor may exercise a call option with respect to the VimpelCom convertible preferred shares subject to the Weather Put Option from January 1, 2015 until approximately three months prior to the VimpelCom convertible preferred shares’ expiration and redemption by VimpelCom on April 15, 2016, as well as following the occurrence of Weather II’s sale of a certain number of Common Shares or Weather II’s or any of its affiliate’s receipt of convertible preferred shares from VimpelCom; and

 

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Telenor may exercise a call option to acquire any new Vimpelcom convertible preferred shares received by Weather II or its affiliates through April 16, 2015.

In addition, Weather II has also undertaken to Telenor not to sell any of its remaining VimpelCom convertible preferred shares to anyone other than Telenor or its nominees until approximately three months prior to their expiration and redemption by VimpelCom on April 15, 2016.

Telenor’s increased voting stake in VimpelCom or the termination of the VimpelCom Shareholders Agreement could lead to further disputes between Telenor and Altimo. For more information on the risks associated with this, see “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—Litigation involving Telenor and Altimo, two of our largest shareholders, could lead to deterioration in their relationship and could have a material adverse effect on our business, financial condition, results of operations and prospects,” “—A disposition by our strategic shareholders of their respective stakes in VimpelCom or a change in control of VimpelCom could harm our business” and “—Risks Related to the Ownership of Our ADSs—The issuance of a significant number of our shares in the Wind Telecom Transaction and a resulting “market overhang” could adversely affect the market price of our ADSs.”

FAS has filed a claim in the Moscow Arbitration Court asking for the invalidation of the Preferred Sale Share transaction and the option agreement between Telenor and Weather II. For more information, see “—FAS Claim” above

Proceedings Involving OJSC VimpelCom and Its Subsidiaries

KaR-Tel Litigation

Prior to our acquisition of KaR-Tel, in November 2003, KaR-Tel redeemed for an aggregate of 450,000.0 Kazakhstani tenge (or approximately US$3,100.0 based on the Kazakhstani tenge to U.S. dollar exchange rate as of December 31, 2003) the equity interests of Turkish companies, Rumeli Telecom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. (the “Former Shareholders”), owning an aggregate of 60.0% of the equity interests in KaR-Tel, in accordance with an October 30, 2003 decision of the Review Panel of the Supreme Court of Kazakhstan. The decision was based on the finding that the Former Shareholders inflicted material damage on KaR-Tel by causing KaR-Tel to lose a valuable government tax concession and selling KaR-Tel obsolete and over-priced telecommunications equipment. The redemption process was initiated on April 15, 2002 by a repeated extraordinary general meeting of KaR-Tel shareholders reconvened by a shareholder owning 40.0% of the equity interests in KaR-Tel. In late August 2004, prior to our acquisition, we received letters from the Former Shareholders claiming that they continue to own such interests. The Former Shareholders stated in these letters that subsequent to such redemption, their respective managements were taken over by The Savings Deposit Insurance Fund (the “Fund”), a Turkish state agency responsible for collecting state claims arising from bank insolvencies. The Former Shareholders indicated in their letters that they were preparing to put their case before the International Center for the Solution of Investment Disputes (“ICSID”), an independent organization with links to the World Bank.

Based on information disclosed by ICSID, an action by the Former Shareholders against the Republic of Kazakhstan, the subject matter of which is “telecommunications enterprise,” was filed in August 30, 2005. While we understand that this action does pertain to the Former Shareholders and their former interests in KaR-Tel, neither VimpelCom nor KaR-Tel is a party to this action. According to ICSID, the arbitration tribunal issued an award in favor of the Former Shareholders on July 29, 2008. Based on information in publicly available sources, the tribunal found that, among other things, the Republic of Kazakhstan expropriated the Former Shareholder’s investment in KaR-Tel without complying with conditions set forth in the Bilateral Investment Treaty between the Republic of Kazakhstan and the Republic of Turkey. However, the tribunal’s award did not address the validity of the decision of the Review Panel of the Supreme Court of Kazakhstan. The tribunal ordered the Republic of Kazakhstan to pay US$125.0 million plus interest to the Former Shareholders. According to ICSID, annulment proceedings were registered on November 7, 2008 and a decision of the appeal committee on the application for annulment was issued on March 25, 2010. Although the ICSID website does not provide any information about the appeal committee’s decision, according to a copy of the decision obtained from a website that does not appear to be associated with ICSID, the appeal committee dismissed the Republic of Kazakhstan’s appeal in its entirety. We cannot assure you that the Former Shareholders or other parties will not pursue any action against us or KaR-Tel in any forum or jurisdiction. If the Former Shareholders or other parties were to prevail in any such action, we could lose ownership of up to 60.0% of our interest in KaR-Tel, be required to reimburse the Former Shareholders for the value of their interests or otherwise suffer monetary and reputational or other damages that cannot currently be quantified.

On January 10, 2005, KaR-Tel received an “order to pay” (“Order to Pay”) issued by the Fund in the amount of approximately US$4.9 billion at the exchange rate as of December 31, 2010 (stated as approximately Turkish

 

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lira 7.55 quadrillion and issued prior to the introduction of the New Turkish Lira, which became effective as of January 1, 2005). The Order to Pay, dated as of October 7, 2004, was delivered to KaR-Tel by the Bostandykski Regional Court of Almaty. The Order to Pay does not provide any information regarding the nature of, or basis for, the asserted debt, other than to state that it is a debt to the Turkish Treasury and the term for payment was May 6, 2004.

On January 17, 2005, KaR-Tel delivered to the Turkish consulate in Almaty a petition to the Turkish court objecting to the propriety of the order and requesting the Turkish court to cancel the Order to Pay and stay of execution proceedings in Turkey. The petition was assigned to the 4th Administrative Court in Turkey to be reviewed pursuant to applicable law.

On June 1, 2006, KaR-Tel received formal notice of the 4th Administrative Court’s ruling that the stay of execution request was denied. KaR-Tel’s Turkish counsel has advised KaR-Tel that the stay request is being adjudicated separately from the petition to cancel the Order to Pay. KaR-Tel submitted an appeal of the ruling with respect to the stay application.

