20-F 1 d885602d20f.htm 20-F 20-F
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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, 2014

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)

Scott Dresser

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
      NASDAQ Global Stock Market
Common shares, US$0.001 nominal value       NASDAQ Global Stock Market*

 

* 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: 1,756,731,135 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 Advisors      4   

ITEM 2.*

  Offer Statistics and Expected Timetable      4   

ITEM 3.

  Key Information      5   

ITEM 4.

  Information on the Company      29   

ITEM 4A.

  Unresolved Staff Comments      82   

ITEM 5.

  Operating and Financial Review and Prospects      82   

ITEM 6.

  Directors, Senior Management and Employees      142   

ITEM 7.

  Major Shareholders and Related Party Transactions      154   

ITEM 8.

  Financial Information      158   

ITEM 9.

  The Offer and Listing      160   

ITEM 10.

  Additional Information      161   

ITEM 11.

  Quantitative and Qualitative Disclosures About Market Risk      176   

ITEM 12.

  Description of Securities other than Equity Securities      177   

ITEM 13.

  Defaults, Dividend Arrearages and Delinquencies      178   

ITEM 14.

  Material Modifications to the Rights of Security Holders and Use of Proceeds      178   

ITEM 15.

  Controls and Procedures      178   

ITEM 16A.

  Audit Committee Financial Expert      180   

ITEM 16B.

  Code of Ethics      180   

ITEM 16C.

  Principal Accountant Fees and Services      181   

ITEM 16D.

  Exemptions from the Listing Standards for Audit Committees      181   

ITEM 16E.

  Purchases of Equity Securities by the Issuer and Affiliated Purchasers      182   

ITEM 16F.

  Change in Registrant’s Certifying Accountant      182   

ITEM 16G.

  Corporate Governance      182   

ITEM 17.**

  Financial Statements      185   

ITEM 18.

  Financial Statements      185   

ITEM 19.

  Exhibits      186   

 

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

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. This Annual Report on Form 20-F includes audited consolidated financial statements as of and for the years ended December 31, 2014, 2013 and 2012 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. The company adopted IFRS as of January 1, 2009.

In this Annual Report on Form 20-F, references to “€,” “EUR,” or “Euro” are to the currency introduced at the start of the third stage of the European economic and monetary union pursuant to the Treaty on the Functioning of the EU, as amended, references to “Russian rubles” or “rubles” or “RUB” are to the lawful currency of the Russian Federation and references to “US$” or “$” or “USD” or “U.S. dollars” are to the lawful currency of the United States of America. References to “LIBOR” are to the London Interbank Offered Rate, references to “EURIBOR” are to the Euro 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

 

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“AB SEK” are to AB Svensk Exportkredit, references to “Bangladeshi T-Bill” are to Bangladeshi Treasury Bill and references to “Rendistato” are to the weighted average yield on a basket of Italian government securities produced and published by Bank of Italy.

This Annual Report on Form 20-F contains translations of certain non-U.S. currency amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the relevant non-U.S. currency amounts actually represent such U.S. dollar amounts or could be converted, were converted or will be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, U.S. dollar amounts have been translated from Euro, Algerian dinar, Pakistan rupee, Bangladesh taka and Canadian dollar amounts at the exchange rates provided by Bloomberg Finance L.P. and from Russian ruble, Ukraine hryvnia, Kazakh tenge, Uzbek som, Armenian dram, Georgian lari and Kyrgyz som amounts at official exchange rates, as described in more detail under “Item 5—Operating and Financial Review and Prospects—Certain Factors Affecting our Financial Position and Results of Operations—Foreign Currency Translation” below.

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 in Exhibit 99.1—Glossary of Terms.

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 segment excludes certain expenses from its Adjusted EBITDA. As a result of reconciliations, our consolidated Adjusted EBITDA differs from the aggregation of Adjusted EBITDA of each of our reportable segment. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by total operating revenue, expressed as a percentage. 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 revenue 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 expectations regarding our capital expenditures in and after 2015;

 

   

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

 

   

our ability to execute our business strategy successfully and to complete, and achieve the expected benefits from, our existing and future transactions, such as the sale by WIND Telecomunicazioni S.p.A. (“WIND Italy”) of 90% of the shares of Galata S.p.A. (“Galata”) to Abertis Telecom Terrestre SAU (“Abertis Telecom”), the cash tender offer commenced by VimpelCom Amsterdam B.V., and the refinancing transaction announced by WIND Italy and Wind Acquisition Finance S.A. (“WAF”), including the related borrowing by WIND Italy and issuance of notes by WAF;

 

   

our ability to extract anticipated synergies or to integrate an acquired business 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 revenue per customer 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 expectations regarding future developments in the markets in which we operate;

 

   

possible developments in, outcome of and/or consequences of investigations by the U.S. Securities and Exchange Commission (“SEC”), the U.S. Department of Justice (“DOJ”), and the Dutch Public Prosecution Service (Openbaar Ministerie) (“OM”), or other bodies which may carry out investigations, as well as our internal investigation, and any litigation related to or arising out of any of the foregoing, and the costs we may incur in connection with the foregoing, as well as any potential disruption or adverse consequences to us resulting from such investigations and any such litigation; 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, including as the result of armed conflict or otherwise;

 

   

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, economic sanctions, and their official interpretation by governmental and other regulatory bodies and courts;

 

 

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risks related to currency fluctuations;

 

   

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 developments in, the outcome of and/or consequences of investigations of our business which are ongoing or may be initiated, and any litigation related to or arising out of any of the foregoing, and the costs associated therewith, including relating to remediation efforts and enhancements to our compliance programs; 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.

PART I

 

ITEM 1. Identity of Directors, Senior Management and Advisors

Not required.

 

ITEM 2. Offer Statistics and Expected Timetable

Not required.

 

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ITEM 3. Key Information

A. Selected Financial Data

The following selected consolidated financial data for the five years ended December 31, 2014 are derived from our historical consolidated financial statements which have been audited by PricewaterhouseCoopers Accountants N.V., an independent registered public accounting firm, for the year ended December 31, 2014, and Ernst & Young Accountants LLP, an independent registered public accounting firm, for the years ended December 31, 2013, 2012, 2011 and 2010. The data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 20-F and the financial information in “Item 5—Operating and Financial Review and Prospects.”

 

     Years ended December 31,  
     2014     2013     2012     2011     2010  
     (In millions of US dollars, except per
share amounts)
 

Service revenue

     18,725        21,529        22,122        19,579        10,291   

Sale of equipment and accessories

     519        725        677        516        194   

Other revenue

     383        292        262        167        37   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     19,627        22,546       23,061       20,262       10,522  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

          

Service costs

     4,381        5,133        5,439        4,962        2,251   

Cost of equipment and accessories

     551        780        693        663        217   

Selling, general and administrative expenses

     6,725        8,373        7,161        6,381        3,198   

Depreciation

     2,839        3,050        2,926        2,726        1,403   

Amortization

     1,479        1,791        2,080        2,059        610   

Impairment loss

     992        2,973        386        527          

Loss on disposals of non-current assets

     74        100        205        90        49   

Total operating expenses

     17,041        22,200        18,890        17,408        7,728   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     2,586        346        4,171        2,854        2,794   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance costs

     2,026        2,150        2,029        1,587        536   

Finance income

     (54     (91     (154     (120     (69

Other non-operating losses/(gains)

     152        172        75        308        (35

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

     38        159        9        35        (90

Net foreign exchange (gain)/ loss

     605        (20     (70     190        5   

(Loss)/profit before tax

     (181     (2,024     2,282        854        2,447   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     722        2,064       906       585       574  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/profit for the year

     (903     (4,088 )     1,376       269       1,873  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

          

The owners of the parent

     (647     (2,625     1,539        543        1,806   

Non-controlling interest

     (256     (1,463     (163     (274     67   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (903     (4,088     1,376        269        1,873   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

          

Basic, (loss)/profit for the year attributable to ordinary equity holders of the parent

   $ (0.37   $ (1.53   $ 0.95      $ 0.36      $ 1.50   

Diluted, (loss)/profit for the year attributable to ordinary equity holders of the parent

   $ (0.37   $ (1.53   $ 0.95      $ 0.36      $ 1.50   

Weighted average number of common shares (millions)

     1,748        1,711        1,618        1,524        1,207   

Dividends declared per share

   $ 0.035      $ 1.24      $ 0.80      $ 0.80      $ 0.80   

 

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     At December 31,  
     2014     2013(2)     2012     2011     2010  
     (In millions of US dollars)  

Consolidated balance sheets data:

          

Cash and cash equivalents

     6,342        4,454        4,949        2,325        885   

Working capital (deficit)(1)

     (938     (2,815     (2,421     (3,074     (1,023

Property and equipment, net

     11,849        15,493        15,666        15,165        7,299   

Intangible assets and goodwill

     18,002        24,546        27,565        28,601        9,217   

Total assets

     41,042        49,747        54,737        54,039        19,505   

Total liabilities

     37,066        40,669        39,988        39,137        9,093   

Total equity

     3,976        9,078        14,749        14,902        10,412   

 

(1) Working capital is calculated as current assets less current liabilities.
(2) Figures for the year ended December 31, 2013 have been adjusted to reflect the adoption of IAS 32 Offsetting Financial Assets and Financial Liabilities, as described in Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

     Years ended December 31,  
     2014      2013      2012      2011      2010  
     (In millions of US dollars)  

Other data:

              

Adjusted EBITDA *

     7,970         8,260         9,768         8,298         4,906   

 

* 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,  
     2014     2013     2012     2011     2010  

Adjusted EBITDA

     7,970        8,260        9,768        8,298        4,906   

Reconciliation adjustments

     —         —         —         (42     (50

Depreciation

     (2,839     (3,050     (2,926     (2,726     (1,403

Amortization

     (1,479     (1,791     (2,080     (2,059     (610

Impairment loss

     (992     (2,973     (386     (527     —    

Loss on disposals of non-current assets

     (74     (100     (205     (90     (49

Finance costs

     (2,026     (2,150     (2,029     (1,587     (536

Finance income

     54        91        154        120        69   

Other non-operating losses/(gains)

     (152     (172     (75     (308     35   

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

     (38     (159     (9     (35     90   

Net foreign exchange loss/(gain)

     (605     20        70        (190     (5

Income tax expense

     (722     (2,064     (906     (585     (574

(Loss)/profit for the year

     (903     (4,088     1,376        269        1,873   

 

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SELECTED OPERATING DATA

The following selected operating data as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 has been derived from internal company sources. The selected operating data set forth below should be read in conjunction with our audited 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.”

 

     As of December 31,  
     2014      2013      2012      2011      2010  

Selected company operating data(1):

              

End of period mobile customers (in millions):

              

Russia

     57.2         56.5         56.1         57.2         52.0   

Italy

     21.6         22.3         21.6         21.0         —    

Algeria(4)

     18.4         17.6         16.7         16.2         —    

Africa & Asia(5)

     71.6         69.4         64.9         59.9         0.7   

Ukraine(4)

     26.2         25.8         25.1         23.2         24.2   

CIS

     26.5         25.4         24.2         19.7         15.6   

Total mobile customers

     221.6         216.9         208.6         197.2         92.5   

Mobile MOU (2)

              

Russia

     304         291         276         243         219   

Italy

     264         237         207         197         —    

Algeria(4)

     194         216         274         289         —    

Africa & Asia

              

Pakistan

     238         226         214         206         —    

Bangladesh

     197         184         216         209         —    

Laos

     103         106         97         233         —    

Ukraine(4)

     511         501         513         483         383   

CIS

              

Kazakhstan

     309         290         213         148         120   

Uzbekistan

     523         471         474         425         386   

Kyrgyzstan

     293         265         272         303         258   

Armenia

     374         339         269         257         294   

Tajikistan

     286         270         241         229         179   

Georgia

     228         244         237         207         137   

Mobile ARPU (2)

              

Russia

   US$ 8.6       US$ 10.6       US$ 10.8       US$ 11.0       US$ 10.8   

Italy

   US$ 14.6       US$ 16.3       US$ 18.5       US$ 21.7         —    

Algeria(4)

   US$ 7.7       US$ 8.4       US$ 9.0       US$ 9.8         —    

Africa & Asia

              

Pakistan

   US$ 2.1       US$ 2.3       US$ 2.6       US$ 2.7         —    

Bangladesh

   US$ 1.5       US$ 1.5       US$ 1.8       US$ 1.8         —    

Laos

   US$ 5.3       US$ 6.0       US$ 5.6       US$ 5.1         —    

Ukraine(4)

   US$ 3.1       US$ 4.7       US$ 5.2       US$ 5.2       US$ 4.8   

CIS

              

Kazakhstan

   US$ 5.8       US$ 7.1       US$ 7.6       US$ 8.3       US$ 9.2   

Uzbekistan

   US$ 5.6       US$ 5.3       US$ 4.6       US$ 4.1       US$ 4.1   

Kyrgyzstan

   US$ 5.5       US$ 6.6       US$ 5.5       US$ 5.5       US$ 5.3   

Armenia

   US$ 6.6       US$ 7.1       US$ 6.8       US$ 8.1       US$ 10.3   

Tajikistan

   US$ 9.2       US$ 10.0       US$ 8.6       US$ 8.8       US$ 6.5   

Georgia

   US$ 4.9       US$ 6.3       US$ 6.7       US$ 6.8       US$ 7.5   

 

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     As of December 31,  
     2014      2013      2012      2011      2010  

Annual churn (as a percentage) (2)

              

Russia

     60.1         63.9         63.2         62.8         50.8   

Italy

     31.4         36.6         35.2         28.3         —    

Algeria(4)

     23.4         31.6         29.5         23.4         —    

Africa & Asia

              

Pakistan

     26.0         23.0         25.2         29.5         —    

Bangladesh

     21.6         22.3         25.2         18.5         —    

Laos

     94.6         102.6         141.0         258.0         —    

Ukraine(4)

     25.1         35.3         29.8         28.9         29.5   

CIS

              

Kazakhstan

     50.5         48.6         55.8         47.4         43.5   

Uzbekistan

     48.1         53.5         55.1         59.7         54.2   

Kyrgyzstan

     65.7         65.6         66.1         52.3         61.9   

Armenia

     43.9         62.6         83.9         87.6         67.6   

Tajikistan

     77.1         77.9         72.7         67.4         82.8   

Georgia

     69.7         74.0         79.1         70.1         94.1   

End of period broadband customers, mobile and fixed (in millions):

              

Russia

     5.9         5.4         5.0         4.6         3.3   

Italy

     12.3         10.5         7.8         6.6         —    

Algeria

     —          —          —          —          —    

Africa & Asia

     —          —          —          —          —    

Ukraine

     0.8         0.8         0.6         0.4         0.2   

CIS (3)

     14.1         13.7         12.3         9.5         6.7   

Total broadband customers

     33.1         30.3         25.6         12.3         3.7   

 

(1) For information on how we calculate mobile customer data, mobile MOU, mobile ARPU, mobile churn rates and broadband customer 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.” The mobile customer numbers for Africa & Asia include 2.2 million customers from our equity investee in Zimbabwe (accounted at cost) as of December 31, 2014 and 2.6 million customers as of December 31, 2013 and 2012.
(2) For Wind Telecom Group companies acquired on April 15, 2011, mobile MOU, ARPU and churn are calculated based on the full year.
(3) CIS mobile broadband customers are those who have performed at least one mobile Internet event in the three-month period prior to the measurement date, as well as fixed Internet access using FTTB, xDSL and WiFi technologies.
(4) The customer numbers for 2012, 2011 and 2010 have been adjusted to reflect revised customer numbers in Algeria and Ukraine where the definition of customers has been aligned to the group definition. MOU, Mobile ARPU and Churn have been adjusted accordingly.
(5) The customer numbers for 2013, 2012, 2011 and 2010 have been adjusted to remove customers in operations that have been sold.

B. Capitalization and Indebtedness

Not required.

C. Reasons for the Offer and Use of Proceeds

Not required.

D. Risk Factors

The risks below relate to 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, these risks. If any of these risks actually occur, our business, financial condition, results of operations or prospects could be harmed. In that case, the trading price of our ADSs could decline and you could lose all or part of your investment.

 

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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 could materially decrease our cash flow and prevent us from raising additional capital.

We have substantial amounts of indebtedness. As of December 31, 2014, the principal amount of our external debt for bank loans, bonds, equipment financing, and loans from others amounted to approximately US$26.4 billion. Much of our indebtedness relates to the 2011 acquisition of 100% of Wind Telecom S.p.A. (“Wind Telecom”), or the Wind Telecom Transaction, and the subsequent refinancing of Wind Telecom entities’ debts. Since the Wind Telecom Transaction, we have also incurred additional external debt through bank loans, bonds and equipment financing. As a result, the leverage of the VimpelCom Group is substantial. For more information regarding 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.”

Agreements under which we borrow funds contain obligations, including 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 and may have the effect of preventing us or our subsidiaries from incurring additional debt. Failure to meet these obligations may result in our default which could increase the cost of securing additional capital and lead to the acceleration of our loans and the loss of assets that secure the defaulted debts. Such a default and acceleration of the obligations under one or more of these agreements (including as a result of cross default and cross acceleration) could have a material adverse effect on our business, financial condition, results of operations and prospects, and in particular on our liquidity and our shareholders’ equity. In addition, covenants in our debt agreements could impair our liquidity and our ability to expand or finance our future operations. For a discussion of agreements under which we borrow funds, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.”

Aside from the risk of default, given our substantial leverage and limits imposed by our debt obligations, our business could suffer significant negative consequences such as the need 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 to maintain resiliency in the face of general adverse economic and industry conditions.

Further, certain bank loans entered into by our subsidiary OJSC “Vimpel-Communications” contain clauses that enable the lender to unilaterally increase interest rates. Any such increase in interest rates under these facility agreements now or in the future could increase our cost of borrowing in Russia, which could have a negative effect on our business. For more information on these bank loans, see “Item 5 Operating and Financial Review and Prospects—Liquidity and Capital Resources—“Financing Activities”.

We may not be able to raise additional capital.

We may need to raise additional capital in the future, including through debt financing. If we incur additional indebtedness, the related risks of leverage that we now face could increase. Specifically, we may not be able to generate enough cash to pay the principal, interest and other amounts due under our indebtedness. In addition, we may not be able to borrow money within the local or international capital markets on acceptable terms or at all. The sanctions imposed by the United States, European Union and other countries in connection with developments in Ukraine during 2014 and 2015, and additional sanctions which may be imposed in the

 

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future, may also negatively affect our ability to raise external financing, particularly if the sanctions are broadened. Our ability to raise additional capital may also be affected by any downgrade of our credit ratings, even for reasons outside our control, which may harm our business, financial condition, results of operations and prospects. If we are unable to raise additional capital, we may be unable to make necessary or desired capital expenditures, to take advantage of investment opportunities, to refinance existing indebtedness or to 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 harm our business, financial condition, results of operations and prospects.

We are exposed to foreign currency exchange loss and currency fluctuation 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 revenue is in currencies other than the U.S. dollar and Euro. Thus, declining values of local currencies against the U.S. dollar or the Euro could make it more difficult for us to repay or refinance our U.S. dollar or Euro-denominated debt or purchase equipment and services. The value of Russian and Ukrainian currencies, for example, have declined significantly in response to political and economic issues since December 31, 2013, and may continue to decline. The significant depreciation of the Russian ruble against the U.S. dollar in 2014 in particular negatively impacted our results of operations and resulted in a foreign currency exchange loss in 2014. In addition, the devaluation of the Ukrainian hryvnia negatively impacted revenues in our Ukraine segment and our results of operations in 2014, and the National Bank of Ukraine’s decision in February 2015 to suspend its interventions to support the Ukrainian hryvnia has resulted in further devaluation in 2015. Currency fluctuations and volatility may impact our results of operations and result in foreign currency transaction and translation losses in the future. Changes in exchange rates could also impact our ability to comply with covenants under our debt agreements. Exchange rate risks could harm our business, financial condition, results of operations and prospects. We cannot ensure that we will be able to effectively hedge against these risks.

In addition, exchange controls and currency restrictions in any of our geographic regions could harm our business, financial condition, results of operations and prospects. For example, the official currency in Uzbekistan is not convertible outside Uzbekistan due to local government or banking regulations, delays and restrictions on exchange rates. In addition, currency restrictions have made it difficult to acquire equipment produced outside of Uzbekistan for use in building and maintaining the company’s telecommunications network. We have also faced currency restrictions in some of our other countries of operation, including Algeria and Bangladesh. For more information about risks related to currency exchange rate fluctuations, see “Item 11—Quantitative and Qualitative Disclosures About Market Risk” and Notes 5 and 17 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

We may incur unexpected liabilities and may not realize anticipated benefits from acquisitions.

From time to time, we engage in acquisitions. Their outcome and effects may differ materially from our expectations based on factors we cannot predict:

 

   

the acquired companies’ compliance with telecommunications licenses and permissions, compliance with laws, regulations and contractual obligations, ability to obtain and maintain favorable interconnect terms, frequencies and numbering capacity and ability to protect their intellectual property;

 

   

unforeseen liabilities or obligations incurred pursuant to the acquisitions;

 

   

our ability to realize expected synergies and integrate acquired business operations while maintaining effective relationships with customers, management and employees;

 

   

risks that different geographic regions present, such as currency exchange risks, developments in competition and regulatory, political, economic and social developments; and

 

   

challenges brought by third parties.

 

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

In addition, we may not be able to divest some of our activities as planned, and the divestitures we do carry out could negatively impact our business.

As a holding company, VimpelCom depends on the performance of its subsidiaries.

VimpelCom is a holding company and does not conduct any revenue-generating business operations of its own. Its principal assets are the direct and indirect equity interests it owns in its operating subsidiaries. It is dependent upon cash dividends, distributions, loans or other transfers it receives from its subsidiaries to make dividend payments to its shareholders (including holders of ADSs), to repay debts, and to meet its other obligations. The ability of VimpelCom’s subsidiaries to pay dividends and make payments or loans to VimpelCom depends on the success of their businesses and is not guaranteed. Although VimpelCom has a global strategy set by leadership, management at each operation is responsible for executing many aspects of that strategy, and it is not certain local management will be able to execute that strategy effectively.

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.

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 covenants in debt agreements and corporate, tax and other laws and regulations. These covenants, laws and regulations include restrictions on dividends, limitations on repatriation of earnings, monetary transfer restrictions and foreign currency exchange restrictions in certain agreements and/or certain jurisdictions in which VimpelCom’s subsidiaries operate. For example, VimpelCom’s subsidiaries operating under WIND Italy are restricted from making certain payments to VimpelCom by existing covenants of the Wind Telecom Group. For more detail on the WIND Italy financings, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.” Furthermore, our ability to withdraw funds and dividends from our subsidiaries and operating companies may depend on the consent of our strategic partners where applicable. See “—Our strategic partnerships and relationships carry inherent business risks” and “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Algeria Transaction and Settlement.”

Our majority stake in an Egyptian public company may expose us to legal and political risk and reputational harm.

We have a 51.9% owned subsidiary in Egypt, Global Telecom Holding S.A.E. (“GTH”), that is a public company listed on the Egyptian Stock Exchange and London Stock Exchange and is therefore subject to corresponding laws and regulations, including laws and regulations for the protection of minority shareholder rights. GTH is the holding company for a number of our assets in Africa and Asia, including Algeria, Bangladesh and Pakistan. GTH is exposed to the risk of unpredictable and adverse government action and severe delays in obtaining necessary government approvals stemming from unrest in Egypt during recent years. Furthermore, GTH may be subjected to significant tax claims under existing or new Egyptian tax law and this could expose GTH to increased tax liability. For more information on tax claims of the Egyptian authorities please see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

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Our strategic partnerships and relationships carry inherent business risks.

We participate in strategic partnerships and joint ventures in a number of countries, including Russia (Euroset), Kazakhstan (KaR-Tel, TNS-Plus, 2Day Telecom, KAZEUROMOBILE LLP), Algeria (Djezzy) Uzbekistan (Buzton), Kyrgyzstan (Sky Mobile, Terra), Georgia (Mobitel), Tajikistan (Tacom), Laos (VimpelCom Lao Co., Ltd) and Zimbabwe (Telecel).

We do not always have a controlling stake in our affiliated companies and even when we do, our actions with respect to these affiliated companies may be restricted to some degree by shareholders agreements entered into with our strategic partners. Our business, financial condition, results of operations and prospects may be materially harmed if disagreements develop with our partners. Our ability to withdraw funds and dividends from these entities may depend on the consent of partners. Agreements with some of these partners include change of control, put and call options and similar provisions, which could give other participants in these investments the ability to purchase our interests, compel us to purchase their interests or enact other penalties. If one of our strategic partners becomes subject to investigation, sanctions or liability, VimpelCom might be adversely affected. Furthermore, strategic partnerships in emerging markets are accompanied by risks inherent to those markets, such as an increased possibility of a partner defaulting on obligations, or losing a partner with important insights in that region. In addition, in Algeria and Laos our local partners are either government institutions or directly related to the local government which could increase our exposure to the risks described in “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 to fluctuations in the global economy”.

We are subject to investigations by the SEC, DOJ and OM, and are conducting an internal investigation. We are unable to predict the duration, scope or results of these investigations or their impact on us.

As previously disclosed, the SEC, DOJ and OM are conducting investigations related to VimpelCom, which have been focused primarily on our prior dealings with Takilant Ltd. (“Takilant”).

In June 2007, Takilant purchased from us a 7% interest in our business in Uzbekistan for US$20.0 million and entered into a shareholders agreement with us. In September 2009, Takilant exercised its option to put its 7% interest to us for US$57.5 million, an amount specified in the shareholders agreement. In addition, we had agreements with Takilant relating to the acquisition of frequency spectrum (including with respect to 3G and LTE) and channels in Uzbekistan pursuant to which we paid Takilant an aggregate of US$57.0 million.

It has also been reported in the press that Takilant is currently being investigated in Sweden and Switzerland on allegations that it and certain persons associated with it have committed acts of bribery and money-laundering connected with their activities in Uzbekistan, and also that Takilant is being investigated in the Netherlands and perhaps other jurisdictions. These investigations may, in part, involve us.

As a result of concerns arising from press reports regarding Takilant, we commenced a review with respect to our operations in Uzbekistan, including our relations with Takilant, and in 2013 we retained external counsel with expertise relating to the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws and regulations to conduct such review.

Following notice of the investigations by the SEC, DOJ and OM, we established a Special Committee of the Supervisory Board in March 2014 to oversee the internal investigation being conducted by the company’s external counsel and our response to the inquiries by various authorities. The Special Committee consists of directors who qualify as independent for purposes of Rule 10A-3 under the Exchange Act. The investigation being conducted by the company’s external counsel has been focused primarily on our Uzbekistan operations, including our relations with Takilant, and whether there was any conduct in our operations in Uzbekistan that may have violated the anti-bribery provisions of the FCPA, the FCPA’s books and records and internal controls provisions, applicable local laws and/or our own internal policies. The investigation is also reviewing our operations in additional countries.

 

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We expect to continue incurring costs related to the investigations, primarily professional fees and expenses, which may be significant. These costs relate to responding to requests for information, testimony and other information in connection with the investigations and in conducting the internal investigation, and we cannot predict at this time the ultimate amount of all such costs. These matters may require the involvement of certain members of our senior management that could impinge on the time they have available to devote to other matters relating to the business. We may also see ongoing media and governmental interest in these matters that could impact the perception of us and result in reputational harm to our company. The investigations have received media attention in a number of jurisdictions, and parliamentary hearings held by the Norwegian Government have addressed the investigations.

The SEC, DOJ and Dutch investigations, as well as our own investigations, are continuing, and we have cooperated, and continue to cooperate, with the authorities in these investigations. We are also exploring the prospect of resolving the company’s potential liabilities arising from the facts established in the investigations. We are unable to predict the duration, scope or results of the ongoing investigations or how the results of these investigations or any resolutions may impact our business, results of operations, financial condition, or the assessment of our internal controls. Further, there can be no assurance that such investigations will not be broader in scope than they currently appear, or that new investigations will not be commenced in these or other jurisdictions, or that there will not be litigation commenced against us.

One or more enforcement actions could be instituted in respect of the matters that are the subject of some or all of the investigations. The DOJ and SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, judgments, settlements, injunctive relief, debarment or other relief, disgorgement, fines, penalties, modifications to business practices, including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA, and criminal convictions and/or penalties. The OM and enforcement authorities in other jurisdictions also have a range of sanctions under the relevant laws and regulations. There can be no assurance that any investigation will not conclude that a violation of applicable law has occurred. The imposition of any of these sanctions or remedial measures could have a material adverse effect on our business or financial condition.

For more information on the risks associated with anti-corruption laws, see “—Legal and Regulatory Risks—We are subject to anti-corruption laws” below.

Our strategic shareholders may pursue diverse development strategies, 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, LetterOne Holdings S.A. (“LetterOne”) and Telenor ASA (“Telenor”), and their respective affiliates, beneficially own, in the aggregate, approximately 90.9% of our outstanding voting shares. As a result, these shareholders, if acting together, have the ability to determine the outcome of matters submitted to our shareholders for approval. These two shareholders have sufficient voting rights to jointly elect a majority of our supervisory board, and could alternatively enter into a shareholders or similar agreement impacting the composition of our supervisory board. A new supervisory board could take corporate actions or block corporate decisions by VimpelCom with respect to capital structure, financings, dispositions and acquisitions and commercial transactions that might not be in the best interest of the minority shareholders or other security holders.

In the past, our strategic shareholders have had different strategies from us and from one another and have engaged in litigation against one another and our company with respect to disagreements over strategy. In addition, in Pakistan and Bangladesh our subsidiaries directly compete with subsidiaries of Telenor and it is possible that we will compete with Telenor and/or LetterOne in other markets in the future.

 

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We cannot assure you that our relationship with LetterOne and Telenor or LetterOne’s and Telenor’s relationship with one another will not deteriorate as a result of differing or competing business strategies, which could harm our business.

For more information on our largest shareholders, see “Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders” below.

Litigation and disputes among our two largest shareholders and us could materially affect our business.

In the past, our two largest shareholders have been involved in disputes and litigation regarding our group companies against one another and our company. Further disputes among our two largest shareholders and us could seriously harm our business, financial condition and results of operations.

For more information on our largest shareholders, see “Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders” below.

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

We derive benefits and resources from the participation of LetterOne and Telenor in our company. If LetterOne or Telenor were to dispose of its stake in our company, we would be deprived of those benefits, which could harm our business, financial condition, results of operations and prospects.

In addition, some 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. If such a change of control provision is triggered and we fail to make any required prepayment, we could trigger acceleration provisions of our debt agreements, making our obligations immediately due and payable. This could harm 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.

Our business is highly capital intensive, as 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, which may require additional capital expenditures in the future. 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. If we do not have sufficient resources from our operations to finance necessary capital expenditures, we may be required to raise additional debt or equity financing, which may not be available when needed or on terms favorable to us or at all. If we are unable to obtain adequate funds on acceptable terms or at all, we may be unable to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures, which could harm our business, financial condition, results of operations and prospects. For more information on future liquidity needs, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Future Liquidity and Capital Requirements.”

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

Future revenue from our prepaid mobile customers, our primary source of revenue, and our contract mobile customers is unpredictable. We do not require our prepaid mobile customers to enter into long-term service

 

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contracts and cannot be certain that they will continue to use our services in the future. We require our contract mobile customers to enter into service contracts; however, many of these service contracts can be canceled by the customer with limited advance notice and without significant penalty. The loss of a larger number of customers than anticipated could result in a loss of a significant amount of expected revenue. Because we incur costs based on our expectations of future revenue, our failure to accurately predict revenue could harm our business, financial condition, results of operations and prospects.

We are in competitive markets, 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 will continue to increase. Each of the items discussed immediately below regarding increased competition could materially harm our business, financial condition, results of operations and prospects.

 

   

We cannot assure you that our revenue will grow in the future, as competition puts pressure on prices;

 

   

With the increasing pace of technological developments, including in particular new digital technologies, and regulatory changes impacting our industry, future business drivers are increasingly difficult to predict, and we cannot assure you that we will adapt to these changes at a competitive pace;

 

   

We may be forced to utilize more aggressive marketing schemes to retain existing customers and attract new ones, including lower tariffs, handset subsidies or increased dealer commissions;

 

   

In more mature or saturated markets, such as Russia and Italy (see “Item 4—Information on the Company”) there are limits on the extent to which we can continue to grow our customer base;

 

   

In such markets, the continued growth in our business and results of operations will depend, in part, on our ability to extract greater revenue from our existing customers, including through the expansion of data services and the introduction of next generation technologies, which may prove difficult to accomplish;

 

   

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;

 

   

The liberalization of the regulations in areas in which we operate could greatly increase competition;

 

   

Competitors may operate more cost effectively or have other competitive advantages such as greater resources, market presence and network coverage, brand name recognition, customer loyalty and goodwill and control over domestic transmission lines;

 

   

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;

 

   

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, and we cannot assure you that we will be able to forge similar relationships;

 

   

Reduced demand for our core services of voice, messaging and data and the development of services by application developers (commonly referred to as “over the top” or OTT players) could significantly impact our future profitability; and

 

   

Our existing service offerings could become disadvantaged as compared to those offered by converged competitors (who can offer combinations of fixed line, broadband, public Wi-Fi, TV and mobile).

For more information on the competition in our markets, see “Item 4—Information on the Company”.

 

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We could experience customer database piracy or other database security breaches.

We may be exposed to database piracy or other database security breaches resulting in the leakage and unauthorized dissemination of personal information about our customers, which could impact our reputation, prompt lawsuits against us by individual and corporate customers, lead to violations of data protection laws and adverse actions by the telecommunications regulators and other authorities, lead to a loss in customers and hinder our ability to attract new customers. If severe customer data security breaches are detected, the regulatory authority can sanction our company, including suspending our operations for some time period and levying fines and penalties. Violation of data protection laws is a criminal offence in some countries, and individuals can be imprisoned or fined. In addition, we may be exposed to cyber-attacks, which could result in equipment failures or disruptions in our operations. Our inability to operate our fixed-line or wireless networks as a result of such events may result in significant expense or loss of market shares. These occurrences, individually or in the aggregate, could harm our business, financial condition, results of operations and prospects.

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

The telecommunications industry is characterized by rapidly evolving technology, industry standards and service demands, which may vary by country or geographic region. Accordingly, our future success will depend on our ability to adapt to the changing technological landscape and the regulation of standards utilizing these technologies. 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 in a timely manner or at all. We may not be able to meet all of these challenges in a timely and cost-effective manner.

In our markets, we operate or are considering developing third generation mobile technologies (“3G”) networks or fourth generation mobile technologies (“4G/LTE”) networks. New network development requires significant financial investments and there can be no assurance that we will be able to develop 3G or 4G/LTE networks on commercially reasonable terms, that we will not experience delays in developing our networks or that we will be able to meet all of the license terms and conditions imposed by the countries in which we operate or that we will be granted such licenses at all. In addition, penetration rates for 4G/LTE compatible devices may not currently support the cost of 4G/LTE development in certain markets, such as Russia, and such rates will need to increase to be commercially viable. If we experience substantial problems with our 3G or 4G/LTE services, or if we fail to introduce new services on a timely basis relative to our competitors, it may impair the success of such services, or delay or decrease revenue and profits and therefore may hinder recovery of our significant capital investments in 3G or 4G/LTE services as well as our growth.

Our ability to provide telecommunications services depends on access to local and long distance line capacity and the commercial terms of our interconnect agreements.

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 interconnection costs as a result of new regulations, commercial decisions by other fixed-line operators, increased inflation rates in the countries in which we operate or a lack of available line capacity for interconnection could harm our ability to provide services, which could in turn harm our business, financial condition, results of operations and prospects.

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

Our business depends on providing customers with reliability, capacity and security, which may be disrupted by computer viruses. We cannot be sure that our network system will not be the target of a virus or, if it

 

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is, that we will be able to maintain the integrity of our customers’ data and that a virus will not overload our network, causing significant harm to our operations. Also, in recent years, during installations of new software, we have experienced network service interruptions. In addition, our technological infrastructure is vulnerable to damage or disruptions from other numerous events, including natural disasters, military conflicts, power outages, terrorist acts, government shutdown orders, equipment or system failures, human error or intentional wrongdoings, including breaches of our network or information technology security.

The successful build-out and operation of our networks depends heavily on obtaining adequate supplies of switching equipment, radio access network solutions, base stations and other equipment on a timely basis.

In some regions, our equipment for provision of mobile services resides in a limited number of locations or buildings. Disruption to the security or operation of these locations or buildings could result in disruption of our mobile services in those regions.

Interruptions of services could harm our business reputation and reduce the confidence of our customers and consequently impair our ability to obtain and retain customers and could lead to a violation of the terms of our licenses, each of which could materially harm our business. In some of the markets in which we operate, we do not carry business interruption insurance to prevent against network disruptions.

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

We rely on third parties for services and products important for our operations. We currently purchase our equipment from a small number of suppliers, principally Alcatel-Lucent, Cisco Systems, Comverse, Ericsson, Huawei and Nokia Solutions and Networks, although some of the equipment that we use is available from other suppliers. From time to time, we have experienced delays in receiving equipment. Our business could be materially harmed if we are unable to obtain adequate supplies or equipment from our suppliers in a timely manner and on reasonable terms.

Also, we may outsource all or a portion of our networks in certain markets in which we operate. For example, in late 2014 we entered into an agreement with MTS for joint planning, development and operation of 4G/LTE networks in 36 regions of Russia. In addition, in February 2015, our wholly-owned subsidiary, Wind Italy, entered into an agreement to sell 90% of Wind Italy’s towers subsidiary, Galata, to Abertis Telecom and Wind Italy has a Tower Services Agreement with Galata for the provision of a broad range of services on the contributed sites and sites subsequently built by Galata hosting Wind Italy equipment. Our business could be materially harmed if our agreements with these parties were to terminate or if negative developments (financial, legal, regulatory or otherwise) regarding these parties, or a dispute between us and these parties, causes such parties to no longer be able to deliver the required services or otherwise fulfil their obligations under our agreements with them. For more information regarding these agreements, see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Network and Tower Sharing Agreements.”

In addition, we rely on roaming partners to provide services to our customers while they are outside the countries in which we operate and on interconnect providers to complete calls that originate on our networks but terminate outside our networks, or that originate outside our networks and terminate on our networks. We also rely on handset providers to provide the smartphones used on our networks. In addition, many of our mobile products and services are sold to customers through retail channels. The third party retailers and dealers that we use to distribute and sell products are not under our control and may stop distributing or selling our products at any time or may more actively promote the products and services of our competitors. Should this occur with particularly important retailers or dealers, we may face difficulty in finding new retailers or sales dealers that can generate the same level of revenue. Any negative developments regarding the third parties on which we depend could have a materially adverse impact on our business, financial condition, results of operations and prospects.

 

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Allegations of health risks related to the use of mobile telecommunication devices and base stations could harm our business.

There have been allegations that the use of certain mobile telecommunication devices and equipment may cause serious health risks. The actual or perceived health risks of mobile devices or equipment could diminish customer growth, reduce network usage per customer, spark product liability lawsuits or limit available financing. In addition, the actual or perceived health risks may result in increased regulation of network equipment. Each of these possibilities has the potential to seriously harm our business.

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

We regard our copyrights, service marks, 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 many of the markets in which 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 litigation outcomes could harm our business, financial condition or results of operations.

We depend on our senior management and other key personnel.

Our ability to maintain our competitive position and to implement our business strategy is dependent to a large degree on our senior management team and other key personnel. In the markets in which we operate, competition for personnel with relevant expertise is intense. The loss of our key personnel or an inability to attract, retain and motivate qualified key personnel could harm our business, financial condition, results of operations and prospects.

Legal and Regulatory Risks

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

As a global telecommunications company that operates in a number of 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. The applicable rules are generally subject to different interpretations and the relevant authorities may challenge the positions that we take. Regulations may be especially strict in the markets of those countries in which we are considered to hold a significant or dominant market position, including Russia, Italy, Algeria, Ukraine, Kazakhstan, Tajikistan, Armenia, Uzbekistan, Kyrgyzstan and Pakistan. 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. In some countries, we are required to obtain approval for offers and advertising campaigns, which can delay or thwart important business initiatives. We may also be required to obtain approvals for certain acquisitions, reorganizations or other transactions, and failure to obtain such approvals may impede or harm our business and our ability to expand our operations.

 

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Laws and regulations in certain of the jurisdictions in which we operate oblige us to install surveillance equipment to ensure that our networks are capable of allowing the government to monitor data and voice traffic on our networks.

Any adverse regulations or regulatory actions could place significant competitive and pricing pressure on our operations and could harm our business, financial condition, results of operations and cash flow. For more information on the regulatory environment in which we operate, see Exhibit 99.2—Regulation of Telecommunications. For more information about the competition proceedings in which our subsidiaries are involved, see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

We are subject to anti-corruption laws.

We are subject to a number of anti-corruption laws, including the 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 harm our business, financial condition, results of operations and prospects. 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. The FCPA also requires public companies to maintain accurate books and records and devise a system of sufficient internal accounting controls. We regularly review and update our policies and procedures and internal controls designed to provide reasonable assurance that we, our employees, distributors and other intermediaries comply with the anti-corruption laws to which we are subject. However, there are inherent limitations to the effectiveness of any policies, procedures and internal controls, including the possibility of human error and the circumvention or overriding of the policies, procedures and internal controls. There can be no assurance that such policies or procedures or internal controls will work effectively at all times 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.

We operate in countries which pose elevated risks of corruption violations. If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities and/or officials (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, financial condition, results of operations and prospects. Any investigation of any actual or alleged violations of such laws or policies by us or any governmental body could also have an adverse impact on our business, financial condition, results of operations and prospects.

Please also see “Risks Related to Our Business—We are subject to investigations by the SEC, DOJ and OM, and are conducting an internal investigation. We are unable to predict the duration, scope or results of these investigations or their impact on us.”

We may not be able to detect and prevent fraud or other misconduct by our employees, representatives, agents, suppliers or other third parties.

We may be exposed to fraud or other misconduct committed by our employees, representatives, agents, suppliers or other third parties that could subject us to litigation, financial losses and sanctions imposed by governmental authorities, as well as affect our reputation. Such misconduct could include misappropriating funds, conducting transactions that are outside of authorized limits, engaging in misrepresentation or fraudulent, deceptive or otherwise improper activities, including in return for any type of benefits or gains or otherwise not complying with applicable laws or our internal policies and procedures.

We regularly review and update our policies and procedures and internal controls which are designed, inter alia, to provide reasonable assurance that we, our employees, representatives, agents, suppliers and other third parties comply with applicable law and our internal policies. Further, we conduct, as appropriate, assessments of, and due diligence on, our employees, representatives, agents, suppliers and other third parties. However, there

 

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can be no assurance that such policies, procedures, internal controls and diligence will work effectively at all times or protect us against liability for actions of our employees, representatives, agents, suppliers or other third parties.

New or proposed changes to laws in the markets in which we operate may harm our business.

We are subject to a variety of national and local laws and regulations in the countries in which we do business. These laws and regulations apply to many aspects of our business. Violations of applicable laws or regulations could damage our reputation or result in regulatory or private actions with substantial penalties or damages. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations, could have an adverse impact on our business, financial condition, results of operations and prospects.

For example, in July 2014 Russia data processing laws were adopted which prohibit processing and storage of personal data on servers located outside of Russia as of September 2015. Violation of these laws by an operator may lead to a ban on the processing of personal data by such operator which in turn could lead to the inability to provide services to customers.

Following various terrorist attacks, the Government of Pakistan introduced Standard Operating Procedure (SOP) requiring all mobile operators to re-verify their entire prepaid unverified customer base through bio-metric verification. For our Pakistan operation this involves the re-verification of more than 38 million SIM cards. We may not be able to sign up any new customers during the verification process. SIM cards which cannot be verified must be blocked by the operators. Failure to comply with the SOP could result in significant fines, suspension of our license and possible criminal liability. In addition, if we incorrectly block legitimate customers we could also face claims from these customers. The SOP regarding re-verification could have an adverse impact on our business, financial condition, results of operations and prospects in Pakistan.

Following amendments to the Pakistan tax laws in mid-2014, a requirement was imposed on operators to charge, collect and pay sales tax on the provision of SIM cards and the activation of handsets. In the given competitive environment we would not be able to pass on this expense to customers. These taxes are still subject to ongoing litigation but, if implemented, could have an adverse impact on our business, financial condition, results of operations and prospects in Pakistan, which in turn could have an adverse impact on our group.

For a discussion of developments in the regulation of mobile termination rates affecting our business in Italy, and other important government regulations impacting our business, see Exhibit 99.2—Regulation of Telecommunications. For information on potential penalties for failure to identify SIM card users in Algeria, see Note 26 to our audited consolidated financial statements included elsewhere in this annual report on Form 20-F.

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

We are required to meet certain terms and conditions under our licenses (such as nationwide coverage and network build out requirements), including meeting certain conditions established by the legislation regulating the communications industry. 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 or comply with permits for the operation of our equipment, use of frequencies or additional licenses for broadcasting directly or through agreements with broadcasting companies, the applicable regulator could decide to levy fines, suspend, terminate or refuse to renew the license or permit. For example, a company in which we have an equity investment in Zimbabwe has received correspondence from local regulators regarding non-compliance with the terms of the company’s license, in particular foreign ownership restrictions, which could result in termination of the license pending further discussion with the regulators.

The occurrence of any of these events could materially harm our ability to build out our networks in accordance with our plans and to retain and attract customers, could harm our reputation and could harm our

 

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business, financial condition, results of operations or prospects. 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 Segment,” “—Description of Operations of the Italy Segment,” “—Description of Operations of the Algeria Segment,” “—Description of Operations of the Africa & Asia Segment,” “—Description of Operations of the Ukraine Segment,” and “—Description of Operations of the CIS Segment.”

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 extension fee), or may cover reduced service areas or scope of service. If our licenses for provision of telecommunications services are not renewed or are renewed on less favorable terms, our business could be materially harmed. For more information on our licenses, including their expiration dates, 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 and we may experience limited spectrum capacity for providing wireless services.

To establish and commercially launch a mobile telecommunications network, we need to receive, among other things, frequency allocations for bandwidths within the frequency spectrums in the regions in which we operate. There is 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 customer base. 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. For instance, we have in the past been unable to obtain frequency allocations necessary to test or expand our networks in Russia. If our frequencies are revoked or we are unable to renew our frequency allocations or obtain new frequencies to allow us to provide mobile services on a commercially feasible basis, our network capacity and our ability to provide mobile services would be constrained and our ability to expand would be limited, which could harm our business, financial condition, results of operations and prospects.

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, requires 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 any such increase could harm our business, financial condition, results of operations and prospects. For more information on the payment requirements relating to frequency allocation, see Exhibit 99.2—Regulation of Telecommunications.

It may not be possible for us to procure in a timely manner the permissions and registrations required for our telecommunications equipment.

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 construction permits and registration of our title to land plots underlying our base stations, 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

 

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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, including by switching off base stations that do not have all necessary permits until such permits are obtained, we cannot assure you that our licenses or permits will not be suspended and not subsequently be revoked in the future. If we are found to operate telecommunications equipment without an applicable license or permit, we could experience a significant disruption in our service or network operation and this would harm our business, financial condition, results of operations and prospects.

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. For more information on these disputes, see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. An adverse outcome in, or any settlement of, these or other proceedings (including any that may be asserted in the future) may harm our business, financial condition, results of operations and prospects.

We could be subject to tax claims that could harm 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, Egypt, Pakistan, Bangladesh, Ukraine, Kazakhstan, Armenia, Georgia, 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 Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

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 on the basis of 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 harm our business, financial condition and results of operations.

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

The tax systems in the markets in which we operate may be unpredictable and give rise to significant uncertainties, which could complicate our tax planning and business decisions, especially in emerging markets in which we operate, where there is significant uncertainty relating to the interpretation and enforcement of tax laws. Any additional tax liability imposed on us by tax authorities in this manner, 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 could harm 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

 

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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.

Introduction of the new tax laws or the amendment of existing tax laws, such as laws relating to transfer pricing rules or the deduction of interest expenses in the markets in which we operate may increase the risk of adjustments being made by the tax authorities and, as a result, could have a material impact on our business, financial performance and results of operations.

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

Tax declarations together with related documentation are subject to review and investigation by a number of authorities, which are empowered to impose fines and penalties on taxpayers.

In Russia, for example, tax returns 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. Laws enacted in Russia in recent years increase the likelihood that our tax returns that were reviewed by tax authorities could be subject to further review or audit during or beyond the eligible three-year limitation period by a superior tax authority.