KaR-Tel received the Fund’s response to the petition in June 2006. In its response to KaR-Tel’s petition, the Fund asserts, among other things, that the Order to Pay was issued in furtherance of its collection of approximately Turkish lira 7.55 quadrillion (prior to the introduction of the New Turkish Lira, which became effective as of January 1, 2005) (equivalent to approximately US$4.9 billion at the exchange rate as of December 31, 2010) in claims against the Uzan group of companies that were affiliated with the Uzan family in connection with the failure of T. Imar Bankasi, T.A.S. The Fund’s response to KaR-Tel’s petition asserts that the Uzan group of companies includes the Former Shareholders and KaR-Tel. In June 2006, KaR-Tel submitted a response to the Fund’s defense in which it denied in material part the factual and legal assertions made by the Fund in support of the Order to Pay. In December 2008, KaR-Tel received the Fund’s further response to KaR-Tel’s petition. On December 11, 2008, KaR-Tel received a Decision of Territorial Court of Istanbul dated December 12, 2007, wherein the Court rejected KaR-Tel’s appeal with respect to the stay of execution request.

On October 20, 2009, KaR-Tel filed with Sisli 3rd Court of the First Instance in Istanbul a claim to recognize in the Republic of Turkey the decision of the Almaty City Court of the Republic of Kazakhstan dated June 6, 2003 regarding, among other things, compulsory redemption of equity interests in KaR-Tel owned by Rumeli Telecom A.S., or Rumeli, and Telsim Mobil Telekomunikasyon Hizmetleri A.S. (“Telsim”), which was confirmed by the Civil Panel of the Supreme Court of the Republic of Kazakhstan on June 23, 2003, as amended by the resolution of the Review Panel of the Supreme Court of the Republic of Kazakhstan dated October 30, 2003 (“Recognition Claim”). On October 20, 2009, KaR-Tel also filed with the 4th Administrative Court of Istanbul a petition asking the Court to treat the recognition of the Kazakhstan court decision as a precedential issue and to stay the proceedings in relation to the order to pay.

On September 28, 2010, Sisli 3rd Court of the First Instance in Istanbul reviewed the Recognition Claim and ruled in favor of KaR-Tel recognizing the Kazakhstan Court judgments on the territory of the Republic of Turkey. The defendants, Rumeli and Telsim, have appealed the decision. KaR-Tel submitted its responses to such motion on appeal on January 20, 2011. The case is in appeal stage in 11th Civil Chamber of the Supreme Court and as of the date of this Annual Report on Form 20-F, no decision on the appeal has been rendered.

On October 25, 2010, the 4th Administrative Court of Istanbul reviewed KaR-Tel’s petition to annul the Order to Pay and ruled in favor of KaR-Tel. The court recognized the Order to Pay as illegal and annulled it. The defendants have appealed the ruling. On February 18, 2011, KaR-Tel submitted its response to the motion on appeal and on April 20, 2011, the Fund submitted its reply to KaR-Tel’s response. The appeal case has been reviewed by the Prosecution Office of the Council of State and sent to the 13th Chamber of Council for review on the merits. As of the date of this Annual Report on Form 20-F, no decision on the appeal has been rendered.

There can be no assurance that claims targeting our ownership of KaR-Tel will not be brought by the Fund directly against us or our other subsidiaries or that KaR-Tel and/or OJSC VimpelCom or its other subsidiaries will not be required to pay amounts claimed to be owed on the basis of other claims made by the Fund. The adverse resolution of any other matters that may arise in connection with any other claims made by the Fund, could have a material adverse effect on our business, financial condition and results of operations, including an event of default under some or all of our outstanding indebtedness.

 

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For more information on these risks, and other risks associated with our acquisition of KaR-Tel, refer to the section of this Annual Report on Form 20-F entitled “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—We are involved in disputes and litigation with regulators, competitors and third parties.”

Petition for Appraisal

On April 18, 2008, Global Undervalued Securities Fund, L.P. (“Global Undervalued”) timely filed a petition in a Delaware court demanding appraisal of its 1,367,328 shares of Golden Telecom which it did not tender in the tender offer pursuant to which our company acquired Golden Telecom. On April 23, 2010, the court determined the fair value of Golden Telecom shares to be US$125.49 per share. Interest was to be applied for a period from February 28, 2008 to the date of payment. Golden Telecom filed a motion for reargument which was denied by the court and a final judgment was entered on May 27, 2010. Golden Telecom filed a timely notice of appeal and Petitioners filed a cross-appeal of the judgment in Delaware Supreme Court. We accrued a loss contingency in the amount of US$52.7 million in relation to cash rights for shares of Golden Telecom in 2010.

In June 2010, Golden Telecom and Global Undervalued entered into an agreement pursuant to which in July 2010, Golden Telecom paid to Global Undervalued US$165.5 million based on the US$105.00 per share tender offer price and interest, partially repaying the liability recorded as of June 30, 2010. Pursuant to the agreement, in July 2010 Golden Telecom deposited US$33.2 million into an escrow account. This escrowed amount was based on the difference between the US$105.00 per share tender offer price and the court-determined US$125.49 fair value of each Golden Telecom share plus interest thereon through December 31, 2010. On December 29, 2010, the Delaware Supreme Court rendered a final resolution of the appraisal litigation by affirming the April 23, 2010 decision valuing Golden Telecom shares at US$125.49 per share. Pursuant to the agreement between Golden Telecom and Global Undervalued, on January 13, 2011, the US$33.2 million in the escrow account was released to Global Undervalued to satisfy the remaining portion of appraisal judgment. On January 18, 2011, Golden Telecom paid Global Undervalued US$68.0 million, the amount of interest accrued from January 1, 2011 through January 13, 2011. As of January 18, 2011, the judgment in the appraisal litigation has been fully satisfied, resulting in a final conclusion to Global Undervalued’s petition for appraisal.

FAS Litigation

Interconnection Arrangement Proceedings. In December 2009, the Russian anti-monopoly regulators commenced proceedings against us alleging violations of the Russian Federal Law “On Protection of Competition” by imposing unfair prices for interconnection with other operators. We ceased to conduct the activities that allegedly violated the law and the case was dismissed on September 22, 2010. FAS initiated administrative proceedings against us in relation to our alleged violations of the law on January 28, 2011. On April 5, 2011, FAS issued its decision that we were in violation of the law and subject to fines for such violations of approximately RUB 7.3 million (or approximately US$257.5 thousand as of April 5, 2011). On April 27, 2011, we appealed the FAS finding subjecting us to fines. We separately filed an appeal challenging the FAS decision. We filed a petition to join the two appeal cases, which was granted on June 3, 2011. On September 15, 2011, the court presiding over two appeal cases ruled that the FAS decision remains in force, but the court reduced the amount of the fine to RUB 2.4 million (approximately US$80 thousand as of September 15, 2011). OJSC VimpelCom did not challenge the decision and paid this fine.