Tax audits may result in additional costs to our group if the relevant tax authorities conclude that entities of the group did not satisfy their tax obligations in any given year. Such audits may also impose additional burdens on our group by diverting the attention of management resources. The outcome of these audits could harm our business, financial condition, results of operations and prospects. Under such review the relevant tax authorities may conclude that we had significantly underpaid taxes relating to earlier periods, which could harm our business, financial condition, results of operations and prospects.

In addition, in recent years, the Russian tax authorities have aggressively brought tax evasion claims relating to Russian companies’ use of tax-optimization schemes, and press reports have speculated that these enforcement actions have been selective and politically motivated.

CFC legislation in Italy and Russia could result in additional tax costs.

Italian legislation provides for taxation of foreign companies located in certain countries and territories with a privileged tax regime that are directly or indirectly controlled by Italian resident individuals, companies and entities. Foreign controlled companies which are resident outside the above mentioned countries may, also, be subject to taxation if generating passive income (e.g. interest, dividends, royalties, capital gains, etc.) and if their corporate tax in the country of establishment is lower than half of applicable tax in Italy. WIND Italy continues to analyze the possible application developments and interpretations of this legislation.

In 2014, new CFC (controlled foreign companies) tax legislation was introduced in Russia. According to the new legislation, affiliated foreign companies of OJSC VimpelCom may now be a subject to taxation in Russia, which could result in additional cost for the group. Moreover, during 2014 Russia ratified the Convention on Mutual Administrative Assistance in Tax Matters with the purpose of enacting wider cooperation with tax authorities in foreign tax jurisdictions.

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, Italian tax law permits the deduction of some interest expense up to a specified limit. A further deduction of interest expense is permitted up to an additional threshold, some of which may be carried forward to future years. Based on these rules, our subsidiary, WIND Italy, currently is not able to

 

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deduct all of its interest expenses, though it is able to carry forward accrued and unused deductions to future fiscal years. 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 may have an adverse impact on the deductibility of interest expenses for WIND Italy which, in turn, could harm VimpelCom’s and WIND Italy’s financial condition and results of operations.

We operate in uncertain judicial and regulatory environments.

In many of the emerging market countries where we operate, the application of the laws of any particular country is frequently unclear and may result in unpredictable judicial or regulatory outcomes.

The uncertain judicial and regulatory environments in which we operate could result in:

 

   

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 new or existing 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.

Laws restricting foreign investment could materially harm our business.

We could be materially harmed 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 Russia or other markets in which we operate.

For example, Russian legislation, named “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. 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 Government Commission on Control of Foreign Investments in the Russian Federation, or the “FAS”, has 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. In the event of any future transactions resulting 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.

Additionally, under Russian law, companies controlled by foreign governments are prohibited from acquiring control over strategic enterprises and the FAS has challenged acquisitions of our shares in the past. As a result, our ability to obtain financing from foreign investors may be limited, should prior approval be refused, delayed or require foreign investors to comply with certain conditions imposed by FAS, which could materially harm our business, financial condition, results of operations and prospects.

 

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Risks Related to Our Markets

The international economic environment could cause our business to decline.

After late 2008, the economies in our markets were adversely affected by the international economic crisis, and economies in markets in which we operate continue to suffer. Among other things, the crisis led to a slowdown in gross domestic product growth, increase of inflation, devaluations of the currencies in Russia and other markets in which we operate and a decrease in commodity prices. The timing of a return to sustained economic growth and consistently positive economic trends is difficult to predict. The recessionary effects, debt crisis and Euro crisis in Europe continue to pose potentially significant macroeconomic risks to our group. In addition, because Russia, Kazakhstan and Algeria, currently three of our larger markets, produce and export large amounts of oil, their economies are particularly vulnerable to fluctuations in the price of oil on the world market. Since June 2014, global oil prices have been falling and are currently at very low levels for recent times. Moreover, economic sanctions imposed in 2014 and 2015 are impacting Russia. Low oil prices, together with the impact of economic sanctions and the significant devaluation of the ruble, are negatively impacting the Russian economic outlook. The current difficult economic environment and any future downturns in the economies of markets in which we operate or may operate in the future could diminish demand for our services, increase our costs, constrain our ability to retain existing customers 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, to take advantage of future opportunities to respond to competitive pressures, to refinance existing indebtedness or to meet unexpected financial requirements, which could harm our business, financial condition, results of operations and prospects.

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 write down the value of the goodwill. In addition, the different possible developments as a result of a financial and economic crisis, in particular related to customer behavior, competition reaction in this environment in terms of offers and pricing or in response to new entrants, regulatory adjustments in relation to reductions in consumer prices and our ability to adjust costs and investments in keeping with possible changes in revenue may adversely affect our forecasts and lead to a write-down in tangible and intangible assets.

A write-down in tangible and intangible assets could impact covenants under our debt agreements and could harm our business, financial condition, results of operations and prospects. For further information on the impairment of tangible and intangible assets and recoverable amounts (particularly key assumptions and sensitivity), see Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Our operations may be adversely affected by ongoing developments in Ukraine.

The current situation in Ukraine along with the response to this situation by the governments of Russia, the United States, member states of the European Union, the European Union itself and other nations, have the potential to materially adversely affect our business in Russia and Ukraine, markets in which we have significant operations, which in turn could have a materially adverse effect on our business, financial condition, results of operations and prospects.

In connection with the current situation in Ukraine, the United States, the European Union and a number of countries have imposed (i) sanctions that block the property of certain designated Russian, Crimean and Ukrainian businesses, organizations and individual persons, (ii) sectoral sanctions that prohibit certain types of transactions with specifically designated businesses operating in certain sectors of the Russian economy, currently financial services, energy, and defense, and (iii) territorial sanctions restricting investment in and trade with Crimea. In addition, the U.S. and EU have implemented certain export control restrictions related to

 

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Russia’s energy sector and military capabilities. Russia has responded with certain countermeasures, currently including limiting the import of certain goods from the United States and other countries, and imposing visa bans on certain persons, and can restrict the ability of Russian companies to comply with sanctions imposed by other nations.

Recent concerns related to Ukraine have prompted calls for increasing levels of sanctions, export controls and other measures impacting Russia. Further sanctions, export controls and/or other measures, including sanctions on additional persons or businesses (including vendors, joint venture and business partners, affiliates and financial institutions) imposed by the United States, the European Union, and/or other countries, could materially adversely affect our business, financial condition, results of operations and prospects.

The status of the Crimea and the situation in Eastern Ukraine has resulted, and may in the future result, in damage or loss of assets, disruption of our services, and regulatory issues, the resolution of which may adversely impact our group. In addition, if there were an extended continuation or an increase in conflict in Ukraine or in the region, it could result in further instability and/or worsening of the overall political and economic situation in Ukraine, Russia, Europe or in the global capital markets generally, which could impact our group. Moreover, the instability in the region, economic sanctions and related measures, and other geopolitical developments could materially harm market conditions, our business, financial condition, results of operations and prospects. In particular, we could be materially adversely impacted by a continued decline of the ruble against the U.S. Dollar or the Euro exchange rates and the general economic performance of Russia.

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. Political and economic relations among the countries in which we operate (including Russia and Ukraine) are often complex and have resulted, and may in the future result, in conflicts, which may materially harm our business, financial condition and results of operation. In addition, emerging economies are subject to rapid change and the information set out in this Annual Report on Form 20-F 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 harm the purchasing power of our customers and, consequently, our business.

Many of the emerging markets in which we operate are susceptible to significant social unrest or military conflicts. In some of the countries in which we operate, the local authorities may order our subsidiaries to temporarily shut down their entire network or part or all of our networks may be shut down due to actions relating to military conflicts or nationwide strikes. For example, in 2014, our subsidiary in Pakistan was ordered to shut down parts of its mobile network and services on a regular basis. Also, our subsidiary in Bangladesh was forced to shut down its network on a number of occasions due to nationwide strikes. In addition, following actions arising from the situation in Ukraine, our subsidiary in Ukraine shut down its network in Crimea in 2014 as well as a portion of its network in Eastern Ukraine temporarily in 2015. In addition, local governments or other factions could make inappropriate use of our network and force us to broadcast propaganda or illegal instructions to our customers. Forced shutdowns or inappropriate use of our network in the countries where we have operations could materially harm our business, reputation, financial condition, results of operations and prospects.

 

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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 harm our business.

The countries in which we operate have experienced periods of high levels of inflation, including certain cases of hyperinflation.

Our profit margins could be harmed if we are unable to sufficiently increase our prices to offset any significant future increase in the inflation rate, which may be difficult with our mass market customers and our price sensitive customer base. Inflationary pressure in the countries where we have operations could materially harm our business, financial condition, results of operations and prospects.

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 nationalization, expropriation or other seizure of certain 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.

The physical infrastructure in many countries in which we operate is in poor condition and further deterioration in the physical infrastructure could harm 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 Ukraine, the physical infrastructure has been damaged by military conflict. 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 customers 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 customers, 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 harm our business.

The banking systems in many countries in which we operate remain underdeveloped, there are a limited number of creditworthy banks in these countries with which our company can conduct business and currency control requirements restrict activities in certain markets in which we have operations.

The banking and other financial systems in 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

 

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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 harm our business, financial condition and results of operations.

In addition, central banks and governments in the markets in which we operate may restrict or prevent international transfers or impose (foreign) currency restrictions which could prevent us from making payments, including the repatriation of dividends. This could harm the business condition of our local operations.

Risks Related to the Ownership of our ADSs

The possible sale of additional shares could adversely affect the market price of our ADSs.

There are currently 305,000,000 VimpelCom convertible preferred shares outstanding which may be converted into VimpelCom common shares at the option of the shareholder (presently Telenor) any time between October 15, 2013 and April 15, 2016 at a price based on the NASDAQ price of VimpelCom ADSs. If convertible preferred shares are converted into common shares they will also become available for trading in the public market, subject to certain limitations under U.S. securities laws. The sale of any of the VimpelCom shares on the public markets or the perception that such sales may occur, commonly called “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. In 2014, the VimpelCom supervisory board approved a new dividend policy that reduced the annual dividend target to US$0.035 per share. Various factors may cause the supervisory board to determine not to pay dividends or not to increase dividends from current levels. Such factors include VimpelCom’s financial condition, its earnings and cash flows, its leverage, its capital requirements, contractual restrictions, legal proceedings and such other factors as VimpelCom’s supervisory board may consider relevant. For more information on our policy regarding dividends, see “Item 8—Financial Information—Policy on Dividend Distributions.” See also “Risks Related to Our Business—As a holding company, VimpelCom depends on the performance of its subsidiaries” and “—Our strategic partnerships and relationships carry inherent business risks.”

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

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.

 

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

Our ADSs are listed on the NASDAQ Global Select Market; however, as a Bermuda company, we are permitted to follow “home country practice” in lieu of certain corporate governance provisions under the NASDAQ listing rules that are applicable to a U.S. company. The primary difference between our corporate governance practices and the NASDAQ rules relates to NASDAQ listing rule 5605(b)(1), which provides that each U.S. company listed on NASDAQ must have a majority of independent directors, as defined in the NASDAQ rules. Bermuda corporate law does not require that we have a majority of independent directors. As a foreign private issuer, we are exempt from complying from this NASDAQ requirement, and we do not have a majority of independent directors, as defined in the NASDAQ rules. Accordingly, you will not have the same protections as are afforded to shareholders of companies that are subject to all of the NASDAQ corporate governance requirements. For more information on the significant differences between our corporate governance practices and those followed by U.S. companies under the NASDAQ listing rules, 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 a leading global provider of telecommunications services in 14 countries and is headquartered in Amsterdam. The company provides voice and data services through a range of traditional and broadband mobile and fixed-line technologies. The VimpelCom Group operates in Italy and emerging markets, which include companies operating in Russia, Ukraine, Kazakhstan, Uzbekistan, Tajikistan, Armenia, Georgia, Kyrgyzstan, Laos, Algeria, Bangladesh, and Pakistan. The operations of these companies cover a territory with a total population of approximately 740 million as of December 31, 2014. We provide services under the “Beeline,” “Kyivstar,” “banglalink,” “Mobilink,” “Djezzy,” “WIND” and “Infostrada” brands. As of December 31, 2014, we had 222 million mobile customers and 56,024 employees. For a breakdown of total revenue by category of activity and geographic segments for each of the last three financial years, see “Item 5—Operating and Financial Review and Prospects.

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

Our predecessor OJSC VimpelCom was founded in 1992. Since then, VimpelCom has a rich history of adapting to shifts in the marketplace. Prior to 2014, VimpelCom focused on development and expansion throughout Russia and the CIS, then into Asia, Europe and Africa through a combination of organic growth and acquisitions. More recently, VimpelCom has turned its focus to enhancing its operations in its core markets and investing in high-speed networks.

The most significant events in the development of our business include the following:

 

   

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

 

   

Telenor, Norway’s leading telecommunications company became a strategic partner in OJSC VimpelCom in December 1998 and the Alfa Group Consortium (“Alfa Group”) acquired strategic ownership interests in 2001.

 

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VimpelCom began its expansion into the CIS by acquiring local operators or entering into joint ventures with local partners in Kazakhstan (2004), Ukraine (2005), Tajikistan (2005), Uzbekistan (2006), Georgia and Armenia (2006).

 

   

In 2009 and 2010, Telenor ASA, the parent company of the Telenor Group, and Altimo Holdings & Investments Ltd. (“Altimo Holdings”), which is now held by LetterOne, combined their ownership of OJSC VimpelCom and Ukrainian mobile operator Kyivstar under a new company called VimpelCom Ltd. (a combination we refer to as the “VimpelCom Ltd. Transaction” in this Annual Report on Form 20-F). The new headquarters were established in Amsterdam.

 

   

In 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 a number of countries including Italy, Algeria, Bangladesh and Pakistan.

 

   

On September 10, 2013, VimpelCom switched the listing of its ADSs to the NASDAQ Global Stock Market from the NYSE. On October 29, 2013, VimpelCom achieved another major milestone with its inclusion in the NASDAQ-100® Index.

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 non-current 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—Factors Affecting Comparability of Prior Periods” and “—Liquidity and Capital Resources—Investing Activities” and “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Future Liquidity and Capital Requirements.”

Leadership

In 2014 and the beginning of 2015, VimpelCom made a number of strategic management appointments to lead the company in its next phase of development. New appointments included:

 

   

Jean-Yves Charlier as Group Chief Executive Officer effective April 13, 2015;

 

   

Scott Dresser as Group General Counsel;

 

   

Yogesh Malik as Group Chief Technology Officer;

 

   

Jeremy Roffe-Vidal as Group Chief Human Resources Officer;

 

   

Rozzyn Boy as Chief Communications Officer;

 

   

Jeffrey Hedberg as CEO of Mobilink in Pakistan;

 

   

Peter Chernyshov as CEO of Kyivstar in Ukraine;

 

   

Vincenzo Nesci as Head of Africa & Asia and CEO of Global Telecom Holdings; and

 

   

Andrey Patoka as Head of CIS.

In addition, Enrique Aznar, our Group Chief Compliance Officer, was appointed to our management board in 2014.

For more information on our directors and senior management, see “Item 6—Directors, Senior Management and Employees—A. Directors and Senior Management” below.

 

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Organizational Structure

VimpelCom Ltd. is the holding company for a number of operating subsidiaries and holding companies in various jurisdictions. Our reporting structure in 2014 is divided into the five following business units, all of which report to our headquarters in Amsterdam:

 

   

Russia;

 

   

Italy;

 

   

Africa & Asia;

 

   

Ukraine; and

 

   

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

Notwithstanding the foregoing, in accordance with accounting rules, we disclose six reportable segments, based on economic environments and stages of development in different geographical areas, requiring different investment and marketing strategies. Accordingly, our reportable segments consist of the six following segments:

 

   

Russia;

 

   

Italy;

 

   

Algeria;

 

   

Africa & Asia;

 

   

Ukraine; and

 

   

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

 

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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 March 1, 2015. Except as otherwise indicated, 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 B.V.

   Netherlands      100

VimpelCom Holdings B.V.

   Netherlands      100 %(1) 

Wind Telecom S.p.A.

   Italy      100 %(2) 

WIND Acquisition Holdings Finance S.p.A.

   Italy      100 %(3) 

WIND Telecomunicazioni S.p.A.

   Italy      100 %(4) 

WIND Retail S.r.l.

   Italy      100 %(5) 

OJSC VimpelCom

   Russia      100 %(6) 

“Kyivstar” PJSC

   Ukraine      100 %(7) 

Limnotex Developments Limited

   Cyprus      71.5 %(8) 

LLP “KaR-Tel”

   Kazakhstan      71.5 %(9) 

LLP “2 Day Telecom”

   Kazakhstan      59 %(10) 

LLP “TNS-Plus”

   Kazakhstan      49 %(11) 

LLC “Tacom”

   Tajikistan      98.0 %(12) 

LLC “Golden Telecom”

   Ukraine      100 %(13) 

LLC “Unitel”

   Uzbekistan      100 %(14) 

LLC “Mobitel”

   Georgia      80.0 %(15) 

CJSC “ArmenTel”

   Armenia      100 %(16) 

LLC “Sky Mobile”

   Kyrgyzstan      71.5 %(17) 

VimpelCom Lao Co. Ltd.

   Lao PDR      78.0 %(18) 

Weather Capital S.à r.l.

   Luxembourg      100 %(19) 

Weather Capital Special Purpose 1 S.A.

   Luxembourg      100 %(20) 

Global Telecom Holding S.A.E.

   Egypt      51.9 %(21) 

Omnium Telecom Algeria S.p.A.

   Algeria      23.7 %(22) 

Pakistan Mobile Communications Limited

   Pakistan      51.9 %(23) 

Banglalink Digital Communications Limited

   Bangladesh      51.9 %(24) 

 

(1) VimpelCom Amsterdam B.V. holds 100% directly.
(2) 100% of the share capital of Wind Telecom S.p.A. is owned by VimpelCom Amsterdam B.V.
(3) 100% of the share capital of WIND Acquisition Holdings Finance S.p.A. is owned by Wind Telecom S.p.A.
(4) WIND Acquisition Holdings Finance S.p.A. owns 100% direclty.
(5) WIND Telecomunicazioni S.p.A. owns 100% directly.
(6) VimpelCom Holdings B.V. holds 100% minus one share directly. VimpelCom Ltd. holds one share directly.
(7) VimpelCom Ltd. holds 99.9961% of the outstanding shares in Kyivstar, through its direct ownership of 0.0039% and indirect ownership of 73.8038%. Kyivstar holds 26.1922% of its own shares.
(8) OJSC VimpelCom holds 71.5% indirectly through a wholly owned holding company.
(9) Limnotex Developments Limited holds 100% directly.
(10) OJSC VimpelCom holds 59% indirectly through a number of subsidiaries.
(11) VimpelCom Holdings B.V. holds 49% indirectly through wholly owned Dutch and Kazakh holding companies.
(12) VimpelCom Holdings B.V. holds 98.0% indirectly through a wholly owned BVI holding company.
(13) Kyivstar holds 100% directly.
(14) OJSC VimpelCom holds 100% indirectly through wholly owned Dutch and BVI holding companies.
(15) VimpelCom Holdings B.V. holds 80.0% indirectly through a number of wholly owned subsidiaries.
(16) OJSC VimpelCom owns 100% directly.
(17) Limnotex Developments Limited holds 100% through its wholly owned Cypriot subsidiary.
(18) OJSC VimpelCom holds 78.0% indirectly through two wholly owned Dutch holding companies.
(19) Wind Telecom S.p.A. owns 100% directly.
(20) Weather Capital S.à r.l. owns 100% directly.

 

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(21) 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.
(22) Global Telecom Holding S.A.E. holds 45.6% directly and indirectly through two wholly owned Maltese subsidiaries. See “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends —Algeria Transaction and Settlement.”
(23) Global Telecom Holding S.A.E. holds 100% indirectly through two wholly owned Maltese subsidiaries.
(24) Global Telecom Holding S.A.E. holds 99.9% indirectly through a Maltese subsidiary.

Description of Our Business

Our Mobile Telecommunications Business

The table below presents the mobile telecommunications services we offer to our customers and a breakdown of pre-paid and post-paid subscriptions as of December 31, 2014.

 

Mobile Service Description    Russia   Italy   Algeria   Africa &
Asia
  Ukraine   CIS

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

   Pre-Paid
92%

 

Post-Paid
8%

  Pre-Paid
93%

 

Post-Paid
7%

  Pre-Paid
94.7%

 

Post-Paid
5.3%

  Pre-Paid
96.3%

 

Post-Paid
3.7%

  Pre-Paid
90.9%

 

Post-Paid
9.1%

  Pre-Paid
98%

 

Post-Paid
2%

Value added and call completion services (1)

   Yes   Yes   Yes   Yes   Yes   Yes

National and international roaming services (2)

   Yes   Yes   Yes   Yes   Yes   Yes

Wireless Internet access

   Yes   Yes   Yes   Yes   Yes   Yes

Mobile financial services

   Yes   Yes   No   Yes   Yes   No

Mobile bundles

   Yes   Yes   Yes   Yes   Yes   Yes

 

(1) Value added services include messaging services, content/infotainment services, data access services, financial value added services, location based services, media, and content delivery channels.
(2) Access to both national and international roaming services allows our customers and customers of other mobile operators to receive and make international, local and long distance calls while outside of their home network.

Our Fixed-line Telecommunications and Our Fixed-line Internet Business

We offer voice, data and Internet services to corporations, operators and consumers using a 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-line/mobile integrated business structure in Russia, Ukraine and the CIS, fixed-line telecommunications use inter-city fiber optic and satellite-based networks.

In Italy, our fixed-line business uses an integrated network infrastructure with 21,744 kilometers of fiber optic cable backbone and 1,458 LLU sites for direct customer connections.

 

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In Africa & Asia, our fixed-line business is limited to our operations in Pakistan. Our fixed-line business in Pakistan includes internet, data and value added services over a wide range of access media, covering major cities of Pakistan.

 

Fixed-Line Service Description    Russia    Italy    Algeria    Africa &
Asia
   Ukraine    CIS
Business and Corporate Services, providing a wide range of telecommunications and information technology and data center services to companies and high-end residential buildings    Yes    Yes    No    Yes    No    Yes
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:    Yes    Yes    No    Yes    No    No

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

                 

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

                 
Consumer Internet Services, which provide fixed-line telephony, Internet access and home phone services (on a VoIP and copper wire basis)    Yes    Yes    No    Yes    Yes    Yes
Consumer Voice Offerings    Yes    Yes    No    No    Yes    Yes
Corporate Voice Offerings, which provide fixed-line voice services, data services, value added services and connectivity services to corporate customers, including large corporate customers, SMEs and SOHOs    Yes    Yes    No    Yes    Yes    Yes
Internet and Data Services, which provide Internet and data transmission services to both consumer and corporate customers    Yes    Yes    No    Yes    Yes    Yes

For a description of our operations in each of our six reportable segments, see the sections entitled “—Description of Operations of the Russia Segment,” “—Description of Operations of the Italy Segment,” “—Description of Operations of the Algeria Segment,” “—Description of Operations of the Africa & Asia Segment,” “—Description of Operations of the Ukraine Segment” and “—Description of Operations of the CIS Segment.”

Strategy

VimpelCom’s strategy focuses on customer excellence, capital efficiency, operating excellence and profitable growth. Our businesses combine mature, strong cash-generating companies with emerging growth opportunities in a number of regions. We combine strong positions in mobile businesses with a selective presence in fixed-line, which we expect will further support our growth strategy as mobile services continue to expand across our markets.

We seek to capture profitable growth especially in mobile data, but also in fixed-line data and mobile voice, by tailoring our strategy in each individual market according to its local characteristics.

 

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We believe that customers will increasingly rely on mobile broadband as the primary means of accessing the Internet and other data services and, in the medium term, the principal technology for such access will be 4G/LTE in Russia and Italy, and 3G in other markets in which we operate. As such, our strategy is primarily mobile-based and we seek to prioritize resources and investment allocation to mobile broadband capacity and coverage. In particular, our focus will be on capturing growth in mobile data services by moving away from unlimited plans to tiered pricing, rationally managing traffic and differentiating our services through more sophisticated offerings.

This broader view of the business provides the basis for our strategy, which is based on local empowerment and starts with the company’s 222 million mobile customers and 56,024 employees as of December 31, 2014. Our focus remains on delivering excellence to our customers. We have created a passionate, performance oriented culture with a key focus on operations and execution at the business unit level. At the Group level, we remain a lean organization focused on value creation through performance management, portfolio management, financial structure optimization, and shared services, such as roaming and procurement.

Our strategy has the following main pillars supported by clear operational strategies executed within each of our business units.

 

   

Customer Excellence. We are committed to creating a superior customer experience, optimizing distribution and developing superior pricing capabilities, while continuously modernizing our networks. We undertake a systematic effort involving dedicated analytics and research to continuously optimize the customer experience and drive superior pricing through integrated mobile bundles that combine traditional voice with SMS and, most importantly, data. This will provide value to the customer while at the same time protecting our revenue stream from cannibalization among various services, such as SMS and instant messaging (“IM”). In order to optimize our distribution, we focus on the most efficient channels in each market. We expect these actions to reduce churn and limit our retention and commercial costs. We see improvements in our customer loyalty as measured by the Net Promoter Score (NPS).

 

   

Profitable Growth. We aim to drive revenue growth that leads to higher profitability by focusing on gaining share in mobile data revenue and capitalizing on areas such as mobile financial services and partnerships with over-the-top players, while limiting cost of traffic. We seek to increase mobile data revenue by driving smartphone and tablet penetration through strong local distribution. We will also continue to introduce value-based commissioning, promoting tiered pricing for speed and time of data, partnering with Internet players and improving network quality. We believe effective deployment of integrated bundles will allow us to monetize the strong growth in mobile data.

 

   

Operational Excellence. Operational excellence and cost management represents a group-wide strategy, and we seek to implement this strategy at all levels of the organization with a continuous improvement culture across our businesses.

 

   

Capital Efficiency. Our goal is to ultimately reduce the ratio of our capital expenditure to revenue over time by deploying capital more efficiently through increased network sharing, continued business portfolio optimization and capital structure optimization. An important element of this strategy is network outsourcing and sharing in order to improve network utilization and quality. We also have a centrally led procurement model that provides advantages both at the group and local level. Further, we have implemented a systematic approach to optimizing our capital structure.

Our business broadly comprises three types of businesses grouped according to their stages of development:

 

   

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

 

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emerging markets footprint and in our more mature market in Italy to capture this growth. In most of these emerging markets, we have and will continue to deploy capital in the networks to capture the growth potential from increased penetration and mobile data growth.

 

   

In Italy, a large and mature market, we are focused on sustaining strong cash flow generation. We are also focused on deleveraging the business. The market is highly penetrated, but has potential for broadband growth in mobile. Here, we will remain focused on reinforcing our solid market position and continue to invest in our mobile data network. The Italian business is strong and fully self-financing, with debt being non-recourse to the rest of the VimpelCom Group.

 

   

Finally, as for our remaining asset portfolio, in 2014 we continued to focus on optimizing and we sold our interest in Telecel Globe Limited, which owned 100% of each of U-COM in Burundi and Telecel CAR in Central African Republic.

Within our group’s priorities, we pursue the following specific objectives:

 

   

Drive value in the mature voice business in our core markets.

 

   

We recognize that in our industry prices of the traditional products and services that we provide are generally falling over time, despite price elasticity being significantly below one. In contrast, the costs of delivering these products and services experience significant inflationary pressure. To address this imbalance, we continuously focus on cost efficiency, especially on optimizing business support costs. We also strive to design our go-to-market actions thoughtfully, with the dual ambition of ensuring that we remain a highly attractive choice for consumers at all times, while at the same time promoting responsible industry conduct.

 

   

We also see that the telecommunications market is highly heterogeneous, consisting of a significant number of sub-segments with partially unique needs. Therefore, we selectively seek to capture opportunities in the B2C (consumer) and B2B (business) sub-segments, especially in those areas where we can leverage the fact that we have both fixed-line and mobile assets, or where our international footprint can be a source of competitive advantage.

 

   

We believe that the shift away from the traditional mobile voice- and SMS-centric world and towards a data-centric world is fundamental. We therefore carefully scrutinize any investment in legacy infrastructure that does not also support our data business, while ensuring that we remain able to deliver a set of core traditional telephone services that fully meet customer expectations.

 

   

Emerge as leader from the transition to a mobile data-centric world.

 

   

We believe that the move towards a data-centric world is the single biggest industry change that our core mobile business has experienced so far. We also see that a key success factor over the coming few years for any telecommunications operator with a significant mobile business will be to manage pricing of mobile data well and to be able to monetize the growth in mobile data traffic. We therefore spend considerable time and effort to ensure that we offer a proactive and customer-centric transition from legacy voice pricing to data-centric pricing with bundled tariff plans, with the ambition to retain and ultimately grow ARPU.

 

   

We see that mobile data offerings are already becoming a significant operator decision parameter for certain customer segments, and we expect this trend to broaden further. To ensure that we are the natural consumer choice in the data-centric world, we aim to provide the best “value-for-money” data product portfolio while staying highly price-competitive at all times.

 

   

We recognize that a mobile data network is more complex to manage than a voice network and that the optimization potential in a data network is significant. We therefore pursue cost efficiency in technology investments, including traffic management and offloading of traffic as well as content compression.

 

   

At the same time, we will invest in digital distribution and services anticipating increased demand for such services as mobile financial services or smart home.

 

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Efficiently invest and grow high quality networks to support increasing demand for mobile data.

 

   

In 2014, we spent $3.9 billion, or 20% of revenue, on investments in our infrastructure across all our regions resulting in an improved market position in mobile data. Our strategy is focused on continued investments in 3G and 4G/LTE to capture growth in mobile data traffic. We plan to continue to invest in all our high-speed data networks in 2015.

 

   

We entered into an agreement with MTS for joint planning, development and operation of 4G/LTE networks in 36 regions of Russia. Under the terms of the agreement, between 2014 and 2016 MTS will build and operate 4G/LTE base stations in 19 regions and VimpelCom will build and operate 4G/LTE base stations in 17 regions of Russia. Within the first seven years of the project, VimpelCom Russia and MTS plan to share base stations, platforms, infrastructure and resources of the transportation network, with each operator maintaining its own core network.

Competitive Strengths

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

 

   

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, Laos and Kyrgyzstan. 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” brand. In Italy, our “WIND” brand is well established and enjoys high recognition. We also have powerful brands for our operations in Africa & Asia, including “Djezzy,” “banglalink” and “Mobilink”. Our brands are generally very well known in the local markets and enjoy “top of mind” brand awareness.

 

   

Product and service innovation. In our mobile business, we continue to seek out new products and services to provide our customers with faster access and easier usage to be competitive in the markets in which we operate. We continue to develop services for our prepaid consumer segment.

 

   

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 mobile bundles for voice, messaging and data services.

 

   

Mobile data services. Mobile data services are driving market growth, and we are focusing our efforts at winning this segment. We are actively developing data services in all markets as part of our prepaid and postpaid tariff proposals. We focus our efforts on small and medium screens.

 

   

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

 

   

Broad distribution network. We have large distribution networks for mobile and fixed-line services in markets of our operations. 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 a 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.

 

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Description of Operations of the Russia Segment

Mobile Business in Russia

Description of Mobile Services in Russia

In Russia, we primarily offer mobile telecommunications services to our customers under two types of payment plans: postpaid plans and prepaid plans. As of December 31, 2014, approximately 8% of our customers in Russia were on postpaid plans and approximately 92% of our customers in Russia were on prepaid plans.

The tables below present the mobile telecommunications services we offer in Russia.

 

Mobile Voice Services

  

Description

Voice Services(1)

  

Includes airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a predefined number of voice traffic and roaming fees for airtime charges when customers travel abroad.

Included in voice services is our “Possibilities with zero”, which allows our prepaid customers to stay connected even in the event that they have a zero account balance. This service includes “Receiving Party Pays,” “Call Me Back” and “Fill Up My Balance,” and allows us to increase voice traffic and revenue without causing average price per minute to decrease. In 2014, we have optimized our portfolio of voice tariff options and simplified roaming pricing.

Roaming(2)

  

As of December 31, 2014, our operations in Russia had active roaming agreements with 577 GSM networks in 213 countries, respectively, in Europe, Asia, North America, South America, Australia and Africa. Additionally, we provided GPRS roaming with 456 networks, in 177 countries.

 

OJSC VimpelCom offers customized application for mobile network enhanced logic (“CAMEL”), an intranetwork prepaid roaming service, which allows prepaid customers 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 non-paying customers caused by roaming. As of December 31, 2014, we provided our Russian customers CAMEL roaming through 259 operators in 128 countries.

 

(1) For a description of MTR and MNP regulations, please refer to the section of this Annual Report on Form 20-F entitled “Exhibit 99.2 Regulation of Telecommunications.”
(2) Roaming agreements generally state that the host operator bills VimpelCom which VimpelCom pays, and then VimpelCom subsequently bills customers the roaming services on the customer’s monthly bill.

 

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Mobile Value Added Services

  

Description

Basic Value Added Services Package)

  

Caller-ID

 

Voicemail

 

Call forwarding

 

Conference calling

 

Call blocking

 

Call waiting

Messaging Services

  

SMS

 

MMS

 

Voice messaging

 

Content/infotainment services

  

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

 

Voice services (including referral services)

 

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

 

Customized ringtones (RBT)

 

Wireless Internet Access

  

Description

Access

  

Access is offered through GPRS/EDGE, 3G/HSPA and 4G/LTE.

 

3G Internet services were commercially launched in September 2008 in Russia, and were available in every region of Russia as of December 31, 2013. We launched 4G/LTE in Moscow in May 2013 and have accelerated roll out to 46 regions as of December 31, 2014.

 

Access offered through USB modems in every region of Russia. We offer special wireless Plug&Play-USB modems, which provide our customers with a convenient tool for Internet access.

Mobile Data Plans

   Tiered data-plans provide smartphone customers with data, voice and SMS packages. In 2014 we launched a new simplified tariff portfolio with competitive prices in combination with transparent services. In addition, we launched Shared Data Service in 2014, offering the option of multiple SIM cards for one account, making it convenient for customers to manage their data account across multiple devices.

Media and Content Delivery Channels

  

RBT, Chameleon (service based on Cell Broadcast technology providing free information content such as news, weather and sports)

 

Dating services and location-based services (such as the ability to locate customers or nearby facilities)

Information and content services (such as weather forecasts or horoscopes)

 

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Wireless Internet Access

  

Description

  

Mobile television and video streaming

 

Google Play Carrier Billing (offering certain Google products and payment through a customer’s mobile account)

 

Unstructured supplementary services data menu (a self-help and entertainment portal)

 

Dynamic SIM Toolkit (DSTK) portal (a self-help and entertainment portal)

 

Interactive Voice Response (IVR) portal (information and content services portal)

 

SMS services, Bee Number requests (information and content services provider)

 

Mobile portal (browsing, entertainment and information services provider)

 

SMS, voice and USSD technology through which third party content is provided.

Other Data Services

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. The following examples describe some of the services that we provide.

 

Other Data Services

  

Description

M2M

   Machine-to-machine, or “M2M,” allows both wireless and wired systems to communicate with other devices of the same technology and includes technologies that allow data transmission between remote equipment. M2M technologies are used in areas such as consumer electronics, banking, metering, security and others.

Mobile VPN

   We offer to our corporate clients secure remote access to corporate information, databases and corporate applications. Remote access is available from different mobile devices, including USB modems, tablets and smartphones.

Geo-positioning services

   Beeline Business provides geo-positioning and service Compass for fleet and assets management via GPS / GLONASS with special devices (trackers) or with smartphones and tablets. We will continue developing services in this direction.

Corporate SMS services

   We provide direct connection to SMS center for large companies and aggregators. We continued with the project of reducing spam SMS messages received by our customers in 2014 and made significant progress, as the average number of spam SMS per month is below one as of December 31, 2014.

Fixed Mobile Convergence

   Beeline Business offers fixed-mobile convergence services to corporate clients providing use of their mobile phone as an extension of their private branch exchange, or “PBX”. We provide these services in 76 cities.

 

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Other Data Services

  

Description

Mobile Cloud Solutions

   In November 2013, we launched an MDM project as a part of the BYOD (bring your own device) concept. We were the first operator in the Russian market who launched cloud MDM, and are currently implementing Mocana solution as BYOD concept development. We are also continuing to develop our cloud product portfolio and there are several cloud solutions (such as MSO 365, Megaplan and 1C Counting) included in our Cloud portal project, which will start in 2015.

Interconnect. We have several interconnection agreements with mobile and fixed-line operators in Russia under which we provide traffic termination services. These services represent termination of incoming voice and data traffic from networks of our competitors when their customers call or send data to our customers.

Sales of Equipment and Accessories. As of December 31, 2014 the number of owned retail mono-brand stores was 1,188 compared to 1,238 owned retail mono-brand stores as of December 31, 2013, and as of December 31, 2014 the number of owned modules was 56 compared to 85 owned modules as of December 31, 2013. As of December 31, 2014 we had 112 “Know How” stores, a format developed with ION in the form of a joint venture.

In order to promote Beeline’s retail chain and increase mobile data devices penetration, Beeline introduced a portfolio of own-branded smartphones and tablets throughout 2014. In addition, we also introduced the co-branded Alcatel 4G/LTE smartphone, sold in combination with a data bundle in June 2014.

Beeline has a direct sales contract with Apple and all new iPhones have been available in Beeline retail stores. Beeline customers with new iPhones are able to use our LTE network.

Specialized customer care. Beeline has introduced several initiatives and services to improve NPS in 2014, such as a new mobile self-service application for iOS and Android, allowing customers to manage all charged Beeline services. This service has been successful with more than 5.7 million downloads as of December 31, 2014. Other examples are filtering spam SMS messages, free anti-virus protection and the introduction of shared data services, offering the option of multiple SIM cards for one account, making it convenient for customers to manage their data account across multiple devices. Also, we introduced an initiative to increase transparency of content subscription costs and ban undesired subscription for our customers. These measures taken to reject unrequested services from content providers impacted our mobile service revenue negatively during 2014, but improved the NPS score.

Mobile Telecommunications Licenses in Russia

GSM Licenses

We hold super-regional GSM licenses (GSM 900, GSM 1800 and GSM 900-1800 standards) for the following seven out of eight super-regions in Russia: Moscow, Central and Central Black Earth, North Caucasus, North-West, Siberia, Ural and Volga. These licenses will expire between September 2017 and April 2018 and we plan to file applications for renewal of all of our licenses prior to expiration.

We do not currently hold a GSM super-regional license for the Far East super-region of Russia, but we hold GSM licenses in a number of regions of the Far East super-region. These licenses expire on various dates between 2016 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, the Orenburg region, and the Nenetskiy Autonomous Region. In total our GSM licenses cover approximately 96% of Russia’s population.

 

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3G Licenses

OJSC VimpelCom holds one of three UMTS licenses in Russia. The license expires on May 21, 2017.

4G/LTE License

In July 2012, OJSC VimpelCom was awarded a mobile license, a data transmission license, a voice transmission license and a telematic license for the provision of 4G/LTE services in Russia. These licenses allow OJSC VimpelCom to provide services using radio-electronic devices in Russia via networks that use 4G/LTE standard equipment within any of the following frequency bands: 735-742.5/776-783.5 MHz; 813.5-821/854.5-862 MHz; 2550-2560/2670-2680 MHz. Certain channels allocated to us in accordance with the licenses have restrictions on their use. To remove restrictions we have to perform certain organizational technical measures including, among others, radio frequency bands releasing spectrum conversion, refarming and reallocation between operators. The roll-out of the 4G/LTE network is using a phased approach based on a pre-defined schedule pursuant to the requirements of the license. Under the phased approach, OJSC VimpelCom launched 4G/LTE services as of June 1, 2013. OJSC VimpelCom was required to extend services to six regions in Russia by December 1, 2013 which condition was met. OJSC VimpelCom is then required to extend services to a specified number of additional regions in each year until December 1, 2019 when services must cover all of Russia. In addition, OJSC VimpelCom is required to comply with the following conditions among others under the terms of the license: (i) invest at least RUB15 billion in each calendar year in the construction of its federal 4G/LTE network until the network is completed, which must occur before December 1, 2019; (ii) provide certain data transmission services to all secondary and higher educational institutions in specified areas; and (iii) provide interconnection capability to telecommunications operators that provide mobile services using virtual networks in any five regions in Russia not later than July 25, 2016.

See also “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—Our licenses may be suspended or revoked and we may be fined or penalized for alleged violations of law, regulations or license terms” and “—Our licenses are granted for specified periods and they may not be extended or replaced upon expiration,” and “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 harm our business”

Competition—Mobile Business in Russia

In the decade prior to 2014, the Russian mobile telecommunications industry has grown rapidly due to increased demand by individuals and businesses. The high penetration in Russia is the result of customers owning multiple SIM cards and the growth of mobile data SIM cards in various devices. Mobile data traffic growth is the main driver of mobile telecommunications growth, supported by improved service quality and coverage of mobile data networks and declining tariffs and costs of handsets and accessories, which have made mobile telecommunications services more affordable to the mass market customer segment. In addition, advertising, marketing and distribution activities, which have led to increased public awareness of, and access to, the mobile telecommunications market, contributed to the growth as well.

 

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

 

Period

   Customers
(in millions)
     Penetration
Rate
    Annual
Customer
Growth(1)
 

As of December 31, 2014

     242.9         170.7     (1.8 )% 

As of December 31, 2013

     247.4         173.5     5.7

As of December 31, 2012

     234.2         163.8     2.0

 

(1) Growth rate as compared to previous year end.

Source: For customers, customer growth and penetration rates, Analysys Mason Research in 2014 and Informa Telecoms & Media in 2013 and 2012. © 2013 Informa Telecoms & Media. All rights reserved.

The Russian mobile telecommunications market is highly competitive. Analysys Mason Research estimates that the top three mobile operators, MTS, MegaFon and OJSC VimpelCom, collectively held approximately 84% of the mobile market in Russia as of December 31, 2014. As a result of competition, mobile providers are utilizing new marketing efforts, including price promotions, to retain existing customers and attract new ones. Competition for customers 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.

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 pricing plans, network coverage, quality of service, the level of customer service provided, brand identity and the range of value-added and other customer services offered.

The following table shows our and our primary mobile competitors’ respective customer numbers in Russia as of December 31, 2014:

 

Operator

   Customers in
Russia
(in millions)
 

MTS

     75.6   

MegaFon

     70.2   

VimpelCom

     57.2   

RT-Mobile

     36.4   

 

Source: Analysys Mason Research for all companies except OJSC VimpelCom.

MTS. One of our primary competitors in Russia is MTS. According to Analysys Mason Research, as of December 31, 2014, MTS had approximately 75.6 million customers in Russia, representing a market share of 31%. It has a greater share of the high value customer market and more frequency allocations than we do, which provides MTS with a potential advantage in the quality of its GSM, UMTS and HSPA services. MTS holds a 4G/LTE FDD license identical to ours, which it received in July 2012. In addition, MTS holds an 4G/LTE TDD license for the Moscow region which provides MTS with a potential advantage in quality of its 4G/LTE services in the Moscow region. MTS is leading in number of retail stores which is an important competitive advantage but requires significant expenses for rent of outlets and personnel costs.

MegaFon. In addition to MTS, our other primary competitor is MegaFon, the second largest mobile operator in Russia in terms of the number of mobile customers. In 2012, Altimo sold its entire 25.1% stake in MegaFon to a private investor. According to Analysys Mason Research, as of December 31, 2014, MegaFon had approximately 70.2 million customers, representing a market share of 29%. MegaFon holds GSM-900/1800, and UMTS licenses to operate in all regions of Russia. MegaFon holds an 4G/LTE FDD license identical to ours which it received in July 2012. In addition, MegaFon has an 4G/LTE TDD license for the Moscow region which provides MegaFon with a potential advantage in quality of its 4G/LTE services in the Moscow region.

 

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RT-Mobile. In August 2014, Rostelecom and Tele2 Russia completed their merger to form a new national mobile operator in Russia which will be operated as a joint venture, RT-Mobile. RT-Mobile is present in 64 regions of the country and owns licenses and spectrum in GSM-900/1800, and UMTS, and 4G/LTE FDD technology identical to ours, which it received in July 2012. The combined entity has around 36.4 million mobile customers as of December 31, 2014. New launches of RT-Mobile are also expected including launch in Moscow in the second half of 2015 according to Tele2 public statements. This could have a negative effect on VimpelCom, Megafon and MTS revenues and profitability as Moscow is one of the largest regional markets in Russia. However, RT-Mobile has no GSM frequencies in the region, which will hamper provision of mobile voice services.

Other Competitors in Russia. In addition to MTS, MegaFon and RT Mobile, we compete with a number of local, regional 2G telecommunications companies.

Marketing and Distribution—Mobile Business in Russia

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

 

   

key/national accounts, for which monthly revenue from mobile and fixed-line services exceeds US$20,000;

 

   

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

 

   

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

 

   

mass market customers.

Customer Loyalty Programs

We recognize the need to continuously build and increase the loyalty of our customers. In Russia, our loyalty programs are designed to retain our existing customers, thereby reducing churn, and increasing customer spending in B2C.

In 2014 we continued to develop our national loyalty program “Happy Time” to increase its value and attractiveness to all prepaid B2C customers. As of December 31, 2014, we had more than 3 million participants.

We continue to encourage our high value customers by providing them with rewards and benefits from Beeline and its partners. As of December 31, 2014, we had more than 2 million customers with Premium-status. We also launched a special financial product, Beeline card (based on MasterCard), which provides cash back for use of the card and which can be spent for our services. As of December 31, 2014, we had more than 240,000 customers using a Beeline card.

Fixed-line Business in Russia

Description of Fixed-line Services in Russia

Business Operations in Russia

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

 

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

 

Fixed-Line Services

  

Description

Local Access Services

   We provide business customers with local access services by connecting the customers’ premises to our own fiber network, which interconnects to the local public switched telephone network in major metropolitan areas in Russia.

International and Domestic Long Distance Services

  

These services are offered via our Fixed Technological Network (FTN), which covers the entire territory of Russia and also includes eight international communications transit nodes across Russia.

 

We provide International and Domestic Long Distance Services primarily through our FTN, proprietary and leased capacity between major Russian cities and through interconnection with zonal networks and incumbent networks. We also offer very small aperture terminal satellite services to customers located in remote areas.

Dedicated Internet and Data Services

  

We provide 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 (“WANs”) to link geographically dispersed computer networks.

 

We also provide private line channels that can be used for both voice and data applications.

 

We offer an IP virtual private network (“IP VPN”) service based on multiprotocol label switching (“MPLS”) which is one of the most popular data services on the corporate market. Within VPN service we also provide the ability to connect remote offices to a corporate IP VPN network via wireless GPRS/EDGE/3G networks with QoS. We are currently planning to use 4G/LTE wireless network in the near future. We also offer customers the ability to enter into service level agreements, which ensure the quality of our service.

Leased Channels

   We provide corporate clients with the ability to rent leased channels with different high speed capacities, which are dedicated lines of data transmission.

Intellectual and Value Added Services

   Our company offers an increasing range of value added services, including toll free (800) numbers, virtual PSTN number, SIP-connection, data center services, such as co-location, web hosting, audio conference, 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. and all Russian stock exchanges.

 

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Fixed-Line Services

  

Description

Fixed Corporate and Cloud Services

  

We offer to our corporate customers IPTV services, certain Microsoft Office packages (including SaaS), web-videoconferencing services (based on Cisco WebEx and TelePresence technologies) and sale, rental and technical support for telecommunications equipment. Our company is the first telecom operator in Russia authorized by Microsoft to resell cloud service MS Office 365.

 

In 2014 we launched a portal for cloud services on www.beeline.ru.

 

The portal will be extended with other cloud services of the third parties and with already existing Beeline products.

Managed Services

  

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

 

We offer and deploy managed Wi-Fi networks (indoor and outdoor) on client’s site (office, restaurant, shops etc.) based on IEEE 802.11b/g/n/ac wireless technology. We can offer VAS services such as SSID customization, first page customization, filtering, forwarding to the predefined page, advertisement allocation, statistic offering, limitation of time and data level.

Equipment Sales

   We offer equipment manufactured by Cisco Systems, Alcatel-Lucent, Avaya, Panasonic, Huawei and other manufacturers. As part of our turnkey approach, we also offer custom solutions and services for the life cycle of the equipment, including its design, configuration, installation, consulting and maintenance.