Roaming Tariff Proceedings. In March 2010, the FAS commenced proceedings against OJSC VimpelCom, MTS and MegaFon alleging violations of the Russian Federal Law “On Protection of Competition” relating to our pricing for interconnection and roaming services. On November 23, 2010, the FAS issued its decision that OJSC VimpelCom, MTS and MegaFon violated the Russian Federal Law “On Protection of Competition” with respect to the pricing of roaming services and ordered that OJSC VimpelCom stop such violations. In addition, OJSC VimpelCom was subject to fines of up to 15.0% of its roaming revenues in 2009. On March 9, 2011 OJSC VimpelCom received the FAS decision imposing a fine of RUB 12.0 million (approximately US$ 0.4 million at the exchange rate as of March 9, 2011). OJSC VimpelCom did not challenge the decision and paid this fine in full.

 

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Moscow Traffic Agreement Proceedings. In May 2010, the FAS concluded that OJSC VimpelCom’s traffic agreement in Moscow violated anti-monopoly legislation. OJSC VimpelCom challenged the FAS findings and on March 21, 2011, the first instance court dismissed OJSC VimpelCom’s claims. OJSC VimpelCom does not believe that it has violated Russian law and appealed the dismissal of its challenge of the FAS decision on April 26, 2011. On June 9, 2011, the appeal court dismissed OJSC VimpelCom’s appeal. On March 9, 2011, OJSC VimpelCom received the FAS decision imposing a fine on OJSC VimpelCom related to FAS’s finding of the violation of the anti-monopoly law legislation in the amount of RUB 10 million (approximately US$ 0.3 million at the exchange rate as of March 9, 2011). On April 19, 2011, OJSC VimpelCom appealed the FAS decision imposing the fines. The proceedings were suspended pending the outcome of the decision in the underlying case. On June 9, 2011, the court of appeal rejected our appeal. OJSC VimpelCom did not challenge the decision and paid this fine.

I-Phone Proceedings. The FAS commenced proceedings against OJSC VimpelCom and OJSC MTS alleging conspiracy with respect to price on I-Phones. The penalty for such violations could result in fines of up to 15.0% of the revenues derived from the relevant services. On April 26, 2012, FAS passed a verdict that OJSC VimpelCom and OJSC MTS were guilty of concerted action with respect to the pricing of iPhone 4 handsets. FAS also stated that both parties voluntarily discontinued the violations of law in question. As of the date of this Annual Report on Form 20-F, we have not received the written ruling. We do not anticipate that fines would be material to our financial position or results of operations. The fines will be determined by FAS separately in administrative proceedings.

Sky Mobile Litigation

Since November 2006, the chief executive officer and directors of OJSC VimpelCom have received several letters from OJSC Mobile TeleSystems, or “MTS,” and its representatives claiming that Sky Mobile’s Kyrgyz telecom business and its assets were misappropriated from Bitel, an MTS affiliate, and demanding that we not purchase Sky Mobile, directly or indirectly, or participate or assist in the sale of Sky Mobile to any other entities. These letters suggested that MTS will take any and all legal action necessary against our company in order to protect MTS’s interest in Bitel and Bitel’s assets. In October 2010, we acquired 50.1% of the share capital of Menacrest, the parent company of Sky Mobile. As of the date hereof, management is not aware of any pending legal action against our company in connection with this matter, except for the litigation against Sky Mobile discussed in the paragraph below.

Sky Mobile is a defendant in litigation in the Isle of Man. The litigation was brought by affiliates of MTS against Sky Mobile and various companies and individuals directly or indirectly associated with the Alfa Group and alleges that the Kyrgyz judgment determining that an Altimo affiliate was the rightful owner of an interest in the equity of Bitel prior to the asset sale between Sky Mobile and Bitel was wrongfully obtained and that Bitel shares and Sky Mobile assets were misappropriated. The legal proceedings in this matter are pending. At this time the company is unable to assess the likelihood of the ultimate outcome of this litigation and its effect on our operating results and financial position.

For the risks related to matters involving Sky Mobile, see “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—We are involved in disputes and litigation with regulators, competitors and third parties.”

Other Proceedings in Russia

Two lawsuits have been filed by the State Property Committee (Federal Agency for Management of the State Property) against Sovintel seeking eviction from the premises (approximately 4,000 square meters) at Krasnokazarmennya Street, where its Data Center and equipment are currently located. The lawsuits commenced on July 23, 2010. The State Property Committee asserted that the lease agreement between Sovintel and FGUP VEI and the sublease agreements with other lessees are void because they were entered into without its consent as owner of the premises. On January 25, 2011, the first of the two lawsuits was dismissed, and on March 30, 2011, the second lawsuit was dismissed. The deadline for appeal has expired in both cases.

Kazakhstan Antimonopoly Proceedings

First Roaming Claim

On May 14, 2010, the KAA initiated an investigation into the alleged breach of antimonopoly laws of Kazakhstan by all three Kazakhstan GSM operators (KaR-Tel LLP (Beeline), GSM Kazakhstan OAO Kazakhtelecom LLP (TM KCell, Active), and Mobile Telecom Systems LLP (TM Neo)), claiming these operators had abused their dominant position by the way they determine the threshold (minimum) balances on consumers’

 

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accounts required for switching on and off roaming services (the “Threshold Amounts”). In addition, the KAA decided to investigate (jointly with FAS) possible breaches of Kazakhstan antimonopoly law by all three Kazakhstan GSM operators, including KaR-Tel, as well as their partner operators in the Russian Federation, for anticompetitive concerted actions, agreements for price maintenance and the use of per-minute billing. The KAA also proposed to the Ministry of Telecommunications and Information of Kazakhstan an earlier date for transfer to per-second billing for roaming services (the date determined by law is January 1, 2012), and to conduct an evaluation of roaming tariffs.

On June 21, 2010, the KAA completed its investigation related to the Threshold Amounts and alleged that all three Kazakhstan GSM operators abused their dominant position by establishing the Threshold Amounts and by switching off a consumer’s roaming services when there is a negative balance on the consumer’s account.

On July 3, 2010, the KAA initiated an administrative procedure with respect to all three Kazakhstan GSM operators, including KaR-Tel, and issued a protocol on administrative offence (the “Protocol”). The KAA filed a claim based on the Protocol with the Administrative Court. The KAA also decided to continue another part of the investigation with respect to concerted actions of Kazakhstan and Russian GSM mobile operators on establishing and/or preservation of tariffs (the “Concerted Actions Investigation”). On July 16, 2010, KaR-Tel filed a claim to recognize as illegal and annul the acts of the KAA that served as a procedural basis for the Protocol. On October 19, 2010, the Interregional Economic Court of Astana ruled in favor of KaR-Tel and recognized as illegal, null and void all acts of the KAA and its territorial branch, which served as the procedural basis for the Protocol. The KAA appealed this decision and on December 13, 2010 the Court of Appeals affirmed the October 19, 2010 decision in favor of KaR-Tel. On January 17, 2011, the Court of Cassation reviewed the cassation petition of the KAA and upheld the October 19, 2010 and December 13, 2010 decisions. The court’s October 19, 2010 decision came into force on January 17, 2011.

On October 21, 2011, the General Prosecutor of the Republic of Kazakhstan filed a protest to the Supreme Court of Kazakhstan appealing in a supervisory review order the Decision of the Interregional Economic Court of Astana of October 19, 2010, which rendered unlawful and void all acts of the Antimonopoly Agency, as well as Decision of the Appeals Chamber of Astana City Court of December 13, 2010, which upheld the Economic Court decision. On October 27, 2011, KaR-Tel received a notice from the Supreme Court of Kazakhstan indicating that the said protest has been accepted for review and the hearing will take place on November 16, 2011. On November 16, 2011, the Supervisory Chamber of the Supreme Court of Kazakhstan issued a Decision that overturned the Decision of the Interregional Economic Court of Astana of October 19, 2010, and Decision of the Appeals Chamber of Astana City Court of December 13, 2010. The Supreme Court sent the case back for the new consideration in administrative proceedings to the Interregional Administrative court of Almaty.

On December 26, 2011, the Interregional Administrative Court of Almaty accepted the request of the Company to discontinue proceedings and to return the Protocol to the Agency for rectification of deficiencies in that the Agency has wrongfully indicated the amount of revenues received by the Company for the purpose of calculation of the administrative fines instead of the amount of revenues received from monopolisitc activity. The amended protocol has not yet been submitted to the court by the Agency. The Company believes that its position is lawful and justified, and intends to defend it in the Interregional Administrative Court of Almaty.

Second Roaming Claim

On October 25, 2010, the KAA completed the Concerted Actions Investigation and reclassified alleged concerted actions of KaR-Tel and other Russian and Kazakhstan GSM operators into establishing of monopolistically high tariffs. On November 3, 2010, the KAA initiated an administrative procedure and issued a new protocol on administrative offence, according to which the KAA has found KaR-Tel and the other two Kazakhstan GSM operators liable for abuse of their dominant position on the market by way of establishing monopolistically high roaming tariffs (“the New Protocol”). As required under Kazakhstan law, the KAA has submitted the New Protocol to a Kazakh administrative court, and the court will decide on the merits and on applicable fines. While the company does not agree with the New Protocol and has challenged it, the ultimate resolution of this matter could result in a loss of up to KZT 9.9 billion (equivalent to approximately US$67.0 million at the exchange rate as of March 31, 2012) in excess of the amount accrued. On November 23, 2010, KaR-Tel filed a claim with the Astana Interregional Economic Court against the Agency requesting that the court recognize as illegal and to annul the acts of the Agency preceding the New Protocol. On February 24, 2011, the Interregional Economic Court of Astana ruled in favor of KaR-Tel and recognized as illegal, null and void the acts of the KAA. The court’s decision entered into force on March 30, 2011.

 

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On November 25, 2011, the Agency appealed to the Supreme Court of Kazakhstan in a supervisory review order the Decision of the Interregional Economic Court of Astana of February 24, 2011, which recognized as illegal, null and void all acts of the Antimonopoly Agency. On January 11, 2012, the Supervisory Chamber of the Supreme Court of Kazakhstan reviewed the protest and overturned the Decision of the Interregional Economic Court of Astana of February 24, 2011. The Supreme Court sent the case back for the new consideration in administrative proceedings to the Interregional Administrative Court of Almaty. On March 1, 2012 the Interregional Administrative Court of Almaty ruled in favor of KaR-Tel and recognized the protocol of the KAA as illegal, null and void. The decision will remain subject to appeal for one year.

Dominant Market Position

On October 10, 2011, Kar-Tel was recognized by the KAA as dominant in the market of interconnection. When a company is recognized as having a dominant position, it will be subject to special reporting obligations to the national regulatory authority, higher scrutiny in anti-monoploy/competition issues and price control and potential price regulation (e.g., tariff caps). .The company does not agree with this decision of the antimonopoly authority. The company filed a claim to the Interregional Economic Court of Astana against the Agency requesting that the court recognize as illegal. On December 26, 2011, the court ruled and rejected the claim of
Kar-Tel. Kar-Tel has appealed the decision.

Proceedings Involving Kyivstar

Antitrust Proceedings in Ukraine

The UAMC is conducting an investigation of Kyivstar’s and other mobile telecommunications operators’ roaming charges and other tariffs. As a result of the investigation the UAMC may issue binding recommendations requiring mobile operators to take and/or refrain from certain actions and/or initiate a case investigation regarding violation of competition legislation.

If the UAMC finds that Kyivstar abused its dominance or was engaged in anticompetitive concerted practices, it could impose fines in the amount of up to 10.0% of revenues for the last financial year of the group of which Kyivstar is a member as well as in the amount of up to 300.0% of such group’s profits received from the activities carried out in violation of competition legislation. In addition, a third party could bring an action for damages suffered as a result of such violation, which could amount to up to 200.0% of the damages suffered by such third party.

In addition, the UAMC is investigating an unfair competition case in relation to alleged distribution by Kyivstar of misleading information on its tariffs. For an unfair competition violation the UAMC could impose a fine in the amount of up to 5.0% of revenues for the last financial year of the group of which Kyivstar is a member. A third party could bring an action for damages suffered as a result of such violation. As of the date of this Annual Report on Form 20-F, the UAMC’s investigation is still pending.