Mobile VPN

   We offer to our corporate clients secure remote access to corporate information, databases and corporate applications. Remote access is available from different mobile devices, including USB modems, tablets 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.

Wholesale Operations 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.

Voice Services. For international operators, including traditional incumbents, mobile and VoIP operators, we provide call termination to fixed-line 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-line 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 operators throughout the world. International operators require connectivity to the Russian Internet segment. In addition, our carrier and operator services division provides data center services 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.

We have interconnection agreements with international global data network operators who provide a one-stop shop concept 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.

Residential and FTTB Operations in Russia

Fixed-line Broadband Internet Access. In Russia, we offer fixed-line broadband Internet access. One of our strategic goals is to develop broadband services based on the most up-to-date engineering solutions.

FTTB IPTV. Currently the Beeline TV product is run in seven out of eight macro regions. In 118 cities of the 37 regions, we provide IPTV service. As of December 31, 2014, we had more than 980,000 IPTV customers.

Wireless Broadband Internet Access. According to iKS Consulting and J’son & Partners 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, 2014, we have installed more than 5,000 WiFi access nodes in Moscow. Our partners in providing WiFi services are, amongst others, Domodedovo and Sheremetyevo Airports, Department of Information Technology, McDonalds, Starbucks, Coffee-House, MEGA, IKEA, METRO, Afimoll trade center, Auchan and Burger King.

Licenses for Fixed-line Business in Russia

We have fixed-line, data and long distance licenses which are important to our fixed business in Russia, including licenses in respect of Local Communications Services (excluding local communications services using payphones and multiple access facilities), Local Communications Services using multiple access facilities, Leased Communications Circuits Services, Voice Communications Services in Data Transmission Networks, Telematic Services, Intra-zonal Communications Services, Data Transmission Services and Communications Services for the Purposes of Cable Broadcasting in the main cities of Moscow, St. Petersburg, Ekaterinburg, Nizhny Novgorod, Khabarovsk, Novosibirsk, Rostov-on-Don and Krasnodar. These licenses will expire between June 8, 2015 and December 31, 2019. In addition we have an International and National Communications Services license for the entire Russian Federation which will expire on December 13, 2019.

The following licenses expire in 2015:

 

   

Local Communications Services license (excluding local communications services using payphones and multiple access facilities) in Khabarovsk (October 31, 2015) and Krasnodar (October 1, 2015);

 

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Local Communications Services using multiple access facilities in Ekaterinburg (July 20, 2015);

 

   

Leased Communications Circuits Services in St. Petersburg (June 8, 2015) and Khabarovsk (August 25, 2015);

 

   

Telematic Services in Moscow (November 21, 2015), St. Petersburg (November 21, 2015) and Krasnodar (September 14, 2015);

 

   

Intra-zonal Communications Services in Krasnodar (December 12, 2015); and

 

   

Data Transmission Services licenses in Khabarovsk (September 14, 2015) and Krasnodar (September 14, 2015).

We have filed or will file applications for renewal for all of our licenses that expire in 2015.

Competition—Fixed-Line Business in Russia

Business Operations

Our fixed-line telecommunications business marketed as “Beeline Business” competes principally on the basis of 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, the state-controlled telecommunications company, for services in St. Petersburg and all of Russian regional cities;

 

   

MTS, for services to corporate customers and the SME market;

 

   

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

 

   

Orange Business, for corporate data network services, convergent mobile and fixed-line services;

 

   

MegaFon, which provides convergent mobile and fixed-line services.

Wholesale Operations

For voice services, our main competitors are the 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.

Residential and FTTB Operations

In terms of end-user Internet penetration, the consumer Internet access business in Russia is already saturated and end-user Internet penetration is high.

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

Our main competitors in the fixed-line broadband market in Russia are Rostelecom, MTS and its subsidiaries, Acado, Er-Telecom, NetbyNet and various local home network providers. Competition is based primarily on network coverage, pricing plans, Internet connection speed, services quality, customer service level, brand identity and a range of value added and other customer services offered.

 

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Marketing and Distribution—Fixed-Line Business in Russia

Business Operations

We utilize a direct sales force in Moscow, operating both with fixed-line 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, as well as having sales incentive plans with our regional partners.

While pricing competition remains a factor, especially for voice and Internet access 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 at providing installation and maintenance of customers’ equipment and local networks in Moscow and other regions. We currently provide high priority 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.

Residential and FTTB Operations

Fixed-line Broadband Internet Access. We offer a wide range of FTTB services tariffs targeted at different customer segments.

FTTB IPTV. TV service is provided on a monthly fee basis. STBs can be rented or bought by customers. We have launched the following value added services for TV: Video on Demand (with a library of more than 3,000 items) and the option to view the recording of popular TV programs. In Moscow we have launched Timeshift option allowing to rewind live channels without recording on STB. Most IPTV sales are carried out in bundles with home internet and Wi-Fi routers for 1 Russian ruble. Customers are offered to rent or buy additional STBs to watch their TV channel pack on another TV set or Wi-Fi bridges which helps to eliminate extra wires that extend through the apartment.

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. We offer WiFi tariff plans that include unlimited usage plans and plans that charge by usage. We also offer special prices for mobile and FTTB users.

Pay TV (cable TV) Services. We offer two tariff plans: “Social” for customers who need basic TV channels, which includes 10-12 TV channels and “Commercial,” which includes 45-55 TV channels. As of December 31, 2014, we had more than 72,000 cable TV customers.

Fixed-line Telephony. We offer two telephony services for residential users: traditional time division multiplexing (also referred to as TDM) accessible in 180 Russian cities (which includes the cities with the possibility of IP services), and VoIP-based services in more than 80 Russian cities. All services offer fixed numbering and have competitive prices for local, zonal, international long distance and domestic long distance calls. As of December 31, 2014, we had approximately 170,686 fixed line telephony customers in Russia.

 

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Description of Operations of the Italy Segment

Our Italy segment consists of our operations in Italy under our wholly owned subsidiary WIND Italy.

Mobile Business in Italy

Description of Mobile Services in Italy

Mobile Telecommunications Services

In Italy, we primarily offer our mobile telecommunications services under two types of payment plans: postpaid and prepaid. As of December 31, 2014, approximately 7.0% of our customers in Italy were on postpaid plans and approximately 93.0% were on prepaid plans.

 

Mobile Voice Services

  

Description

Consumer Voice Offerings

   Our consumer voice offerings are tailored to specific market segments. Our voice offerings can be upgraded with a variety of option plans and value added services. Prepaid consumer customers can choose from tariff plans in which their prepaid credit is deducted on a per second basis at a billing rate per minute, or on a monthly basis at a flat rate per month choosing amongst one of the several available options. In addition to tariff plans similar to those offered to prepaid customers, we offer a number of all-inclusive flat rate monthly tariff plans to contract and prepaid consumer customers that include a set amount of calling minutes, SMSs and gigabytes of mobile Internet access for a fixed monthly fee. Additional all-inclusive bundles specifically target young people (all-inclusive music) and digitally native customers (All-Digital), with accounts that are manageable only via digital channels such as web, mobile applications (apps) and social networks.

Corporate Voice Offerings

   We provide corporate voice services to large corporate customers, 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 customers, 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 our standard corporate voice offerings. As interest in mobile applications (apps) is growing, with the aim of bringing greater mobility to business processes, WIND Italy has also launched the Enterprise Mobility Services through strategic partnerships and vertical System Integrator agreements. Innovative digital services have also been developed for corporate customers allowing them to create a personalized website, a certified web mail and Mobile POS.

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 customers. WIND Italy has continued

 

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its growth in mobile Internet services due to an increase in the number of smartphones and improvements to its own offerings of plans with bundle options, suited for both prepaid and postpaid customers, which include minutes of voice traffic, SMS, and mobile Internet browsing for a fixed monthly fee.

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

 

Mobile Value Added Services

  

Description

Mobile Internet

   Our mobile customers can connect their mobile phones to the Internet using GSM, GPRS, 4G/LTE or UMTS technologies. Several offers include bundles and innovative options like Open-Internet, which allow data customers to share the total amount of data included in the bundle with family members.

PC Mobile Internet

   Our mobile customers can connect their mobile phones to a computer to be used as a modem to browse the Internet using GSM, GPRS, 4G/LTE or UMTS technologies. In addition, our customers can directly connect their PC to the Internet utilizing a dongle with a WIND SIM card.

BlackBerry

   Offered to corporate, SME and consumer customers

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, ringtones, a chat service for customers as well as services specifically targeted at students. MMS provides multimedia (photo, video and sound) content, such as sports events, news, gossip, music and a chat service.

Content and Innovative Services

   In 2014 WIND Italy had a strong focus on innovative services based on using the mobile phone for payments with the aim of simplifying the customer’s life by improving the user experience. In addition WIND improved its MyWIND App, renewed its partnership with Google for carrier billing and enhanced roll-out of mobile ticketing. WIND also focused its attention on digital services and in 2014 introduced a new innovative concept called “Digital Home & Life” in a store in Rome, in order to be closer to its customers. In the store, as well as online, WIND customers can choose and buy new technological devices to interact with their smartphone and, within their house, to manage aspects of their life and home, such as wellness and entertainment.

NFC

   During 2014, WIND Italy implemented different initiatives to test NFC services.

International Roaming. Our mobile customers in Italy can use our mobile services, including SMS, MMS and data services where available, while roaming in other countries. Roaming coverage outside Italy is provided through our roaming agreements with approximately 488 international operators in 219 countries as of December 31, 2014.

Handset Offerings. We offer our customers in Italy a broad selection of handsets and Internet devices, which we source from a number of suppliers. The Italian market is a predominantly prepaid market and, as a result, mobile operators generally have provided limited handset subsidies, and only to higher value customers.

 

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Mobile Telecommunications Licenses in Italy

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 considering the technological evolution from GSM to UMTS. WIND Italy acquired a UMTS license in 2001, which is 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.

WIND has been licensed LTE/4G spectrum consisting of two blocks of 800 MHz spectrum and four blocks 2600 MHz spectrum. The license is valid until 2029.

Both the National Regulatory Authority (Autorità per le Garanzie nelle Comunicazioni, or “AGCOM”) and the Communications Department of the Italian Ministry of Economic Development have been reviewing frequency assignments and implementing changes thereto in 2014. Any changes to the frequency assignments could lead to increased costs for WIND Italy to adopt equipment and avoid interference.

Competition—Mobile Business in Italy

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 our principal competitors. Telecom Italia and Vodafone have well established positions in the Italian mobile market and each has a greater market share than WIND Italy. Hutchison 3G has been aggressively seeking new customers through the use of handset subsidies, which are not customarily offered in the Italian market, and heavily discounting its offering compared to WIND Italy. During 2014 the entire market reduced in size as a consequence of operators focusing on more robust pricing strategies and less aggressive use of promotions.

Telecom Italia, as the incumbent in the market, has the advantage of longstanding relationships with Italian customers. Vodafone Italy 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.

According to Analysys Mason Research, the four network operators in Italy offer mobile telecommunications services to approximately 89.6 million registered customers as of December 31, 2014, representing a penetration rate of approximately 146.6% of the Italian population. As of December 31, 2014 there were 17 MVNO/ESPs providing services in the Italian market, with an aggregate market share of approximately 7%. Penetration is distorted by the widespread use of multiple SIM cards by individual users. The market is mostly prepaid.

According to Analysys Mason Research, as of December 31, 2014, excluding MVNOs, Telecom Italia had a market share of 34.7%, followed by Vodafone with 31.1%, WIND Italy with 23.4% and Hutchison 3G with 10.7%.

Marketing and Distribution—Mobile Business in Italy

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 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.

 

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WIND Italy made strong developments on digital touch points (websites, Mobile sites, MyWIND App, self-care areas and social network) to improve the customer experience.

WIND Italy provides specific services to innovative startups and upcoming businesses by way of Wind Business Factor, which is a platform for business coaching and networking addressed to startups and new entrepreneurs.

For our corporate customers in Italy, we use different marketing strategies depending on the nature and size of a customer’s business. For large corporate customers 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. For the SOHO market, we advertise in the professional and general press and use airport billboards.

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, 2014, we had 159 WIND owned stores and approximately 498 exclusive franchised outlets operating under the WIND name. WIND Italy also utilizes 1,015 non-exclusive points of sale, 910 electronic chain store outlets and approximately 4,697 other points of sale in smaller towns 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 website.

Sales to large corporate customers 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 website.

Given the increasing importance of customer experience as a strategic element of differentiation in the market, WIND Italy has created a new function for the Customer Experience Development. This function’s objective is to ensure the continuous improvement of customer satisfaction, developing a customer experience model with the fundamental support of all business functions. The activity will be carried out using a methodology based on NPS (Net Promoter Score). This indicator is able to correlate the level of loyalty and growth and it is now used worldwide to assess the quality of customer experience. NPS is becoming increasingly central to WIND Italy’s strategy; in addition to being measured periodically through market research, NPS will be used as a tool for continuous monitoring of customer perception when interacting with WIND Italy. In this way, it will be possible to better assess the level of customer satisfaction and implement improvement actions.

Fixed-line Business in Italy

Description of Fixed-line Services in Italy

In Italy, we offer a wide range of fixed-line voice and Internet broadband services. We offer these services to both consumer and corporate customers under the Infostrada brand.

Our fixed-line voice customer base in Italy consisted of approximately 2.8 million customers as of December 31, 2014. Our direct customers mainly comprise LLU customers.

 

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WIND Italy offers voice and broadband Internet services to direct customers, renting from Telecom Italia the “last mile” of the access network, which is disconnected from Telecom Italia equipment and connected to the WIND equipment in telephone exchanges. In the areas where WIND Italy does not have direct access to the network via LLU, customers can request wholesale services, though WIND Italy no longer actively markets such wholesale services.

 

Fixed-Line Services

  

Description

Internet and Data Services

   In the broadband access market in Italy, we mainly offer our products directly through LLU. We offer broadband to both direct and indirect customers, 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 “All Inclusive” and “Absolute ADSL” packages which, for a fixed monthly fee, provide customers with a fixed-line voice service and unlimited connectivity to broadband. In addition, we offer a bundled offering with a fixed-line voice service, unlimited connectivity to broadband and a mobile SIM with All Inclusive postpaid and prepaid offer.
   Only on LLU customers WIND continues to push the “ADSL Vera” concept that allows a variable maximum download speed up to 20 Mbps depending on the quality of the copper network utilized with no additional charge.
   For corporate customers, WIND has developed several innovative and digital services such as Cloud including IaaS, Data Center, cCloud and SaaS (software as a service), characterized for being fast, simple and flexible.

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 customers in Italy subscribe to bundled fixed-line voice and Internet broadband offerings.

Corporate Voice Offerings

   We provide PSTN, ISDN and VoIP fixed-line voice services, data services, value added services and connectivity services to corporate customers, including large corporate customers, SMEs and SOHOs.
   For larger corporate customers, we typically tailor our offerings to the needs of the customer and, where applicable, to competitive bidding requirements. We offer our large corporate customers 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 customers national toll free and shared toll. We typically offer SME and SOHO customers off the shelf plans rather than bespoke offerings.
   Our offerings tailored for SME and SOHO customers include “All Inclusive Business” providing unlimited calls to national fixed and mobile and unlimited Internet access; in addition, “Internet Pack” offer includes one Wi-Fi router, one Internet Key 3G along with a Data SIM contract. The “WIND Impresa” offer provides six to 60 simultaneous voice calls, on VoIP technology and a combined service for renting, running, and maintaining telephone switchboards.

 

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Licenses—Fixed-line Business in Italy

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.

Competition—Fixed-line Business in Italy

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 main Italian telecommunications provider, Telecom Italia also benefits from corporate and public sector customers, coupled with recognition and familiarity. Swisscom and Vodafone have entered the fixed-line Internet, voice and data markets by buying Fastweb S.p.A. and Tele2 (successively rebranded TeleTu), respectively. We expect that the fixed-line telecommunications market will remain competitive as a result of the presence of international competitors, the introduction and growth of new technologies, products and services, the declining number of fixed-line customers due to continued fixed-line 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 customer base in Italy to contract, thereby impacting our revenue and profitability.

Four service providers, Telecom Italia, WIND Italy (with its brand Infostrada), Vodafone/TeleTu and Fastweb accounted for approximately 94% of the total broadband fixed services actually accessed in the Italian market as of December 31, 2014.

Based on our internal estimates, as of December 31, 2014, Telecom Italia had approximately 7.0 million broadband customers in Italy, representing a market share of approximately 50.3% of broadband retail connections, followed by WIND Italy with approximately 2.2 million broadband customers, representing a market share of approximately 15.9% of broadband retail connections, Fastweb with approximately 2.1 million active broadband customers, representing a market share of approximately 15.0% of broadband retail connections and by Vodafone/TeleTu, with approximately 1.8 million broadband customers representing a market share of approximately 12.7% of broadband retail connections. All other operators had in the aggregate approximately 0.85 million broadband customers, representing a market share of approximately 6.1% of broadband retail connections.

Marketing and Distribution—Fixed-line Business in Italy

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

The main sales channels for fixed-line voice and broadband services are represented by the shops and the toll-free number 159. In the Internet access market for consumer customers, the “Infostrada” web portal is an important and growing distribution channel. In Italy, we utilize sales agencies, WIND Italy’s call centers and a direct sales force to target sales of fixed-line voice and Internet services to corporate customers. However, in 2013 and 2014, we have increasingly adopted pull sales channels which are more effective and efficient in order to increase the fixed business marginality.

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.

Description of Operations of the Algeria Segment

Our Algeria segment covers our operations in Algeria.

 

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Mobile Business in Algeria

Description of Mobile Services in Algeria

In Algeria, we generally offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2014, we had the following percentages of postpaid and prepaid customers:

 

Payment Plan

   Algeria  
Postpaid      3
Prepaid      95
Hybrid (monthly fee with recharge possibility)      2

Call Completion Services and Value Added Services

In Algeria, we provide all of our customers voice services that include airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for predefined number of voice traffic and roaming fees for airtime charges when customers travel abroad.

 

Value Added Services

  

Description

Basic Value Added Services

   Caller-ID
   Voicemail
   Call forwarding
   Conference calling
   Call blocking
   Call waiting

Messaging Services

   SMS
   MMS (which allows customers to send pictures, audio and video to mobile phones and to e-mail)
   Mobile instant messaging

Content/chat/infotainment services

   Dependent upon location

Data access services

   On GPRS and EDGE, and 3G

RBT

   Customized ring back tones

Roaming

In Algeria 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 generally cover all major roaming destinations, and include active roaming agreements with 432 GSM networks in 157 countries, GPRS roaming with 202 networks in 93 countries and CAMEL roaming through 152 operators in 81 countries.

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 customer while on the host’s network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer’s monthly bill.

 

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Interconnect

We have several interconnection agreements with mobile and fixed-line operators in Algeria under which we provide traffic termination services. These services represent termination of incoming voice and data traffic from a network of our competitors when their customers call or send data to our customers.

Sales of Equipment and Accessories

Handset offerings. In order to stimulate mobile phones and smart phones penetration, we offer to our customers a broad selection of handsets and Internet devices, which we source from a number of suppliers.

USB Modems. In Algeria, we generally offer our customers wireless Internet access through GPRS/EDGE and 3G networks using special Plug&Play-USB modems. 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 interfaces.

Mobile Telecommunications Licenses in Algeria

The key terms of our licenses in Algeria:

 

   

2G, 3G and VSAT licenses for the entire territory of Algeria and ISP authorization for the entire territory of Algeria.

 

   

The 2G license will expire on July 30, 2016. The 3G license will expire on December 2, 2028.

Competition—Mobile Business in Algeria

The mobile industry in Algeria has grown rapidly over the past ten 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-customer 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 Analysys Mason Research, there were approximately 44.4 million subscriptions in Algeria as of December 31, 2014, representing a penetration rate of approximately 113.4%.

In Algeria, there are three mobile operators: Djezzy, operating through our subsidiary Omnium Telecom Algeria SpA; Mobilis, a subsidiary of Algeria’s incumbent operator, Algérie Télécom; and Ooredoo. Algérie Télécom launched its Mobilis GSM network in April 1998 and was the only operator until the second GSM license was awarded to Djezzy in July 2001. OTA launched under the Djezzy brand in February 2002. Wataniya Telecom Algeria (renamed Ooredoo) was awarded the third GSM license in December 2003. In December 2013, a 3G license was granted to all three operators. 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 customer services offered.

In July, 2014, Djezzy launched 3G services and has since expanded services to 21 provinces across the country, including Algiers and the largest provinces in terms of population.

Customer 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, supported by data revenue growth after commercial launch of 3G networks.

 

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Competition for customers in Algeria is intense as a result of greater market penetration and is focused on new technologies, products and services. As a result of increased competition, mobile providers are utilizing new marketing strategies, including aggressive price promotions, to retain existing customers and attract new ones.

The following table shows our and our competitors’ respective customer numbers in Algeria as of December 31, 2014:

 

Operator

   Customers in
Algeria
(in millions)
 

Djezzy (VimpelCom)

     18.4   

Mobilis (AMN)

     14.1   

Ooredoo (WTA)

     11.8  

 

Source: Analysys Mason Research for all companies except Djezzy.

Marketing and Distribution—Mobile Business in Algeria

Our postpaid plans are targeted at our business customers and include “Djezzy Classic” and “Business Control.” Our postpaid plans for residential customers include “Djezzy Classic” and “Djezzy Control.” Our prepaid plans for residential customers include “Djezzy Good” and “Djezzy Go.” In July 2014, Djezzy launched a number of commercial offers including Millennium 3G (a hybrid voice and data product) and data dongle promotions, as well as B2B and B2C 3G offers. Djezzy launched a new prepaid offer “Go”, which achieved encouraging uptake, at the end of December 2014. Djezzy also launched an unlimited postpaid offer “Infinity”, which was supported by OTT partnerships with WhatsApp, Opera Mini and the 3G “Be-Djezzy” applications. We sell our mobile telecommunication services through indirect channels (distributors) and through our “Djezzy” branded shops, of which there were 2,000, including 1,102 equipped with IT material and sales application, as of December 31, 2014. Our nine exclusive national distributors cover all the 48 Wilayas and are distributing our products through 66,831 authorized points of sale. We also had a pool of more than 700 agents in a call center as of December 31, 2014. This pool of agents combines a series of insourced and outsourced agents that are directly managed by OTA management in three languages (Arabic, French and Amazigh).

Description of Operations of the Africa & Asia Segment

Our Africa & Asia segment covers our operations in Pakistan, Bangladesh and Laos.

Mobile Business in Africa & Asia

Description of Mobile Services in Africa & Asia

In Africa & Asia, we generally offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2014, we had the following percentages of contract and prepaid customers:

 

Payment Plan

   Pakistan     Bangladesh     Laos  

Postpaid

     2     6     3

Prepaid

     98     94     97

 

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Call Completion Services and Value Added Services

In Africa & Asia, we provide all of our customers voice services that include airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for predefined number of voice traffic and roaming fees for airtime charges when customers travel abroad.

 

Value Added Services

  

Description

Basic Value Added Services

   Caller-ID
   Voicemail
   Call forwarding
   Conference calling
   Call blocking
   Call waiting

Messaging Services

   SMS
   MMS (which allows customers to send pictures, audio and video to mobile phones and to e-mail)
   Mobile instant messaging

Content/chat/infotainment services

   Dependent upon the country of the customer

Data access services

   On GPRS and EDGE, and 3G

RBT

   Customized ring back tones

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.

 

Country

  

Roaming Agreements (as of December 31, 2014)

Pakistan

   Active roaming agreements with 301 GSM networks in 148 countries
   GPRS roaming with 198 networks in 101 countries
   CAMEL roaming through 56 operators in 44 countries

Bangladesh

   Active roaming agreements with 423 GSM networks in 155 countries
   GPRS roaming facilities in 325 networks in 117 countries
   Offer in-flight and maritime roaming with Emirates Airlines and Malaysian Airlines

Laos

   Active roaming agreements with 392 GSM networks in 135 countries
   GPRS roaming with 201 networks in 64 countries
   CAMEL roaming through 26 operators in 16 countries

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 customer while on the host’s network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer’s monthly bill.

 

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Interconnect

We have several interconnection agreements with mobile and fixed-line operators in Africa and Asia under which we provide traffic termination services. These services represent termination of incoming voice and data traffic from a network of our competitors when their customers call or send data to our customers.

Sales of Equipment and Accessories

Handset offerings. In order to stimulate mobile phones and smart phones penetration, we offer to our customers a broad selection of handsets and Internet devices, which we source from a number of suppliers.