On May 25, 2009, the UAMC adopted a decision determining that all mobile network operators in Ukraine, including Kyivstar, hold a dominant position in respect of interconnections that terminate on their respective networks. The implementation of this decision would have resulted in the requirement that operators holding a dominant position on their respective networks comply with the NCCR regulations governing the pricing regime for interconnection services. In June 2009, however, the decision was suspended in order to further review operators’ objections and other implications of this decision. On June 24, 2010, the UAMC confirmed the initial decision which means that it is valid and the mobile operators, including Kyivstar, must comply with the NCCR regulations governing the pricing regime for interconnection services.

In addition, in June 2010, the UAMC initiated investigations on protection of economic competition in relation to international roaming tariffs charged by operators. On September 30, 2010, the UAMC issued a recommendation to all mobile operators to reduce international roaming tariffs. Kyivstar reduced its international roaming tariffs by 40.0% in order to comply with the recommendation. As of the date of this Annual Report on Form 20-F, the UAMC’s investigation on protection of economic competition is still pending.

 

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Disputes Regarding Interconnect Agreements

In October 2010, Ucomline filed a lawsuit against Kyivstar in the Commercial Court of Kyiv in which it sought a court decision that would obligate Kyivstar to enter into an interconnect agreement under conditions proposed by Ucomline. Kyivstar filed a counterclaim against Ucomline in the Commercial Court of Kyiv to oblige Ucomline to enter into an interconnect agreement under conditions proposed by Kyivstar. The dispute relates to determining rates for terminating fixed and international traffic from the Ucomline network on the Kyivstar network and terminating mobile traffic from the Kyivstar network on the Ucomline network. On December 29, 2010, the Commercial Court of Kyiv ruled in favor of Ucomline in full and in favor of Kyivstar’s counterclaim in part and further ruled that the interconnect agreement between the parties should be made as provided in the court decision. On January 6, 2011, Kyivstar filed an appeal to the Kyiv Appeal Commercial Court. Kyivstar’s appeal was dismissed on March 22, 2011 by the Kyiv Appeal Commercial Court and the decision of the Commercial Court of Kyiv was upheld in full. The High Commercial Court of Ukraine upheld the decisions of the courts of the first and second instances. However, Kyivstar and Ucomline entered into a compromise agreement, pursuant to which they settled their dispute. As of the date of this Annual Report on Form 20-F, Kyivstar has a valid interconnect agreement with Ucomline.

On April 1, 2011, Kyivstar filed a lawsuit against Astelit in the Commercial Court of Kyiv to oblige Astelit to amend its current interconnect agreement with Kyivstar, as proposed by Kyivstar. On April 4, 2011 the Commercial Court of Kyiv dismissed the lawsuit of Kyivstar without consideration due to the fact that Kyivstar did not send the copies of its lawsuit to all known addresses of Astelit. Kyivstar did not agree with this decision of the Commercial Court of Kyiv and filed an appeal to the Kyiv Commercial Appeal Court, which, on May 10, 2011, entered a decision in favor of Kyivstar and returned the case to the Commercial Court of Kyiv for due consideration on the merits of the case. Astelit in its turn did not agree with the decision of the Kyiv Commercial Appeal Court and filed an appeal to the High Commercial Court of Ukraine. At the same time, Astelit filed a counterclaim against Kyivstar in the Commercial Court of Kyiv to oblige Kyivstar to amend the interconnect agreement as proposed by Astelit. On May 27, 2011, the Commercial Court of Kyiv entered a decision in favor of Astelit. Kyivstar did not agree with this decision of the Commercial Court of Kyiv and on June 6, 2011, filed an appeal to the Kyiv Commercial Appeal Court, where the matter was pending consideration. Astelit and Kyivstar have since agreed on the interconnection rates and entered into corresponding agreements, and accordingly the lawsuit has been closed by the parties. As of the date of this Annual Report on Form 20-F, Kyivstar has a valid interconnect agreement with Astelit.

In October 2011, NCCR determined that Kyivstar and other telecommunications operators were SMP operators (i.e., operators with significant market power) in the market of terminating mobile and fixed traffic on their own networks. On December, 19, 2011 NCCR approved rates for terminating mobile and fixed traffic on networks of SMP operators, which rates apply to operations of Kyivstar.

Proceedings Involving Wind Italy and its Subsidiaries

Wind Italy Tax Proceedings

On June 12, 2009, the Italian Tax Authority notified WIND Italy of the commencement of a tax audit with reference to (i) Wind Finance SL S.A.’s application for a refund of withholding taxes on interest payments made by WIND Italy to Wind Finance SL S.A. (the issuer of second lien notes) for 2005 and part of 2006 and (ii) the eligibility for the withholding tax exemption regime under Article 26-quater of Presidential Decree No. 600 of September 29, 1973 (or the “Exemption Regime” implementing in Italy the so-called Interest and Royalty Directive No. 2003/49/EC) on interest payments made by WIND Italy to Wind Finance SL S.A. for the remaining part of 2006, 2007 and 2008. The scope of the audit was subsequently expanded to Wind Acquisition Finance S.p.A. (which was merged into WIND Italy on December 31, 2006) with reference to (i) Wind Acquisition Finance S.A.’s application for a refund of withholding taxes on interest payments made by Wind Acquisition Finance S.p.A. (before the merger into WIND Italy) to Wind Acquisition Finance S.A. for 2005 and part of 2006 and (ii) the eligibility for the withholding tax exemption claimed under the Exemption Regime on interest payments made by Wind Acquisition Finance S.p.A. to Wind Acquisition Finance S.A. for the remaining part of 2006, 2007 and 2008.

 

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On May 31, 2010 the findings of the audit were submitted to WIND Italy in a report (processo verbale di constatazione), or the “Tax Report,” proposing that the tax authorities impose a 12.5% withholding tax on the interest payments under investigation.

In November 2010, the Italian Tax Authority notified WIND Italy of the tax assessments (avvisi di accertamento) for interest payments made by WIND Italy for the year 2005. The assessments quantify withholding tax not applied on interest payments made in 2005 by WIND Italy to Wind Finance SL S.A. and by Wind Acquisition Finance S.p.A. to Wind Acquisition Finance S.A. in the amount of €1.3 million plus penalties in the amount of €2.0 million (which equals 150% of the assessed withholding tax due), plus interest in the amount of €173,398 (which equals the interest computed up to November 30, 2010). The amount of withholding tax assessed as due for the year 2005 represents 2.5% of interest payments made by WIND Italy during that year, as WIND Italy had paid withholding tax at the rate of 10% (the rate provided by the Double Tax Treaty between Italy and Luxembourg) instead of at the rate of 12.5% (the ordinary rate provided by Italian law) because the minimum holding period required under the Exemption Regime had not yet passed. WIND Italy appealed both tax assessments before the Italian Tax Court.

On November 30, 2011, WIND Italy settled with the Italian Tax Authorities certain tax assessments (avvisi di accertamento) and findings stemming from the Tax Report related to the application of withholding taxes on interest payments made by WIND Italy to Wind Finance SL S.A. and WIND Italy (and Wind Acquisition Finance S.p.A. before merging into WIND Italy on December 31, 2006) to Wind Acquisition Finance S.A. from 2005 through the end of 2010. The scope of the settlement was expanded from the scope of the Tax Report and included the period from 2005 through November 2010, as applicable, with respect to the proceeds from loan agreements through which Wind Finance SL S.A. and Wind Acquisition Finance S.A., as applicable, made available the amounts obtained through the issuance of (i) the second lien notes issued by Wind Acquisition Finance S.A., (ii) the senior notes issued by Wind Acquisition Finance S.A. on November 28, 2005, (iii) the senior notes issued by Wind Acquisition Finance S.A. on March 1, 2006, (iii) the senior notes issued by Wind Acquisition Finance S.A. on July 13, 2009 and (iv) the senior secured notes issued by Wind Acquisition Finance S.A. on November 26, 2010. The tax claim was in relation to interest payments made by WIND Italy prior to certain corporate reorganization transactions, pursuant to which, among other things, Wind Acquisition Finance S.A. became a wholly owned subsidiary of WIND Italy, at the end of November 2010. For audited interest payments made by WIND Italy to Wind Acquisition Finance S.A. following corporate reorganization, no tax claims were, or have been, raised by the Italian Tax Authority.

The total sum of the settlement amounts to approximately €113.2 million, including interest. Payments will be made in equal installments of approximately €9.13 million over twelve quarters. The first two installments were paid on December 2, 2011 and March 2, 2012. With respect to the proceedings before the Italian Tax Court, which proceedings were instituted only with respect to interest payments made during the 2005 fiscal year relating to the second lien notes issued by Wind Acquisition Finance S.A. and the senior notes issued by Wind Acquisition Finance S.A. on November 28, 2005, €0.3 million is separately required to be paid for the settlement of such proceedings in relation to the tax assessment for the 2005 fiscal year.

Proceedings Involving OTH and Its Subsidiaries

Algeria Tax Litigation

OTA has recently been subject to tax claims by the Algerian tax authority with respect to payment of taxes during its taxation period between 2002 and 2009.

Claims for July 2002 to August 2007 Period

In 2002, when OTA signed its investment agreement with the Algerian Investment Promotion Organization in connection with its GSM license, OTA was granted favorable tax treatment for a period of five years starting in July 2002 and ending in August 2007. OTA has been charged by the Algerian Directions des Grandes Entreprises (DGE) with a final tax reassessment for 2004 and has been ordered to pay approximately DZD 4.5 billion, including penalties, (equal to approximately US$60.0 million at the exchange rate as of December 31, 2011). While a tax claim remains outstanding, OTA is unable to repatriate dividends to foreign investors, including OTH. With respect to the 2004 tax assessment, OTA filed a claim against

 

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the DGE and paid a deposit equal to the reassessed amount for 2004 and penalties, in order to obtain a payment deferment (in accordance with Article 74 of the Tax Procedure Code) and allow OTA to repatriate 50% of OTA’s 2008 dividend to foreign investors.

In November 2009, OTA received a further final tax reassessment for the years 2005 through 2007 from the DGE ordering it to pay approximately DZD 50.3 billion, including penalties, (equal to approximately US$668 million at the exchange rate as of December 31, 2011). The DGE has alleged that (i) OTA did not keep proper manual accounts during these years notwithstanding that OTA’s accounts were fully audited and approved by both OTA’s international auditors and its local statutory auditors, and (ii) OTA deducted certain expenses such as management and bad debt expenses and therefore understated the taxable income.

In Algeria the tax authorities are able to raise additional tax assessments for four years after the end of the relevant tax period. However, once a preliminary tax claim is received by a company the four year statute of limitation is tolled. OTA has received the final tax assessment for the years 2004, 2005, 2006 and 2007. OTA filed a tax claim objection (tax appeal) on the 2004, 2005, 2006 and 2007 final tax assessments.

On March 7, 2010 OTA received a rejection on its submitted administrative appeal filed on December 27, 2009 against the notice of reassessment dated November 16, 2009 received from the DGE in respect of the tax years 2005, 2006 and 2007. OTA’s administrative appeal in relation to the 2004 tax reassessment has also been rejected.

Claims for 2008 and 2009 Tax Years

On September 30, 2010, OTH announced that OTA has received a preliminary tax notification from the DGE in respect of the years 2008 and 2009, in which said department has re-assessed taxes alleged to be owed by OTA in the amount of approximately DZD 17.1 billion (equal to approximately US$227.0 million at the exchange rate as of December 31, 2011), despite the fact that OTA has already paid the taxes due for these years.

The tax audit for these years was initiated in early 2010 following the tax filing for 2009.

This reassessment was based primarily on the allegation that OTA did not keep proper accounts for the years 2008 and 2009 notwithstanding that OTA’s accounts were fully audited and approved by both OTA’s international auditors (KPMG), and its local statutory auditors.

OTA received a final tax notification from the DGE in respect of the years 2008 and 2009 in December 2010.

OTA continues to appeal all of the tax claims. Without prejudice to their rights under the Investment Agreement, applicable bilateral investment treaty and applicable laws, OTA has prepaid claimed amounts and penalties totaling approximately DZD 71.9 billion (equal to approximately US$955.0 million at the exchange rate as of December 31, 2011).

For more information on the risks associated with these tax claims, see “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—The Algerian Government has made substantial tax and other claims against OTA which have harmed OTA’s business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH.”