USB Modems. In Africa & Asia, we generally offer our customers wireless Internet access through GPRS/EDGE and 3G networks using special Plug&Play-USB modems. 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 interfaces.

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:

 

Country

  

Licenses

Pakistan

   2G, 3G WLL, Long Distance and International licenses for the entire territory of Pakistan and for Azad Jammu Kashmir and Gilgit Baltastan.
   The 2G licenses will expire in 2022 and the 3G license will expire in 2029.

Bangladesh

   2G and 3G license for the entire territory of Bangladesh.
   The 2G license will expire in 2026. The 3G license will expire on September 18, 2028.

Laos

   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 November 14, 2012 (effective as of January 1, 2013) and is renewed on an annual basis.

Competition—Mobile Business in Africa & Asia

Pakistan

The Pakistani telecommunications sector has experienced significant growth over the past ten years due to a variety of reasons. The introduction 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 phones. 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.

Pakistan is mainly a 2G market. However, 3G is growing following its launch in 2014. Mobilink launched 3G services in 31 cities, reaching as the first operator 2 million 3G customers.

According to the Pakistan Telecommunications Authority, there were approximately 136 million customers in Pakistan as of December 31, 2014, representing a penetration rate of approximately 73.1% (inclusive of Azad

 

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Jammu Kashmir and Northern Areas). The Pakistani mobile telecommunications market has five main operators: Mobilink, Telenor Pakistan, Ufone, Warid and Zong. Telenor Pakistan is a member of 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 Telecom is a wholly owned company of the Abu Dhabi Group and launched its cellular services in Pakistan in May 2005. Zong is wholly owned by China Mobile.

The following table shows our and our competitors’ respective customer numbers in Pakistan as of December 31, 2014:

 

Operator

   Customers in
Pakistan
(in millions)
 

Mobilink (VimpelCom)

     38.5   

Telenor Pakistan

     36.5   

Zong

     26.3   

Ufone

     22.0   

Warid

     12.5   

 

Source: The Pakistan Telecommunications Authority.

Bangladesh

The mobile telecommunications industry was introduced late in Bangladesh. Since Grameenphone launched its GSM technology in 1997, the industry has grown rapidly. In the last decade the penetration increased from 0.8% in 2002 to 72.4% in 2014 according to the Bangladesh Telecommunications Regulatory Commission. Increased demand for mobile telecommunications services is largely due to the expansion of the economy of Bangladesh and a corresponding increase in disposable income, declining tariffs which have made mobile telecommunications services more affordable to the mass market customer segment, and improved service quality and coverage. Bangladesh is mainly a 2G market with prepaid customers. However, 3G usage is growing following the launch of 3G service in October 2013. The growing 3G network is expected to increase average revenue per user as the use of the Internet grows with improving data speed presenting a significant opportunity to grow market share in significant urban centers. At the end of 2014, 5.1% of Banglalink customers were using 3G data service.

According to the Bangladesh Telecommunications Regulatory Commission, there were approximately 120 million customers in Bangladesh as of December 31, 2014, representing a penetration rate of approximately 72.4%.

The mobile telecommunications market in Bangladesh is highly competitive. The top three mobile operators, Grameenphone, Banglalink and Robi, collectively held approximately 89.5% of the mobile market in Bangladesh as of December 31, 2014 according to the Bangladesh Telecommunications Regulatory Commission. In addition to Grameenphone and Robi, we also compete with Airtel, Citycell and Teletalk.

The following table shows our and our competitors’ respective customer numbers in Bangladesh as of December 31, 2014:

 

Operator

   Customers in
Bangladesh
(in millions)
 

Grameenphone

     51.5   

Banglalink (VimpelCom)

     30.9  

Robi

     25.3  

Airtel

     7.5  

Teletalk

     3.9   

Citycell

     1.3  

 

Source: The Bangladesh Telecommunications Regulatory Commission.

 

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Laos

The Lao telecommunication market is strictly regulated by fixed price floors and limited promotion periods. VimpelCom Lao has been impacted by these regulations, resulting in a declining subscriber base.

According to Analysys Mason, there were approximately 4.7 million customers in Laos as of December 31, 2014.

The Lao mobile telecommunications market has four operators: Unitel; VimpelCom, operating through our subsidiary VimpelCom Lao Co.; Lao Telecom; and ETL. 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 (51.0%) and Shinawatra International Public Company Limited (49.0%). ETL is 100% controlled by the Lao Government (via the Ministry of Communication, Transport, Post and Construction).

The following table shows our and our primary mobile competitors’ customer numbers in Laos as of December 31, 2014:

 

Operator

   Customers in
Laos
(in millions)
 

Unitel

     2.3   

LTC

     1.7  

VimpelCom Lao Co. (VimpelCom)

     0.2  

ETL

     0.5  

 

Source: Analysys Mason Research for all companies except VimpelCom Lao Co.

Marketing and Distribution—Mobile Business in Africa & Asia

Below is a summary of our sales and distribution arrangements in the countries in which we operate:

 

   

In Pakistan, we offer a portfolio of tariffs and products designed to cater to the needs and requirements of specific market segments, including mass-market customers, youth customers, personal contract customers, SOHOs (with one to five employees), SMEs (with six to 50 employees) and enterprises (with more than 50 employees). We offer corporate customers several postpaid plan bundles, which include on-net minutes, variable discount for closed user groups and follow-up minutes based on bundle commitment. As of December 31, 2014 our sales channels include seven company stores, 21 business centers, a direct sales force of over 350 employees, 379 franchise stores, 73 contractual direct-selling representatives, and over 229,000 third party retailers.

 

   

In Bangladesh, we offer our customers several national prepaid and postpaid tariff plans, focusing on mass, youth and B2B segments. We divide our primary target customers into five categories: high-value customers (for the top 20% of our high-ARPU-generating customers); public call offices (a telephone facility in a public place providing calling-card-based domestic and international telecommunications services), enterprises (for companies with 15 or more employees), SME accounts (for companies with one to 15 employees) and mass customers. 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. With rapid growth in 3G network, we are offering a wide range of 3G products which cater to the need of different segments to add information on current 3G offers. As of December 31, 2014, our sales and distribution channels include nine company stores, a direct sales force of 78 permanent employees (Zonal sales managers), 109 franchise stores, 52,048 retail SIM selling outlets, 198,437 top up selling outlets and 1,182 Banglalink service points.

 

 

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In Laos, we offer pricing plans for contract, prepaid and Internet services for residential and corporate customers. 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 5 exclusive distributors and 79 promoters.

Fixed-line Business in Africa & Asia

Description of Fixed-Line Services in Africa & Asia

Our fixed-line business in Africa & Asia is limited to our operations in Pakistan. We do not offer fixed-line services in other countries in which we operate in Africa & Asia. Our fixed-line business in Pakistan includes internet, data and value added services over a wide range of access media, covering major cities of Pakistan. We also offer 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 our network.

Competition—Fixed-line Business in Africa & Asia

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

In Pakistan, our main competitors for fixed-line 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, World Call, Wi-Tribe, and Telenor Pakistan. Our main competitors for consumer Internet services are PTCL, Wateen, World Call, Wi-Tribe and Qubee.

Marketing and Distribution—Fixed-line Business in Africa & Asia

In Pakistan, we utilize a direct sales force for corporate customers. We employ a team of regional sales managers in three different regions 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. We offer WiMax services to the consumer market only in Karachi. Direct sales are supported by a dedicated sales force of business development officers. Indirect sales are supported by retail business development officers who offer services through our franchise network. Our telesales channel also offers WiMax services.

Description of Operations of the Ukraine Segment

Mobile Business in Ukraine

Kyivstar Transformation program

Kyivstar experienced significant pressure on results in 2014, due to the transition to lower priced bundled tariff plans and more conservative spending behavior by customers as a result of the challenging macro-economic and geopolitical environment. Kyivstar, during 2013, launched its transformation program with the aim to improve customer excellence and operational performance. The transformation was ongoing during 2014 and has been delivering positive results. Net Promoter Scores improved, particularly in network quality perception, but also due to attractive simplified tariff offerings focused on on-net, off-net, Internet and FTTB. As a result, Kyivstar reported the leading position in NPS and annualized churn improved during 2014.

Description of Mobile Services in Ukraine

Mobile Voice Services

As of December 31, 2014, approximately 9.1 % of our customers in Ukraine were on postpaid plans and approximately 90.9 % of our customers in Ukraine were on prepaid plans.

 

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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 Segment—Mobile Business in Russia—Description of Mobile Services in Russia.”

Roaming

As of December 31, 2014, Kyivstar provided voice roaming on 428 networks in 195 countries, GPRS roaming on 350 networks in 158 countries and 3G roaming on 208 networks in 102 countries.

Wireless Internet Access

In Ukraine, we provide our customers with wireless Internet access through GPRS/EDGE networks. The service was commercially launched in 2008. Customers receive a USB modem and SIM card with a pre-installed special Internet rate data plan.

Mobile Telecommunications Licenses in Ukraine

In Ukraine, Kyivstar holds 900 MHz GSM and 1,800 MHz GSM cellular licenses to provide telecommunications services throughout the territory of Ukraine. These licenses were received on October 5, 2011 for a term of 15 years each and will expire on October 4, 2026.

On February 25, 2015, VimpelCom announced that Kyivstar has been awarded one of three licenses to provide nationwide 3G services in the 2100 Mhz band. The results of the auction have been approved by the National Commission for the State Regulation of Communications and Informatization of Ukraine. The license is valid for a period of 10 years.

We have also obtained a range of national and regional radio frequency licenses for use of radio frequency resource in the referred standards and in specified standards—RRL and WiMax. Our network covers approximately 98% of Ukraine’s population.

Competition—Mobile Business in Ukraine

According to Analysys Mason Research, as of December 31, 2014, there were approximately 62 million customers in Ukraine, representing a penetration rate of approximately 137.8 %. There are currently three mobile operators with national coverage in Ukraine: Kyivstar, Mobile TeleSystems—Ukraine (“MTS Ukraine”) and LLC Astelit.

The following table shows our and our primary mobile competitors’ respective customer numbers in Ukraine as of December 31, 2014:

 

Operator

   Customers
(in millions)
 

Kyivstar (VimpelCom)

     26.2  

MTS Ukraine

     22.9  

Astelit

     10.3  

 

Source: Analysys Mason Research for all companies except Kyivstar.

 

 

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Kyivstar and MTS Ukraine

Kyivstar competes primarily with MTS Ukraine, which is 100% owned by MTS and operates a GSM-900/1800 network in Ukraine.

Other Competitors in Ukraine

Kyivstar also competes with Astelit, which operates throughout Ukraine. Kyivstar also competes with Trimob, a company which was separated from Ukrtelecom to provide services under a 3G license, and with other small CDMA players.

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 customer.

We divide our primary target customers into two large groups:

 

   

B2B (subdivided into SME customers and LE customers); and

 

   

B2C (mass market) customers.

The Ukrainian mobile market operates primarily on prepaid plans. To attract more contract customers, we have differentiated our service levels to provide higher customer service to our contract customers, such as direct access to customer service agents on a dedicated contract customer service line, in addition to our initiatives to increase the flexibility and accessibility of the payment methods offered to contract customers. Kyivstar further simplified its offerings by introducing new tariff plans in 2014 focused on on-net, off-net, Internet and FTTB.

Customer Loyalty Programs

In Ukraine, to promote brand loyalty we use “Kyivstar club” program, providing a monthly bonus, which is a percentage of the amount spent by the customer’s usage per month and the length of time the customer has been a Kyivstar customer. In 2015 we are planning to introduce new loyalty programs that aim to stimulate gross adds in SME segment and in the LE segment we are planning to offer individual discounts for clients and pricing.

Fixed-line Business in Ukraine

Description of Fixed-line Services in Ukraine

Business Operations

We have constructed and own a 44,634 kilometer fiber optic network, including 24,917 kilometers within cities, 15,188 kilometers and 9,729 kilometers local FOL for FTTB, which is interconnected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine and to our gateway. We provide data and Internet access services in almost all metropolitan cities in Ukraine.

Our fixed-line services include corporate Internet access, VPN services, data center, contact center, fixed-line telephony and a 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 10 Gbps. Fixed-line voice services are available in 30 major cities of Ukraine.

As of December 31, 2014, we owned in total 44,634 kilometers of fiber optic cable (including Backbone and MAN) that satisfies almost all our needs in terms of transmission network capabilities with a negligible level of leased capacity still being needed.

 

 

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Local Access Services. We provide local access services to corporate customers by connecting their premises to our fiber optic network, which interconnects to the local PSTN in 30 major Ukrainian cities.

International and Domestic Long Distance Services. We provide outgoing international voice services to business customers through our 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. We also hold an international license that enables us to provide international voice and data services to our business and corporate customers.

Dedicated Internet and Data Services. We provide a VPN service that has an integrated voice and data ISDN connection, frame relay, broadband digital customer line and dedicated Internet services.

Information Services. We provide 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.

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

Wholesale Operations

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 our 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.

We derive most of our carrier and operator services revenue in Ukraine from voice call termination services to our own mobile network, and voice transit to other local and international destinations.

Residential and FTTB Operations

In Ukraine, we offer the fixed-line and wireless Internet services. We began providing fixed-line broadband services in Ukraine in 2008 and as of December 31, 2014 provided services in 130 cities in Ukraine. In connection with this service, we have been engaged in a project to install FTTB for fixed-line broadband services in approximately 45,076 residential buildings in 130 cities, providing over 60,953 access points.

Licenses for Fixed-line Business in Ukraine

The table below sets forth the principal terms of the licenses which are important to our fixed-line business in Ukraine.

 

License Type

  

Region

  

Expiration Date

International communication

   All of Ukraine    August 18, 2019

Long-distance communication

   All of Ukraine    August 18, 2019

Local communication

   All of Ukraine    August 29, 2015

Competition—Fixed-line Business in Ukraine

Business Operations

In the voice services market for business customers, we compete with Ukrtelecom, Datagroup, Vega, and a number of other small operators. There is a high level of competition with more than 2,000 ISPs in Ukraine. Our main competitors in the corporate market for data services are Ukrtelecom, Volia, Vega and Datagroup.

 

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Wholesale Operations

In Ukraine, carrier and operator services market competitors include Datagroup, Ukrtelecom, and Vega.

Consumer Internet Services

Our main competitors for provision of consumer Internet services in Ukraine are Volia and Ukrtelecom. From December 31, 2013 to December 31, 2014, we increased the number of broadband customers in Ukraine by 10% from 761,532 to 813,286.

Marketing and Distribution—Fixed-line Business in Ukraine

Business Operations

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.

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.

Fixed-line services have significant potential considering positive difference in market share and brand preference for the B2B market. Fixed-line services are used as an effective tool to acquire, develop and retain corporate large accounts, especially in financial, agricultural and retail sectors.

Residential and FTTB Operations and operator services in Ukraine

Our marketing strategy is focused on attracting new customers. We offer several tariff plans, each one targeted at a different type of customer. In 2014 our consumer fixed-line Internet services business was supported by BTL activities, including a leaflets distribution, in areas where the service is provided.

Fixed-line Broadband Internet Access. We offer a wide range of FTTB services tariffs targeted at different customer segments. There are four unlimited tariff plans with monthly fees, which offer different speeds up to 100 Mbps for active Internet users.

Description of Operations of the CIS Segment

Mobile Business in the CIS

Description of Mobile Services in the CIS

Mobile Voice Services

As of December 31, 2014, approximately 2% of our customers in the CIS were on postpaid plans and approximately 98% of our customers 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 Segment—Mobile Business in Russia—Description of Mobile Services in Russia.”

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

 

 

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Country

  

Roaming Agreements (as of December 31, 2014)

Kazakhstan

   Voice roaming on 541 networks in 185 countries
  

 

GPRS roaming on 383 networks in 148 countries

  

 

CAMEL roaming on 230 networks in 96 countries

Uzbekistan

   Voice roaming on 484 networks in 184 countries
  

 

GPRS roaming on 344 networks in 156 countries

  

 

CAMEL roaming on 205 networks in 97 countries

Armenia

   Voice roaming on 401 networks in 173 countries
  

 

GPRS roaming on 297 networks in 128 countries

  

 

CAMEL roaming on 193 networks in 92 countries

Tajikistan

   Voice roaming on 187 networks in 85 countries
  

 

GPRS roaming on 162 networks in 79 countries

  

 

CAMEL roaming in 100 networks on 58 countries

Georgia

   Voice roaming on 195 networks in 83 countries
  

 

GPRS roaming on 135 networks in 73 countries

  

 

CAMEL roaming on 111 networks in 59 countries

Kyrgyzstan

   Voice roaming on 424 networks in 144 countries
  

 

GPRS roaming on 159 networks in 76 countries

  

 

CAMEL roaming on 90 networks in 50 countries

Mobile Internet Services

We have partnered with Opera Software to offer a “Beeline” branded version of the Opera Mini browser under a framework agreement in all CIS BU countries. We have promotional zero-zones for major local and international social networks in CIS countries to lower the entry barrier for new data-users and stimulate consumption for existing ones. We also focus on smartphone penetration growth in our countries as the major source of effective demand for our mobile internet services.

In Kazakhstan, we provide customers with wireless Internet access over GPRS/EDGE/UMTS networks. Our UMTS/HSPA network was commercially launched in January 2011. The wireless Internet services that we offer include small screen Internet (data services and options in regular voice price plans) and large screen Internet (special Internet price plans bundled with USB modem or without a modem for PC and note/netbooks).

In Uzbekistan, we provide customers with wireless Internet access over GPRS/EDGE/UMTS/4G/LTE networks. The UMTS/HSPA services were commercially launched in 2008 and the majority of the network was constructed in 2010. In September 2014, we launched 4G/LTE in Tashkent. We provide Internet services both for smartphones and feature phones as well as for USB dongles and tablet computers. We focus on small screen users and we have begun to integrate mobile services of popular social networks. Devices provided are locked for the Beeline network so that they only work within our network.

In Armenia, we provide customers with wireless Internet access over GSM/GPRS/EDGE/UMTS networks. UMTS services were commercially launched in 2009. For small screen customers, we launched data bundles for Internet access for a daily fee with unlimited data usage and a limit on speed only after a certain amount of usage per day, and began to integrate mobile services of popular social networks, including, Odnoklassniki and Facebook. USB modems were commercially launched in July 2009. Customers receive a USB modem and a SIM card with a pre-installed special Internet rate data plan.

 

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In Tajikistan, USB modems were launched in January 2008. We provide our customers with wireless Internet access via GSM/EDGE and UMTS networks. We provide Internet services for smartphones and feature phones as well as for USB dongles. In 2014, the usage of non-voice 3G/GPRS services increased due to a balanced set of new Internet tariffs that Tacom offered. In addition, we have offered entry level monthly and daily Internet options for our customers in Tajikistan.

In Georgia, we provide our customers with wireless Internet access through EDGE and 4G networks. Beeline in Georgia participated in the tender for 4G/LTE license, which was awarded in January 2015. Our 4G network in Georgia was launched in February 2015. The license is valid for 15 years.

In Kyrgyzstan, we provide our customers with wireless Internet access through GPRS/EDGE/UMTS/HSPA+ networks. Our UMTS/HSPA+ network in Kyrgyzstan was launched in December 2010. USB modems were commercially launched for prepaid and contract customers in November 2009. We launched attractive internet options to promote data usage during idle hours and spread the network load in Kyrgyzstan in 2014. Kyrgyzstan was successful in branded smartphone distribution in 2014 therefore increasing data user base.

Mobile Telecommunications Licenses in the CIS

 

Country

  

Licenses (as of December 31, 2014)

  

License Expiration

Kazakhstan

   National GSM-900/1800 and UMTS license for the entire territory of Kazakhstan    Unlimited term and can be terminated voluntarily by the operator

Uzbekistan

   National license for GSM-900/1800, UMTS and 4G/LTE covering the entire territory of Uzbekistan    August 6, 2016

Armenia

   GSM-900/1800 and UMTS license for the entire territory of Armenia    March 3, 2028

Tajikistan

   National GSM-900/1800, UMTS and 4G/LTE licenses for the entire territory of Tajikistan    May 12, 2019, July 13, 2015 and December 9, 2015, respectively

Georgia

   Two GSM-1800 frequency licenses and one E-GSM frequency license for the entire territory of Georgia    July 23, 2023, January 26, 2017 and January 25, 2018, respectively

Kyrgyzstan

  

National license to use radio spectrum of 900 MHz, 1800 MHz, 2100 MHz for the entire territory of Kyrgyzstan (technology neutral)

National GSM-900/1800 and UMTS licenses for the entire territory of Kyrgyzstan

   30 October 2019, May 30, 2016 and October 23, 2015, respectively

On December 29, 2014, Mobitel won the tender for the 4G license conducted by the Georgian National Communications Commission. The license was obtained on January 29, 2015 and remains valid for 15 years. Under the terms of the license, Mobitel has certain specific rollout criteria and by February 1, 2020 the Mobitel 4G network should cover 90% of the villages and cities in Georgia. The commercial launch of LTE was announced on February 1, 2015.

Competition—Mobile Business in the CIS

Kazakhstan

According to Analysys Mason Research, there were approximately 27.7 million customers in Kazakhstan as of December 31, 2014, representing a penetration rate of approximately 159.5%.

 

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The following table shows our and our primary mobile competitors’ respective customer numbers in Kazakhstan as of December 31, 2014:

 

Operator

   Customers
(in millions)
 

GSM Kazakhstan

     13.1   

KaR-Tel (VimpelCom)

     9.8   

Tele2 Kazakhstan

     3.3   

AlTel

     1.5   

 

Source: Analysys Mason Research for all companies except KaR-Tel.

Uzbekistan

According to Analysys Mason Research, as of December 31, 2014, there were approximately 20.1 million customers in Uzbekistan, representing a penetration rate of approximately 65.5%. The relatively low penetration rate is caused by the single-SIM profile of Uzbekistan mobile subscribers.

The following table shows our and our primary mobile competitors’ respective customers in Uzbekistan as of December 31, 2014:

 

Operator

   Customers
(in millions)
 

Unitel (VimpelCom)

     10.6   

Ucell

     8.6   

Others

     0.9   

 

Source: Analysys Mason Research for all companies except Unitel.

MTS re-entered the market in a joint venture with a government controlled entity in December 2014. MTS owns a 50.01% stake and the government 49.99%.

Armenia

According to Analysys Mason Research, as of December 31, 2014, there were approximately 3.6 million customers in Armenia, representing a penetration rate of approximately 120.5%.

The following table shows our and our primary mobile competitors’ respective customers in Armenia as of December 31, 2014:

 

Operator

   Customers
(in millions)
 

K-Telecom

     2.2   

ArmenTel (VimpelCom)

     0.8   

Orange Armenia

     0.6   

 

Source: Analysys Mason Research for all companies except ArmenTel.

Tajikistan

According to Analysys Mason Research, as of December 31, 2014, there were approximately 10.2 million customers in Tajikistan, representing a penetration rate of approximately 121.7%.

 

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The following table shows our and our primary mobile competitors’ respective customers in Tajikistan as of December 31, 2014:

 

Operator

   Customers
(in millions)
 

Babilon Mobile

     3.7   

TCell

     3.3   

MegaFon TJ

     1.8   

Tacom (VimpelCom)

     1.3   

TK Mobile

     0.1   

 

Source: Analysys Mason Research for all companies except Tacom.

Georgia

According to Analysys Mason Research, as of December 31, 2014, there were approximately 5.7 million customers in Georgia, representing a penetration rate of approximately 132.3%.

The following table shows our and our primary mobile competitors’ respective customers in Georgia as of December 31, 2014:

 

Operator

   Customers
(in millions)
 

Geocell

     2.1   

Magticom

     2.0   

Mobitel (VimpelCom)

     1.3   

Others

     0.3   

 

Source: Analysys Mason Research for all companies except Mobitel.

Kyrgyzstan

According to Analysys Mason Research, as of December 31, 2014, there were approximately 7.0 million customers in Kyrgyzstan, representing a penetration rate of approximately 124.8%

The following table shows our and our primary mobile competitors’ respective customers in Kyrgyzstan as of December 31, 2014:

 

Operator

   Customers
(in millions)
 

Alfa Telecom (Megacom)

     2.8   

Sky Mobile (VimpelCom)

     2.7   

Nur Telecom

     1.4   

 

Source: Analysys Mason Research for all companies except Sky Mobile.

Marketing and Distribution—Mobile Business in the CIS

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

 

   

large account corporate customers (business market);

 

   

SME customers (business market);

 

   

high ARPU customers (consumer market);

 

   

youth segment (consumer market); and

 

   

mass market customers.

 

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In Kazakhstan we offer a wide pricing portfolio which contains nationwide and regional tariff plans and add-ons for consumer and business segments. During 2014 the pricing portfolio for the consumer segment has been expanded by a new integrated bundle line.

In Uzbekistan, we offer several U.S. dollar-based prepaid and postpaid tariff plans, each one targeted at a different type of customer.

In Armenia, we offer several Armenian dram-based prepaid and contract tariff plans, each one targeted at a different type of customer. As of December, 2014, 15.3% of the ArmenTel customer base used postpaid plans.

In Tajikistan, we offer several Tajik somoni-based prepaid and postpaid tariff plans, each one targeted at a different type of customer.

In Georgia, we offer four Georgian lari-based prepaid tariff plans and two contract-based postpaid tariff plans for our SME and large account corporate customers.

In Kyrgyzstan, we offer seven Kyrgyz som-based price plans for our mass market customers and three price plans for SME and large account customers.

Customer Loyalty Programs

We have loyalty programs in each of the CIS countries in which we operate. These programs are based on various principles with the main target to increase the lifetime and ARPU of our customers. As of December 31, 2014, we had more than 7.1 million customers participating in these programs in the CIS.

Fixed-line Business in the CIS

Description of Fixed-line Services in CIS

Business Operations

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

 

   

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

 

   

local, long-distance, international fixed-line voice services (including traditional telephony, IP and session initiation protocol (“SIP”) telephony);

 

   

local, intercity and international channels (including leased lines and IP VPN through fiber optic, wireless, WiMax and satellite technologies); and

 

   

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

Uzbekistan. We provide 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, Samarkand, Bukhara, Zarafshan and Uchkuduk, which is longer than 340 kilometers, and copper cables, which are longer than 240 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:

 

   

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

 

   

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

 

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dedicated lines of data transmission; and

 

   

dedicated line access and fixed-line 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, and TCP/IP (transmission control protocol/Internet protocol) 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 ADSL and fiber optic lines); and

 

   

voice over IP services.

Wholesale Operations

Kazakhstan. We have several interconnection agreements with mobile and fixed-line operators in Kazakhstan under which KaR-Tel provides traffic termination services. Our subsidiary, TNS-Plus, has international interconnection agreements with operators in Russia, Uzbekistan and Kyrgyzstan and provides international voice traffic transit and international line rental services for Kazakh and international operators.

Uzbekistan. We have interconnection agreements with Uztelecom, the incumbent fixed-line services provider in Uzbekistan, through which all national and international traffic is routed, and 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 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 all 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 four agreements with local operators. Under these agreements Mobitel provides voice call termination to its own network.

Kyrgyzstan. In Kyrgyzstan, we have interconnection agreements with all 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 Kyrgyzstan which allows our subsidiary there to interconnect with OJSC VimpelCom directly.

Residential and FTTB Operations

In Kazakhstan, we offer the same spectrum of fixed-line broadband and wireless Internet access as in Russia. For more information, see “—Description of Operations of the Russia Segment—Fixed-line Business in Russia.” In Kazakhstan, we launched a co-branded version of Opera Software’s Opera Mini web browser and offer unlimited browsing services to our customers. We also launched various mobile Facebook services and have plans to launch others.

 

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In Uzbekistan and Armenia, we offer the same spectrum of fixed-line broadband and wireless Internet access as in Russia. For more information, see “—Description of Operations of the Russia Segment—Fixed-line Business in Russia.” In Armenia, we offer PSTN-fixed and IP telephony services, as well as fixed-line broadband Internet access based on ADSL technology and dial-up services and wireless Internet access based on CDMA technology.

Licenses—Fixed-line Business in CIS

We have fixed-line, data and long distance licenses which are important to our fixed business in Uzbekistan, Armenia, Tajikistan and Kyrgyzystan in respect of Local Communications Services, International and National Telematic Services Data Transmission Services and Communications Services. These licenses will expire between August 4, 2015 and March 3, 2029.

Competition—Fixed-line Business in the CIS

Business Operations

Kazakhstan. We operate an Internet service provider in Kazakhstan, where we compete primarily with state-owned provider Kazakhtelecom, KazTransCom, owned by TeliaSonera, TransTelecom, owned by the Kazakhstan Temir Zholy (a railway company), 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, Uztelecom, East Telecom, Sarkor Telecom, Sharq Telecom and EVO. There is a high level of competition in the capital city of Tashkent. The fixed-line 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 U!Com, “Armenian Datacom Company” CJSC, GNC-Alfa and CrossNet.

Marketing and Distribution—Fixed-line Business in CIS

Kazakhstan. We are focusing our development in Kazakhstan on customer base and revenue growth, which we aim to promote by expanding our transport infrastructure, strengthening our position in the market, developing our sales efforts and data services.

Uzbekistan. In Uzbekistan, our strategy includes maintaining our current market position by retaining our large corporate clients customer base.

Armenia. In Armenia, our strategy includes focusing on customer retention and ARPU growth by developing new services, including Internet access through a fiber optic network with a guaranteed speed to corporate customers and government organizations.

Regulatory

For a description of the regulation of our telecommunications businesses, see Exhibit 99.2—Regulation of Telecommunications.

Seasonality

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

 

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Our fixed-line 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 revenue from our fixed-line telecommunications business is lower when there are fewer working days in the period or a greater number of customers are on vacation, such as during the summer months.

Equipment and Operations

Mobile Telecommunications Equipment and Operations

Mobile Telecommunications Network Infrastructure

GSM, 3G and 4G/LTE and LTE Advanced technologies are based on “open standards,” which means that standard compliant equipment from any supplier can be added to expand the initial network. Our GSM/GPRS/EDGE/UMTS/4G/LTE/LTE-A networks, which use mainly Ericsson, Huawei, Alcatel-Lucent, Nokia, Cisco Systems and ZTE equipment, are integrated wireless networks of radio base station equipment, circuit and 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 achieve the benefits of purchasing scale of the Group and ensure that we receive on an ongoing basis the best commercial terms possible. We make supplier selection decisions based mainly on compliance with technical and functional requirements and total cost of ownership, seeking to optimize network operations and provide the best value and experience to our customers.

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, space on roofs of buildings for radio units and antennas or space on greenfield land to place our towers and equipment shelters.

New Technology

We continue to move toward a high-speed broadband connection environment deploying new technologies in fixed-line and mobile networks. We are also introducing new network technologies aiming to improve customer experience, optimize network usage and increase investment efficiency, such as step-by-step migration to new Radio Access technologies and next generation architecture. In certain countries we have implemented key technologies to improve voice quality, such as tandem free operation (“TFO”), transcorder free operation (“TrFO”), Adaptive Multi-Rate (“AMR”), HD Voice codecs and Voice over LTE (“VoLTE”). TFO and TrFO are technologies that remove voice transcoding operations during the call so the voice quality can be improved and resources in media gateways can be saved. AMR is the technology to dynamically adapt the coding rate to the radio conditions in order to deliver the optimum voice quality. HD Voice is a set of high definition codecs that provide high-definition voice quality during the call. VoLTE is the technology to enable Voice calls over LTE network with higher voice quality and lower call setup times. These technologies are being implemented in commercial networks in Group operational companies after testing to ensure the quality of the network.

In the area of data services we have successfully launched Data Traffic Management systems that provide the unique possibility to increase customer perception of mobile broadband services and at the same time more efficiently utilize network resources. We are continuing to extend the functionality of DTM infrastructure to further stretch the possibilities of data services monetization and improve the customer experience, including with Mobile Toolbar and Fair Usage Policy for data services.

We are investing in radio access technologies that will ensure a high level of quality of our broadband services in the future, such as 3G/HSPA+, 4G/LTE, at the same time using the possibilities to optimize investments by rolling out Single-RAN network. We have acquired new spectrum in several operating companies

 

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to boost our networks capacity and enable the launch of new Radio Access Networks Technologies enhancing the network capacity and spectral efficiency, recently including 3G on 2100MHz in Algeria, 3G on 2100MHz in Pakistan and LTE on 800MHz in Georgia.

We have successfully conducted several laboratory tests and pilots of technologies that improve the customer experience and network efficiency. We commercially launched the 4G/LTE Carrier Aggregation in Moscow (providing top speeds exceeding 100 Mbps on the 4G/LTE network), and completed a successful lab testing of the VoLTE service, while continuing the SON (Self Optimized Network) pilot in Russia and Uzbekistan, which yielded highly positive results.

In order to comply with Russian MNP regulations, we have launched MNP process in December 2013.

In order to comply with the requirements of the 4G/LTE licenses that OJSC VimpelCom was awarded in Russia in July 2012, OJSC VimpelCom has launched 4G/LTE services in 46 regions in the Russian Federation in 2014. OJSC VimpelCom is currently expanding and improving its access and transport network in other regions of Russia to comply with further requirements, as further described in “—Description of Operations of the Russia Segment—Mobile Business in Russia—Mobile Telecommunications Licenses in Russia—4G/LTE License”. We also have launched 4G/LTE services in Uzbekistan and three pilot 4G/LTE networks in CIS countries. In Georgia, we successfully launched commercial 4 G/LTE on February 1, 2015.

In Italy, WIND is continuing to invest in research initiatives for new technologies and broadband services in both the fixed-line and mobile sectors, with a particular focus on “green” aspects and the opportunity coming from the “Big Data” approach. As confirmation of WIND’s commitment to technology and service innovation, the Financed Projects team—established in 2008 and based in Ivrea—is devoted to monitoring, studying and testing technological and business trends from a medium/long term perspective, in cooperation with internal business and technology functions, to follow the innovation opportunities aligned with WIND’s strategy. The team developed relationships with leading national and international universities and research institutions, co-sponsoring new ideas and participating in EU development initiatives. In 2014, the team was involved in research projects on: (i) “Big Data” approach to extract information from mobile network traffic in order to identify patterns and to develop predictive models for traffic planning, touristic flows forecast and development of new applications related to sustainable mobility; (ii) solutions for security and privacy management for data; and (iii) environmentally friendly ICT solutions (“green ICT”), with a specific focus on green data centers.

As of December 31, 2014, WIND’s LTE core network infrastructure consisted of four MME Mobility Management Entities, two HSS Home Subscriber Servers, four PDN GW PDN Gateways, and four S GW Serving Gateway sites in 4G/LTE technology to further enhance its indoor data service coverage and to allow WIND to offer superior data download and upload speeds based on 4G/LTE.

To support rapidly growing data traffic, we have installed dense wavelength division multiplexing, or “DWDM”, equipment on our backbone in several operating companies. 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 harm 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-line customers. The backbone of our transport network is an optical cable network. The Big European Ring (main fiber ring) and a few rings in Central, Ural, Siberian, South and North Caucus regions connect the major cities in the Western part of Russia and the Eastern part up to and including Siberia. We also lease capacity from Rostelecom and Transtelcom to reach the Far-Eastern part of Russia. The two chords links provide additional protection and capacity for the Big European Ring. The total length of our Intercity optical cable network reaches 43,526 kilometers. We use satellite technology to connect remote Russian sites where on-land communications are not available. There are protected optical lines connecting Moscow and St. Petersburg, and which pass to Stockholm, London and Frankfurt. Two independent optical lines connect our optical networks in Russia and Ukraine. Three cross-boundary lines to Kazakhstan provide reliable connections to Kazakh, Uzbek and other Asian telecommunication operators.

We have built the interregional (also called “zone”) transport networks that connect our sites in small towns and the countryside. The total length of local fiber cables is 43,662 kilometers and the total length of our zonal fiber cables is 46,840 kilometers. These networks are constructed in more than 220 cities, which provide our customers with IP VPN services, voice services and access to Internet.

Our fixed-line voice network has the following three levels: local, regional and federal. The local voice networks, constructed in 180 cities, provide customers with fixed-line voice services. Our local network in Moscow is integrated into the telephone network and connected to 142 transit and local nodes of urban telephone network (“UTN”). We have completed construction of zone networks in 52 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-line customers with long-distance voice services and minimizes our costs of traffic.

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 customers’ apartments.

As of December 31, 2014, we had approximately 2.26 million customers connected to our FTTB network in Russia. The network operates in 139 cities across Russia (130) and the CIS (9). We have the largest FTTB network in Moscow and the core broadband market in Russia.

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 over 21,744 kilometers of fiber optic cable backbone in Italy and 4,995 kilometers of fiber optic cable MANs as of December 31, 2014. 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, 2014 we had 1,458 LLU sites for direct customer connections (around 62% of the population is covered), and had interconnections with the incumbent operator in order to offer voice and data services to the rest of the population.

 

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IP Network, based on MPLS hierarchical backbone and connected to main national and international operators, is developed in all of Italy and it is able to offer fixed and mobile broadband services to consumer and corporate customers.

WIND Internet network access is implemented by an all-IP network, with over 50 POPs, for direct (xDSL) and indirect Internet access services, as well as VPN (xDSL, Fiber Optics). The IP nodes access network consists of 53 BRAS for consumer services and 64 Edge Routers for Business application, located in POPs to ensure optimal coverage of the national territory.

WIND has signed a commercial agreement with Metroweb to enable WIND to provide customers in Milan with access to fiber through fiber to the home technology. Beginning in 2013, WIND began to offer high speed services in fiber to the home technology under this contract in Milan, where it marketed offers in fiber optic technology which allows the end user to reach download speeds of up to 100 Mbps and upload speeds of up to 10 Mbps.

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. All our DWDM and SDH optical networks are fully ring-protected and can be self-healing which is necessary to ensure uptime of the transmission network. Our core IP/MPLS network is fully mesh-protected, meaning that the recovery mechanisms which provide different levels of protection or restoration against different failure modes are available for network uptime. It connects all the main regional cities of Ukraine. The total length of our fiber optic cables is 19,717 kilometers.

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 138 cities of Ukraine. The total length of fiber cables constructed within the cities is 24,917 kilometers.

Our IP/MPLS data network carries mobile network and FTTB IP traffic, allowing us to provide L2VPN, IP VPN and Internet services. We have interconnections with major European and Russian ISPs in a number of cities.

We also have the separate fixed-line network of Golden Telecom Ukraine (“GTU”).

In the future we plan to merge Kyivstar’s and GTU’s fixed-line networks for local, long-distance and international transit voice services.

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 owns more than 11,970 kilometers of fiber optic main lines across Kazakhstan, which are based on Ericsson SDH and Huawei SDH/DWDM equipment. As of December 31, 2014, we had approximately 200,656 customers 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 117 nodes situated throughout Uzbekistan. The main technologies

 

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of our access networks are ADSL 15,176 ports and FTTB 30,720 ports. 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-line infrastructure covers all districts of Armenia with a full set of equipment (international gateway, digital-analog exchanges, Internet protocol digital customer line access multiplexers (“DSLAMs”), copper wire access network, fiber optic backbone network, data network). Its network consists of 223,520 ADSL ports and 169 exchanges, of which 130 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-line telephone services to rural customers.

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.

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

In Russia we own a series of five buildings consisting of approximately 26,000 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 five buildings on Lesnoryadsky Pereulok in Moscow, constituting approximately 15,360 square meters, that are used as an administrative office, warehouse and operating facility. These buildings also house the main switches for our Moscow 3G/GSM network and our main and reserve IT centers. We have other offices at 4, Krasnoproletarskaya Street, in the center of Moscow. These consist of three leased administrative buildings of approximately 32,400 square meters. We 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 customer 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.

In Italy, as of December 31, 2014, we owned certain sites where some of our telecommunications network equipment is located, including 287 radio centers (for all of which we own the towers and rooms for equipment, and for approximately 120 out of 287, and we also owned the land where the radio centers are located), 586 towers, about 6100 towers on rented locations, excluding roof top sites, on which antennas for radio coverage are installed, and approximately 1000 other minor towers. Following the sale of a majority stake of Wind Italy’s tower subsidiary, Galata, certain sites will no longer be held by Wind Italy. For more information regarding this transaction, see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Network and Tower Sharing Agreements.”

In Ukraine, our subsidiary Kyivstar owns a series of buildings consisting of 34,068 square meters at Degtyarivska, 53 in Kyiv. We use these buildings as offices, print-centers, call centers and switching centers. In addition, we own a number of buildings throughout Ukraine consisting of over 90,000 square meters that we use as office space, switching centers, call centers, sales centers, date centers and storage units.

 

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In Pakistan, our subsidiary PMCL owns a number of properties consisting of 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.

Disclosure of Activities under Section 13(r) of the Securities Exchange Act of 1934

Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” we are required to disclose whether we or any of our affiliates are knowingly engaged in certain activities, transactions or dealings relating to Iran or certain designated individuals or entities. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities – including non-U.S. entities that are not otherwise owned or controlled by U.S. entities or persons – and even when such activities were conducted in compliance with applicable law.

The following information is disclosed pursuant to Section 13(r). None of these activities involved our U.S. affiliates.

 

   

Our Armenian subsidiary, ArmenTel, and Telecommunications Company of Iran, or “TCI,” an Iranian Government-owned company, have an agreement for the provision of voice services, which has been in place since 2003. Under the agreement, ArmenTel sends direct traffic to TCI and TCI sends both direct and transit traffic to ArmenTel. We (including ArmenTel) did not provide any telecommunications equipment or technology to TCI. However, in 2013 ArmenTel has discontinued providing voice services under the agreement. During 2014, there was no gross revenue received from these activities involving TCI and no net profits.

 

   

In 2001, our Russian subsidiary, OJSC VimpelCom, began providing telecommunications services, including mobile and fixed line services, to the Embassy of Iran in Moscow. The gross revenue for these services in 2014 was approximately US$14,842.63 and net profits were approximately US$8,800.94. OJSC VimpelCom intends to continue the services to the Embassy of Iran.

 

   

In 2008, our Tajikistan subsidiary, LLC Tacom, began providing telecommunications services to the Embassy of Iran in Dushanbe. The gross revenue for these services in 2014 was approximately US$7,383 and net profits were approximately US$5,533. LLC Tacom intends to continue the services to the Embassy of Iran.

 

   

In 2014, our Kyrgyzstan subsidiary, Sky Mobile LLC, began providing mobile telecommunications services to the Embassy of Iran in Biskek. The gross revenue for these services in 2014 was approximately US$1,953 and net profits were approximately US$900. Sky Mobile LLC intends to continue the services to the Embassy of Iran.

 

   

We have active roaming agreements with GSM mobile network operators in various countries throughout the world, including with TCI, MTN Irancell, Taliya Mobile and Telecommunication Kish Company (also known as TKC KIFZO) in Iran. TCI and MTN Irancell are owned or controlled by the Iranian Government, and our other roaming partners in Iran may be affiliated with the Iranian Government. Pursuant to our roaming agreements with these companies, our customers receive customary international roaming services on their networks, and their customers receive such services while roaming on our networks outside those countries. We intend to continue our roaming agreements with TCI, MTN Irancell, Taliya Mobile and TKC KIFZO for the foreseeable future. During 2014, our

 

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gross revenue received from roaming arrangements with TCI and MTN Irancell was approximately US$166,000 and US$16,000, respectively, and net profits were approximately US$72,000 and US$7,000, respectively. During 2014, we received no gross revenue from roaming arrangements with Taliya Mobile and TKC KIFZO with no net profits.

Telenor ASA may be deemed an affiliate based on its indirect share ownership in us through Telenor East and the officers of the Telenor ASA group who are on our board. Telenor East has provided us with the information included below relevant to Section 13(r). This information relates solely to activities conducted by Telenor ASA subsidiaries and does not relate to any activities conducted by us. We are not representing the accuracy or completeness of such information and undertake no obligation to correct or update this information.

Various subsidiaries of Telenor ASA are party to roaming agreements and interconnection agreements with Iranian telecommunication companies. Pursuant to those roaming agreements, the Telenor subsidiaries’ customers are able to roam in the particular Iranian network (outbound roaming) and customers of such Iranian operators are able to roam in the relevant subsidiaries’ network (inbound roaming). For outbound roaming, Telenor subsidiaries pay the relevant Iranian operator roaming fees for use of its network by Telenor subsidiaries’ customers, and for inbound roaming the relevant Iranian operator pays the relevant Telenor subsidiary roaming fees for use of its network by the Iranian operator’s customers.

The subsidiaries of Telenor ASA identified below were party to the following roaming agreements and interconnection agreements with Iranian telecommunication companies in 2014:

(1) Telenor Norge AS, a Norwegian subsidiary, has two roaming agreements with Mobile Telecommunication Company of Iran (“MCI”). During 2014, Telenor Norge AS recorded net expenses related to these roaming agreements of $43,330.07 to MCI.

(2) Telenor Sverige AB, a Swedish subsidiary, has roaming agreements with MCI, MTN Irancell (“Irancell”) and Taliya Mobile (“Taliya”). During 201, Telenor Sverige AB recorded net revenues and net expenses related to these roaming agreements of $54,988.89 in net revenues from MCI and $53,258.65 in net expenses to Irancell and $12,022.24 in net expenses to Taliya.

(3) Telenor A/S, a Danish subsidiary, has roaming agreements with MCI and Irancell. During 2014, Telenor A/S recorded net expenses related to these roaming agreements of $12,379.28 to MCI and $608.73 to Irancell.

(4) Telenor d.o.o. Beograd Omladinskih brigada 90, a Serbian subsidiary, has a roaming agreement with MCI. During 2014, Telenor d.o.o. Beograd Omladinskih brigada 90 recorded a net expense of $1,258.79 related to this roaming agreement.

(5) Telenor Hungary Plc, a Hungarian subsidiary, has a roaming agreement with MCI. During 2014, Telenor Hungary Plc recorded net revenues of $20,108.56 related to this roaming agreement.

(6) Telenor Bulgaria EAD, a Bulgarian subsidiary, has a roaming agreement with MCI. During 2014, Telenor Bulgaria EAD recorded net revenues related to this roaming agreement of $13,176.46 from MCI.

(7) DiGi.Com Bhd, a Malaysian subsidiary, has a roaming agreement with MCI. During 2014, DiGi.Com Bhd recorded a net expense of $5,275.95 related to this roaming agreement.

(8) Telenor Pakistan (Private) Ltd., a Pakistani subsidiary, has roaming agreements with MCI, Irancell and Taliya. During 2014, Telenor Pakistan (Private) Ltd. recorded net revenues and net expenses related to these roaming agreements of (i) $14,199 in net revenues from MCI, (ii) $5,445 in net revenues from Irancell, and (iii) $21 in net expenses to Taliya.

(9) Total Access Communications Plc. (“dtac”), a Thai subsidiary, has roaming agreements with MCI and Irancell. During 2014, dtac recorded net revenues and net expenses related to these roaming agreements of $107,671.11 in net revenues from MCI and $11,583.92 in net expenses to Irancell.

 

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(10) Telenor Global Services AS, a Norwegian subsidiary, has two interconnection agreements with MCI. During 2014, Telenor Global Services AS recorded net revenues of $32,860 related to these interconnection agreements.

Telenor ASA’s subsidiaries identified above intend to continue these agreements.

Legal Proceedings

Current Legal Proceedings

For details of current legal proceedings, please see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. For details of the investigations by the SEC, DOJ and OM, please also see “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are subject to investigations by the SEC, DOJ and OM, and are conducting an internal investigation. We are unable to predict the duration, scope or results of these investigations or their impact on us.”

Concluded Legal Proceedings

For details of concluded legal proceedings, please see Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

ITEM 4A. Unresolved Staff Comments

None.

 

ITEM 5. Operating and Financial Review and Prospects

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 20-F. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of numerous factors, including the risks discussed in “Item 3—Key Information—D. Risk Factors.”

Our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F are prepared in accordance with IFRS, as issued by the IASB.

Overview

Our total operating revenue was US$19,627 million for the year ended December 31, 2014, compared to US$22,546 million for the year ended December 31, 2013. Our operating profit was US$2,586 million for the year ended December 31, 2014, compared to US$346 million for the year ended December 31, 2013. The loss for the year attributable to the owners of the parent was US$647 million for the year ended December 31, 2014, compared to a loss of US$2,625 million for the year ended December 31, 2013.