Other Legal Proceedings in Algeria

 

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On April 15, 2010, an injunction by the Bank of Algeria came into effect that restricts all Algerian banks from engaging in foreign banking transactions on behalf of OTA. OTA has challenged this injunction in the Algerian courts but the case is still pending. As a result of the injunction OTA faces difficulties in importing equipment from foreign suppliers and is prevented from transferring funds outside of Algeria. The Algerian authorities alleged breaches of foreign exchange regulations by OTA and a member of its senior management. On March 28, 2012, the Algerian Court of First Instance handed down a judgment against OTA and a member of OTA’s senior executive team. The judgment consists of fines of DZD 99.0 billion (approximately US$1.3 billion at the exchange rate as of March 28, 2012) including a criminal sentence against a member of OTA’s senior executive team.

OTA maintains that OTA and its senior executive have acted in compliance with the law and OTA is taking the necessary steps to file an appeal. The lodging of the appeal will provisionally suspend the judgment.

On February 22, 2012, the Commercial section of the Court of Appeal of Algiers confirmed the Judgment of the Bir Mourad Rais Court dated May 27, 2008, which declared a resolution in the minutes of OTA’s extraordinary general assembly meeting dated December 17, 2004 null and void. That resolution related to waiver of a preemption right by Cévital, one of OTA’s shareholders, in connection with a capital increase. As a result, OTA will have to either appeal this judgment before the Supreme Court of Algeria or allow Cévital to hold 3.43% (instead of 3.28%) of its capital effective as from December 17, 2004 and pay Cévital all dividends, plus interest, voted since such date in relation to the additional 0.15% share of the capital. As of the date of this Annual Report on Form 20-F, OTA has not appealed the judgment.

On April 12, 2012, OTH submitted a formal Notice of Arbitration against the Algeria government in respect of actions taken by the Algerian government against OTA. The claim in the Notice of Arbitration is being made under the arbitration rules of the United Nations Commission on International Trade Law. In its Notice of Arbitration, OTH asserts that since 2008 its rights under the Agreement on the Promotion and Reciprocal Protection of Investments between Egypt and Algeria have been violated by actions taken by the Algerian government against OTA, including the Algerian Court of First Instance’s March 28, 2012 judgment against OTA and a member of its senior executive team. VimpelCom continues to be open to finding an amicable resolution with the Algerian government that is mutually beneficial to both parties.

Proceedings in Canada

On October 29, 2009, the CRTC, an independent regulatory body that regulates and supervises Canadian broadcasting and telecommunications systems, decided that WIND Canada’s parent company Globalive Wireless Management Corp, of which we indirectly hold 65.08% of the outstanding shares and 32.02% of the voting rights, was not in compliance with Canadian ownership and control rules, and was therefore not eligible to operate as a telecommunications common carrier in Canada. Industry Canada, the Canadian governmental body responsible for awarding spectrum licenses, ruled that WIND Canada was in compliance with Canadian ownership and control rules and granted WIND Canada spectrum licenses on March 16, 2009.

On December 11, 2009, the Government of Canada varied the decision of the CRTC by Order in Council, confirming that WIND Canada met the Canadian ownership and control rules and clearing it to commence operations. Following this decision, WIND Canada commenced commercial operations on December 16, 2009.

Shortly after, certain of WIND Canada’s competitors filed an application challenging the decision of the Government of Canada, and on February 4, 2011, the Federal Court of Canada ruled that the Government of Canada’s decision contained two legal errors and should be set aside. WIND Canada appealed the Federal Court Ruling and was successful in its appeal. One of the original claimants sought leave to appeal the appeal decision in favor of WIND Canada to the Supreme Court of Canada, but the Supreme Court of Canada declined to grant leave to appeal.

On March 14, 2012, the federal government announced that it intends to remove foreign ownership restrictions for companies (such as WIND Canada) that hold less than a 10% share of the total Canadian telecommunications market. This change is expected to occur before the beginning of 2013.

 

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Regulation of Telecommunications

General Regulatory Environment

We are generally subject to regulation governing the operation of our business activities. Such regulation typically takes the form of industry specific laws and regulations covering telecommunications services and general competition law applicable to all activities. The following section describes the regulatory framework and the key regulatory developments in Russia, Italy, Algeria, Pakistan, Bangladesh, Ukraine, Kazakhstan, Uzbekistan and Armenia. We are also subject to significant regulation in other countries in which we operate. Such regulations have a significant impact on our local operations in those countries, but we believe that such regulations are not material to our consolidated business and results of operations.

Regulation of Telecommunications in Russia

The Federal law “On Communications,” or the “Communications Law,” came into effect on January 1, 2004 and is the principal legal act regulating the Russian telecommunications industry. The Communications Law sets forth general principles for the regulation of the telecommunications industry, including a description of the institutional framework for the federal government’s involvement in the regulation, administration and operation of the telecommunications industry. The most important aspects of the Communications Law with respect to our business address the federal government’s authority to:

 

   

license communications service providers;

 

   

allocate radio frequencies;

 

   

certify telecommunications equipment;

 

   

allocate numbering capacity;

 

   

ensure fair competition and freedom of pricing; and

 

   

conduct oversight of operators’ compliance with the terms of their licenses and Russian law.

In order to establish and commercially launch a wireless telecommunications network, a company must receive, among other things:

 

   

a license to provide mobile telephony services using a specific standard and band of radio frequency spectrum;

 

   

permission to use radio frequency for its radio electronic devices, or “REDs;”

 

   

a decision on allocation of radio frequency bands;

 

   

registration of its REDs and high frequency equipment;

 

   

authorization to put into operation communications networks (including communications facilities); and

 

   

a decision on allocation of numbering resources.

For the risks related to the regulation governing the operation of communications networks, see the section of this Annual Report on Form 20-F entitled “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—We face uncertainty regarding our frequency allocations, equipment permits and network registration, and we may experience limited spectrum capacity for providing wireless services.”

 

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Russian Regulatory Authorities

The regulation in the telecommunications area in Russia is conducted by several governmental agencies. These agencies, whose functions are not often clearly defined, form a complex, multi-tier system of regulation and supervision that is subject to frequent revision.

The Ministry of Communications and Mass Media, or the “Ministry,” is currently the federal body with executive power to regulate the telecommunications industry. The Ministry has the authority to set policy and adopt regulations in the area of communications and make proposals to the President and the Russian Government on issuance of legal acts regarding certain key issues in the area of communications. The Ministry controls and coordinates the activity of the following entities: (i) the Federal Communications Agency, or “Rossvyaz,” (ii) the Federal Agency on Press and Mass Media, or “Rospechat,” and (iii) the Federal Supervisory Service for Communications, Information Technologies and Mass Media, or “Roskomnadzor.”

Rossvyaz and Roskomnadzor have functions particularly relevant to our business. Rossvyaz is responsible for allocation of the numbering resources and certification in accordance with the established procedure. Roskomnadzor is responsible for the licensing of activities in the area of telecommunications, issuing permissions for radio frequency use, control over telecommunications and information technologies, control over radiation of REDs and high frequency devices and the registration of REDs and high frequency devices.

Licensing to Provide Telecommunications Services and Radio Frequency Allocation

Under the Communications Law, the regulation of the Russian Government dated March 16, 2009 “On the Federal Supervisory Service for Communications, Information Technologies and Mass Media” and the regulation of the Russian Government dated January 12, 2006 “On Approval of the Regulations for Holding a Tender (Auction, Contest) for a License to Provide Communication Services”, Roskomnadzor issues licenses to provide telecommunications services on the basis of an application from an eligible applicant or, when applicable, on the basis of results of a tender or an auction. Licenses are generally issued for a term of three to twenty-five years and a legal entity or individual person can only render commercial telecommunications services upon issuance of a license.

Roskomnadzor has the right to renew an existing license upon application which may be rejected if, as of the date of submission of the application, the operator has been found to have violated the terms of the license and such violations have not been cured. The Communications Law also regulates the procedures for re-issuing a license in the case of a reorganization of the license holder or transfer of communications networks and means to other persons.

The Communications Law identifies a limited number of reasons pursuant to which licenses may be suspended by the licensing body, including identification of license violations, cancellation of permissions to use radio frequencies or failure to comply with the requirements of the notice issued by the licensing body within the cure period. Prior to suspension, the licensing body generally issues a warning that the license may be suspended if corrective action is not taken. The Communications Law also provides that a telecommunications license may be cancelled for certain reasons, upon a claim by an interested person or the licensing body, such as provision of inaccurate information when applying for the license, failure to eliminate the circumstances which caused the suspension of the license validity or failure to perform obligations undertaken when receiving the license. The licensing body can also terminate a license in a liquidation or winding up of the license holder.

Licenses issued prior to the enactment of the Communications Law and Regulation No. 87 of the Russian Government dated February 18, 2005 “On approval of the list of the types of communications services and the list of conditions included into licenses,” or “Regulation 87,” generally contain a number of other detailed conditions, including a start-of-service date, requirements for adhering to technical standards and a schedule of the capacity of the network that the licensee must attain. These license conditions also require that the licensee’s services, by specified dates, cover either (i) a specified percentage of the territory for which the license is issued or (ii) a specified number of cities within the territory for which the license is issued. Conditions in licenses issued after the enactment of Regulation 87 must include the period during which the licensee is entitled to provide the relevant services, the start-of-service date, and the territory in which the relevant services are to be provided, as well as certain other conditions depending on the type of the licensed activity, including information on the calculation of compulsory payments into the universal services fund, as described below.

 

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In addition to obtaining a license, wireless telecommunications operators have to receive a permit for radio frequency usage for every radio transmitter they operate. The permit for radio frequency usage is issued by the Ministry on the basis of decisions of the State Radio Frequency Commission, which evaluates the electromagnetic compatibility of the REDs and coordinates the possibility of radio transmitters usage with the Defense Ministry, Federal Protective Service and the Federal Security Service of the Russian Federation. Under the Communications Law, permits for the use of radio frequencies are granted for ten years or a shorter period if such shorter period is indicated in the application. Radio frequency permit duration may be extended if by its ending no normative acts are adopted, which allow to use radio frequencies upon previous terms. Radio frequency allocation permission may be suspended or terminated for a number of reasons, including a failure to comply with the conditions which the allocation of frequency was subject to.

The Government Regulation No 171 of March 16, 2011, or “Regulation 171,” established the rules of charging a one-off payment and annual payments for radio frequency spectrum usage in the Russian Federation. The new rules concern all user categories and radio facilities operating in all types of networks. Pursuant to Regulation 171, and by Order No 164 of June 30, which came into effect on January 1, 2012, the Ministry established the calculation procedure for one-off and annual payments. This calculation procedure was amended by the Order of the Ministry No 352 of December 22, 2011 which decreased one-off payment rate and updating the calculation procedure of frequency assignments. The amendment came into effect on February 17, 2012. The amounts of one-off and annual payments are determined by multiplying the rate by the quantity of frequency assignments indicated in the permit for radio frequency usage and by the index depending on frequency bandwidth category, population within RED location, frequency band width in use, working frequency range, the perspective of the radio technology and network social dimension. At present the rate of one-off payment is 300 rubles for one frequency assignment. The rate for annual payments is RUB 1,400.

Universal Services Fund

The Communications Law provides for the establishment of a “universal service fund”. All telecommunications operators are required to make compulsory payments to a “universal services fund,” which was formed in order to compensate operators for losses from offering universal services in remote regions of Russia. Operators must make quarterly payments to the universal services fund of 1.2% of its quarterly revenues from communications services provided to subscribers and other users in the public communications network. Amounts paid as value added tax are excluded from the calculation of revenues.

Equipment Certification

Pursuant to the Communications Law telecommunications equipment used in Russia requires confirmation of compliance with certain technical requirements in the area of telecommunications and information technologies and must be certified. The regulation of the Russian Government dated June 25, 2009 “On Approval of the List of the Communication Equipment Subject to Mandatory Certification” sets forth the types of communications equipment that is subject to mandatory certification. The Federal Communications Agency is responsible for confirming such compliance. The design, production, sale, use or import of encryption devices, which include some commonly-used digital wireless telephones, requires a license and equipment certification from the Federal Security Service.

The decision of the Russian Government No. 539 dated October 12, 2004 “On the Procedure for the Registration of Radio-Electronic Equipment and High-Frequency Devices” (as amended) approved a list of certain high-frequency equipment manufactured or used in the Russian Federation that requires special permission from Roskomnadzor. These permissions are specific to the entity that receives them and do not allow the use of the equipment by other parties.

Numbering Capacity

The regulation of the Russian Government dated July 13, 2004 “On Endorsing the Rules for Distribution and Use of Numeration Recourses of the Unified Electric Communication System of the Russian Federation” (as

 

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amended) specifies the procedures for allocating numbering capacity and the use of numbering recourses under the Communication Law. The Federal Communications Agency is responsible for allocating numbering resources and for determining whether such resources are limited, and, in cases stipulated by the Communications