We use the U.S. dollar as our reporting currency. The functional currencies of our group are the Russian ruble in Russia, the Euro in Italy, the Algerian dinar in Algeria, the Pakistani rupee in Pakistan, the Bangladeshi taka in Bangladesh, the Ukrainian hryvnia in Ukraine, the Kazakh tenge in the Republic of Kazakhstan, the Armenian dram in the Republic of Armenia, the Georgian lari in Georgia, the Kyrgyz som in Kyrgyzstan, the Lao Kip in Laos and the U.S. dollar in Tajikistan. During 2014 we changed the functional currency of our operations in Uzbekistan from the U.S. dollar to the Uzbek som.

Due to the significant fluctuation of the non-U.S. dollar functional currencies against the U.S. dollar in the periods covered by this discussion and analysis, changes in our consolidated operating results in functional currencies differ from changes in our operating results in reporting currencies during some of these periods. In

 

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the following discussion and analysis, we have indicated our operating results in functional currencies and the devaluation or appreciation of functional currencies where it is material to explaining our operating results. For more information about exchange rates relating to our functional currencies, see “—Certain Factors Affecting our Financial Position and Results of Operations—Foreign Currency Translation” below.

Basis of Presentation of Financial Results

VimpelCom Ltd. maintains its records and prepares its statutory financial statements in accordance with Dutch law and tax legislation. Our subsidiaries outside of the Netherlands record and prepare their statutory financial statements in accordance with local accounting principles and tax legislation and in accordance with IFRS, if applicable. Our audited consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB. They differ from our financial statements issued for statutory purposes that are prepared on a stand-alone legal entity basis (unconsolidated) in accordance with IFRS, as endorsed by the European Union. The principal differences relate to:

 

   

consolidation procedures and business combinations; and

 

   

investments in subsidiaries that are stated at net asset value.

Our audited consolidated financial statements set forth elsewhere in this Annual Report on Form 20-F include the accounts of VimpelCom Ltd. and its consolidated subsidiaries. All inter-company accounts and transactions have been eliminated. We have used the equity method of accounting for companies in which we have significant influence. Generally, this represents voting stock ownership of at least 20.0% and not more than 50.0%.

We and our subsidiaries paid taxes computed on income reported for local statutory tax purposes. We based this computation on local statutory tax rules, which differ substantially from IFRS. Certain items that are capitalized under IFRS are recognized under local statutory accounting principles as an expense in the year paid. In contrast, numerous expenses reported in the financial statements prepared under IFRS are not tax deductible under local legislation. As a consequence, our effective tax charge was different under local tax rules and under IFRS.

Reportable Segments

We present our reportable segments based on economic environments and stages of development in different geographical areas, requiring different investment and marketing strategies. Accordingly, our reportable segments consist of the six following segments:

 

   

Russia;

 

   

Italy;

 

   

Algeria;

 

   

Africa & Asia;

 

   

Ukraine; and

 

   

CIS.

The Russia segment includes all results from operations in Russia. The Italy segment includes all results from our operations in Italy. The Algeria segment includes all results from our operations in Algeria. The Africa & Asia segment includes operating results from our operations in Pakistan, Bangladesh and Laos. We include mobile customers of our equity investee in Zimbabwe (accounted at cost) in the Africa & Asia reporting segment. The Ukraine segment includes the operating results of our operations in Ukraine. The CIS segment includes the operating results of all operations in Kazakhstan, Tajikistan, Uzbekistan, Georgia, Armenia and Kyrgyzstan. Although Georgia is no longer a member of the CIS, consistent with our historic reporting practice,

 

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we continue to include Georgia in our CIS reporting segment. Starting January 1, 2014, we disclose Algeria operations as a separate segment since the adjusted EBITDA during 2014 in Algeria exceeded 10% of the total group adjusted EBITDA. For more information on our reportable segments, please see Note 7 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Factors Affecting Comparability of Prior Periods

Our selected operating and financial data, audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 20-F and the following discussion and analysis reflect the contribution of the operators we acquired from their respective dates of acquisition or consolidation. In addition, comparability is affected by dispositions of the operators we sold from their respective dates of disposals or deconsolidation. On September 16, 2014, we and GTH completed the sale of all of our debt and equity interest in the Globalive group of companies in Canada, including Globalive Wireless Management Corp., the operator of the Wind Mobile cellular telephony service in Canada (“Wind Canada”). On October 17, 2014, we completed the sale of our entire indirect 100.0% stake in Telecel Globe that held our interest in subsidiaries operating in Burundi and Central African Republic. As a consequence of the abovementioned dispositions we stopped including results of our debt and equity interest in Wind Canada from September 16, 2014, and our operations in Burundi and Central African Republic from October 17, 2014. For more information regarding our acquisitions and dispositions, see “—Liquidity and Capital Resources—Acquisitions and Dispositions” and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. In addition, on April 19, 2013, we completed the sale of our entire indirect stake in Sotelco Ltd. in Cambodia to our local partner, and as a consequence, we stopped including the results of our operations in Cambodia from such date. We do not provide comparable financial information for periods preceding the date on which we acquired, consolidated or commenced operations in a particular country or segment, or following the date of disposition.

Recent Developments and Trends

The mobile markets in Russia, Italy, Ukraine, Algeria, Kazakhstan, Armenia, Georgia and Kyrgyzstan have reached mobile penetration rates exceeding 100.0% in each market. As a result, we will focus less on customer market share growth and more on revenue market share growth in each of these markets. The key components of our growth strategy in these markets will be to increase our share of the high value customer market, increase usage of value added services and improve customer loyalty. Our management expects revenue growth in these markets to come primarily from an increase in usage of voice and data traffic among our customers.

The remaining mobile markets in which we operate, particularly Pakistan, Bangladesh and Uzbekistan, are still in a phase of rapid customer growth with penetration rates substantially lower than in our other markets. In these markets, our management expects revenue growth to come primarily from customer growth in the short term and increasing usage of voice and data traffic in the medium term.

Our management expects revenue growth in our mobile business to come primarily from data services and in our fixed-line business from broadband as well as business and corporate services.

Investigations

The SEC, DOJ and Dutch investigations, as well as our own investigations, are continuing, and we have cooperated, and continue to cooperate, with the authorities in these investigations. We are also exploring the prospect of resolving the company’s potential liabilities arising from the facts established in the investigations. We expect to continue incurring costs related to the investigations, primarily professional fees and expenses, which may be significant. These costs relate to responding to requests for information and testimony in connection with the investigations and in conducting our internal investigation, and we cannot predict at this time the ultimate amount of all such costs. We are unable to predict the duration, scope or results of the ongoing investigations or how the results of these investigations or any resolutions may impact our company’s business,

 

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results of operations or financial condition. No provision relating to the investigations has been recorded in our company’s audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. For details of the investigations by the SEC, DOJ and OM, please see “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We are subject to investigations by the SEC, DOJ and OM, and are conducting an internal investigation. We are unable to predict the duration, scope or results of these investigations or their impact on us” and Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Change in functional currency for Uzbekistan

Historically the functional currency of our operations in Uzbekistan for accounting purposes has been the U.S. dollar as opposed to the local currency the Uzbek som. During 2014 we concluded that the Uzbek som should be the functional currency for Unitel as it more clearly drives the economics within the Uzbek Telecom industry. The impact of change in functional currency was not material and accounted for in 2014.

Algeria Transaction and Settlement

On January 30, 2015, we together with our 51.9% owned subsidiary GTH completed the sale by GTH of a non-controlling 51% interest in OTA to the Fonds National d’Investissement, the Algerian National Investment Fund (“FNI”), for a purchase consideration of US$2.6 billion. Immediately prior to the closing of the transaction, OTA distributed to its shareholders a dividend in respect of the financial years 2008-2013 of approximately US$1.9 billion. The total dividends and proceeds paid to GTH at closing of the transaction amounted to approximately US$3.8 billion, net of all taxes and after the settlement of all outstanding disputes between the parties and the payment of associated fines.

Shortly prior to closing of the transaction and in order to facilitate the closing, OTA contributed its operations, referred to as the Contribution, to Optimum Telecom Algeria S.p.A. (“Optimum”), a wholly-owned subsidiary of OTA.

Shareholders Agreement

GTH and the FNI along with VimpelCom, OTA and Optimum entered into a shareholders agreement at closing of the transaction to govern the relationship of GTH and the FNI as shareholders in OTA and the operations of Optimum.

Pursuant to the shareholders agreement, we and GTH will continue to fully consolidate OTA. GTH has the right to appoint board members representing a simple majority of the votes on the boards of each of OTA and Optimum and will retain control over each of OTA and Optimum. Certain enumerated strategic decisions are subject to a supermajority vote of the respective boards (including the affirmative vote of at least one director representing GTH and the FNI). OTA will pay future dividends to its shareholders out of available free cash flow, targeting a pay-out ratio of not less than 42.5% of consolidated net income. Declaration of dividends above 42.5% of consolidated net income are subject to a super majority vote of the respective boards.

Transfers of the parties’ respective shareholdings in OTA are not permitted during the first seven years following the closing of the transaction other than to certain affiliates. Following such seven year period, transfer by GTH of its OTA shares to a third party shall be subject to a right of first refusal in favor of the FNI and transfer by the FNI of its OTA shares to a third party shall be subject to a tag along right in favor of GTH. Furthermore, GTH has an option to sell all (and not less than all) of its OTA shares to the FNI at the then fair market value. GTH’s option is exercisable solely at its discretion during the three month period between July 1, 2021 and September 30, 2021 as well as at any time upon occurrence of certain events (including, generally, change of control of the FNI, material breach of the shareholders agreement by the FNI, loss of VimpelCom’s ability to consolidate OTA, the taking of certain actions in Algeria against GTH or OTA, failure by OTA to pay a

 

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minimum dividend or imposition of certain tax assessments). Concurrently, the FNI has an option to buy from GTH all (and not less than all) of GTH’s OTA shares at the then fair market value. The FNI’s option is exercisable solely at its discretion during the three month period between October 1, 2021 and December 31, 2021 as well as at any time upon the occurrence of certain events (including, generally, change in VimpelCom’s indirect control of OTA, insolvency of GTH or VimpelCom or material breach of the shareholders agreement by GTH). GTH and the FNI have agreed to meet not later than November 30, 2019 to discuss, among other matters, their intentions regarding the exercise of their discretionary put and call options, whether to continue their relationship following the exercise periods for such options and other possible solutions to enable liquidity of their respective interests in OTA.

Settlement of Disputes

The foreign exchange and import restrictions put in place by the Bank of Algeria against OTA on April 15, 2010 were lifted on closing, following the payment (with no admission of wrongdoing or liability) by OTA to the Algerian Treasury of the fine of DZD99 billion (approximately US$1.1 billion). At closing of the transaction, OTA definitively discontinued (with no admission of wrongdoing or liability) all pending related proceedings.

At closing of the transaction, OTA definitively discontinued (with no admission of wrongdoing or liability) all pending proceedings relating to the disputes with the Algerian tax administration relating to tax reassessments for the years 2004 to 2009. OTA has written off the related tax receivable on its balance sheet.

Upon closing of the transaction, GTH terminated its international arbitration against the Algerian State initiated on April 12, 2012 and the parties to the arbitration settled the arbitration and all claims relating thereto.

Credit Facilities

Shortly prior to closing of the transaction, OTA and Optimum established credit facilities with a syndicate of Algerian and international banks in an aggregate amount of DZD82 billion (approximately US$0.9 billion). For more information on these credit facilities, see “—Liquidity and Capital Resources—Financing Activities.”

Agreement with OTA’s Minority Shareholder Cevital

Pursuant to an amended Framework Agreement between GTH and Cevital S.p.A., or Cevital, a minority shareholder in OTA, following the closing of the transaction, Cevital continues to be a shareholder in OTA and holds 3.43% of the share capital of OTA. At closing of the transaction, the existing OTA shareholder arrangements to which Cevital was a party were terminated and Cevital dismissed all pending litigation against OTA in settlement for a dinar payment by OTA equating to approximately US$50 million plus Cevital’s entitled share of the approximately US$1.9 billion pre-closing dividend paid by OTA to its shareholders.

For more information, see Notes 6, 26 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Network and Tower Sharing Agreements

In late 2014 our wholly owned subsidiary, OJSC VimpelCom, entered into an agreement with MTS for joint planning, development and operation of 4G/LTE networks in 36 regions of Russia. Under the terms of the agreement, between 2014 and 2016 MTS will build and operate 4G/LTE base stations in 19 regions and OJSC VimpelCom will build and operate 4G/LTE base stations in 17 regions of Russia. Within the first seven years of the project, OJSC VimpelCom and MTS plan to share base stations, platforms, infrastructure and resources of the transportation network, with each operator maintaining its own core network.

In February 2015 our wholly owned subsidiary, Wind Italy, entered into a definitive agreement for the sale of 90% of the shares of Wind Italy’s wholly owned subsidiary Galata to Abertis Telecom for a total cash

 

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consideration of €693 million (approximately US$737 million as of March 12, 2015). Galata is a tower business consisting of 7,377 towers together with the relevant functions, employees and related contracts. Upon the transaction closing, which is expected to occur in the near future, Abertis Telecom will own 90% of the share capital of Galata while Wind Italy will retain a 10% stake. Wind Italy has a Tower Services Agreement for an initial term of 15 years with Galata for the provision of a broad range of services on the contributed sites and sites subsequently built by Galata hosting Wind Italy equipment.

VimpelCom Amsterdam B.V. cash tender offer for OJSC VimpelCom and VimpelCom Holdings B.V. U.S. dollar notes

On March 2, 2015, VimpelCom Amsterdam B.V. announced that it commenced a cash tender offer for up to US$2,100 million aggregate principal amount of the outstanding U.S. dollar notes issued by VimpelCom Holdings B.V. and loan participation notes issued by VIP Finance Ireland and UBS (Luxembourg) SA for the sole purpose of funding loans to OJSC VimpelCom. The total outstanding amount of these bonds is US$6,700 million. The tender offer expires on March 30, 2015 and settlement is expected to take place on April 2, 2015. For more information regarding this tender offer, including the results of the early tender period, see “—Liquidity and Capital Resources—Financing Activities—Recent Financing Activities.”

Macroeconomic and Political Risks Concerning Russia and Ukraine

Low oil prices, together with the impact of economic sanctions resulting from the current situation in Ukraine and the consequent devaluation of the Russian ruble, are negatively impacting the Russian economic outlook. In 2014, the significant depreciation of the ruble against the U.S. dollar in particular negatively impacted our results of operations and resulted in a foreign currency exchange loss in 2014. In addition, the devaluation of the Ukrainian hryvnia negatively impacted revenues in our Ukraine segment and our results of operations in 2014, and the National Bank of Ukraine’s decision in February 2015 to suspend its interventions to support the Ukrainian hryvnia has resulted in further devaluation in 2015. Furthermore, the current situation in Ukraine along with the response to the situation by the governments of Russia, the United States, the European Union and other countries have the potential to adversely affect our business in Russia and Ukraine, markets in which we have significant operations. For more information, see “Item 3.D—Risk Factors—Risks Related to our Business—We are exposed to foreign currency exchange loss and currency fluctuation and convertibility risks”, “—Risks Related to Our Markets—The international economic environment could cause our business to decline” and “—Risks Related to Our Markets—Our operations may be adversely affected by ongoing developments in Ukraine.”

Certain Performance Indicators

The following discussion analyzes certain operating data, including mobile and broadband customer data, mobile MOU, mobile ARPU and mobile churn rates, that are not included in our financial statements. We provide this operating data because it is regularly reviewed by our management and our management believes it is useful in evaluating our performance from period to period as set out below. Our management believes that presenting information about mobile and broadband customers, mobile MOU and mobile ARPU is useful in assessing the usage and acceptance of our mobile and broadband products and services, and that presenting our mobile churn rate is useful in assessing our ability to retain mobile customers. This operating data is unaudited.

Mobile Customer Data

We offer both postpaid and prepaid services to mobile customers. As of December 31, 2014, the number of our mobile customers reached approximately 222 million. Mobile customers are generally customers in the registered customer base as of a measurement date who engaged in a revenue generating activity at any time during the three months prior to the measurement date. Such activity includes any incoming and outgoing calls, customer fee accruals, debits related to service, outgoing SMS and MMS, data transmission and receipt sessions, but does not include incoming SMS and MMS or abandoned calls. Our total number of mobile customers also

 

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includes customers using mobile Internet service via USB modems. For our business in Italy, prepaid mobile customers are counted in our customer base if they have activated our SIM card in the last twelve months (with respect to new customers) or if they have recharged their mobile telephone credit in the last twelve months and have not requested that their SIM card be deactivated and have not switched to another telecommunications operator via mobile number portability during this period (with respect to our existing customers), unless a fraud event has occurred. Postpaid customers in Italy are counted in our customer base if they have an active contract unless a fraud event has occurred or the subscription is deactivated due to payment default or because they have requested and obtained through mobile number portability a switch to another telecommunications operator. We include mobile customers of our equity investee in Zimbabwe (accounted at cost), in the Africa & Asia reporting segment. These figures are also included in our total customer data.

The following table indicates our mobile customer figures (in millions), as well as our prepaid mobile customers as a percentage of our total mobile customer base, for the periods indicated:

 

     As of December 31,  
     2014     2013     2012  

Russia

     57.2        56.5        56.1   

Italy

     21.6        22.3        21.6   

Algeria(1)

     18.4        17.6        16.7   

Africa & Asia(2)

     71.6        69.4        64.9   

Ukraine(1)

     26.2        25.8        25.1   

CIS

     26.5        25.4        24.2   

Total number of mobile customers

     221.6        216.9        208.6   

Percentage of prepaid customers

     94.3     92.4     96.2

 

(1) The customer numbers for 2012 have been adjusted to reflect revised numbers in Algeria and in Ukraine to align with the group definition. MOU, ARPU and Churn have been adjusted accordingly.
(2) The customer numbers for Africa & Asia include 2.2 million customers from our equity investee in Zimbabwe (accounted at cost) as of December 31, 2014 and 2.6 million customers as of December 31, 2013 and 2012. The customer numbers for 2012, 2013 and 2014 have been adjusted to remove customers in operations that have been sold.

Mobile MOU

Mobile MOU measures the monthly average minutes of voice service use per mobile customer. We generally calculate mobile MOU by dividing the total number of minutes of usage for incoming and outgoing calls during the relevant period (excluding guest roamers) by the average number of mobile customers during the period and dividing by the number of months in that period. For our business in Italy, we calculate mobile MOU as the sum of the total traffic (in minutes) in a certain period divided by the average number of customers for the period (the average of each month’s average number of customers (calculated as the average of the total number of customers at the beginning of the month and the total number of customers at the end of the month)) divided by the number of months in that period. The Africa & Asia segment measures mobile MOU based on billed minutes.

Our management does not analyze mobile MOU on a segment level in the Africa & Asia and CIS segments but rather on a country basis.

Mobile ARPU

Mobile ARPU measures the monthly average revenue per mobile user. We generally calculate mobile ARPU by dividing our mobile service revenue during the relevant period, including data revenue, roaming revenue and interconnect revenue, but excluding revenue from connection fees, sales of handsets and accessories and other non-service revenue, by the average number of our mobile customers during the period and dividing by the number of months in that period. For Italy, we define mobile ARPU as the measure of the sum of our mobile revenue in the period divided by the average number of mobile customers in the period (the average of each

 

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month’s average number of mobile customers (calculated as the average of the total number of mobile customers at the beginning of the month and the total number of mobile customers at the end of the month)) divided by the number of months in that period.

Our management does not analyze mobile ARPU on a segment level in Africa & Asia and CIS segments but rather on a country basis.

Mobile Churn Rate

We generally define our mobile churn rate as the total number of churned mobile customers over the reported period expressed as a percentage of the average of our mobile customer base at the starting date and at the ending date of the period. The total number of churned mobile customers is calculated as the difference between the number of new customers who engaged in a revenue generating activity in the reported period and the change in the mobile customer base between the starting date and the ending date of the reported period. Migration between prepaid and postpaid forms of payment and between tariff plans may technically be recorded as churn, which contributes to our mobile churn rate even though we do not lose those customers. For our business in Italy, mobile churn is defined as the rate at which customers are disconnected from our network, or are removed from our customer base due to inactivity, fraud or payment default. In Italy, our mobile churn is calculated by dividing the total number of customer disconnections (including customers who disconnect and reactivate with us at a later stage with a different SIM card) for a given period by the average number of customers for that period (calculated as the average of each month’s average number of customers (calculated as the average of the total number of customers at the beginning of the month and the total number of customers at the end of the month)) divided by the number of months in that period.

Broadband Customers

Broadband customers are generally customers in the registered customer base who were engaged in a revenue generating activity using broadband in the three-month period prior to the measurement date. In Russia and Ukraine, such activity includes monthly Internet access using FTTB, xDSL and WiFi technologies, as well as mobile Internet access via USB modems using GPRS/3G/HSDPA technologies. In Italy, we measure fixed broadband customers based on the number of active contracts signed, while mobile broadband customers are those consumers who have performed at least one mobile Internet event in the previous month on GPRS/3G/HSPA/4G/LTE network technology. Our CIS mobile broadband customers are those who have performed at least one mobile Internet event in the three-month period prior to the measurement date.

 

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Results of Operations

Consolidated results

 

     Years ended December 31,  
     2014     2013     2012  
     (In millions of US dollars, except per
share amounts)
 

Service revenue

     18,725        21,529        22,122   

Sale of equipment and accessories

     519        725        677   

Other revenue

     383        292        262   
  

 

 

   

 

 

   

 

 

 

Total operating revenue

     19,627        22,546        23,061   
  

 

 

   

 

 

   

 

 

 

Operating expenses

      

Service costs

     4,381        5,133        5,439   

Cost of equipment and accessories

     551        780        693   

Selling, general and administrative expenses

     6,725        8,373        7,161   

Depreciation

     2,839        3,050        2,926   

Amortization

     1,479        1,791        2,080   

Impairment loss

     992        2,973        386   

Loss on disposals of non-current assets

     74        100        205   

Total operating expenses

     17,041        22,200        18,890   
  

 

 

   

 

 

   

 

 

 

Operating profit

     2,586        346        4,171   
  

 

 

   

 

 

   

 

 

 

Finance costs

     2,026        2,150        2,029   

Finance income

     (54     (91     (154

Other non-operating losses/(gains)

     152        172        75   

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

     38        159        9   

Net foreign exchange (gain)/ loss

     605        (20     (70

(Loss)/profit before tax

     (181     (2,024     2,282   
  

 

 

   

 

 

   

 

 

 

Income tax expense

     722        2,064        906   
  

 

 

   

 

 

   

 

 

 

(Loss)/profit for the year

     (903     (4,088     1,376   
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

The owners of the parent

     (647     (2,625     1,539   

Non-controlling interest

     (256     (1,463     (163
  

 

 

   

 

 

   

 

 

 
     (903     (4,088     1,376   

 

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The table below shows, for the periods indicated, the following consolidated statement of operations data expressed as a percentage of consolidated total operating revenue:

 

     Years ended December 31,  
     2014     2013     2012  

Service revenue

     95.4     95.5     95.9

Sale of equipment and accessories

     2.6     3.2     2.9

Other revenue

     2.0     1.3     1.1
  

 

 

   

 

 

   

 

 

 

Total operating revenue

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

Operating expenses

      

Service costs

     22.3     22.8     23.6

Cost of equipment and accessories

     2.8     3.5     3.0

Selling, general and administrative expenses

     34.3     37.1     31.1

Depreciation

     14.5     13.5     12.7

Amortization

     7.5     7.9     9.0

Impairment loss

     5.1     13.2     1.7

Loss on disposals of non-current assets

     0.4     0.4     0.9
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     86.8     98.5     81.9
  

 

 

   

 

 

   

 

 

 

Operating profit

     13.2     1.5     18.1
  

 

 

   

 

 

   

 

 

 

Finance costs

     10.3     9.5     8.8

Finance income

     (0.3 %)      (0.4 %)      (0.7 %) 

Other non-operating losses/(gains)

     0.8     0.8     0.3

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

     0.2     0.7     0.0

Net foreign exchange (gain)/loss

     3.1     (0.1 %)      (0.3 %) 
  

 

 

   

 

 

   

 

 

 

Profit/(loss) before tax

     (0.9 %)      (9 %)      9.9
  

 

 

   

 

 

   

 

 

 

Income tax expense

     3.7     9.2     3.9
  

 

 

   

 

 

   

 

 

 

Profit/(loss) for the year

     (4.6 %)      (18.1 %)      6.0
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

The owners of the parent

     (3.3 %)      (11.6 %)      6.7

Non(controlling interest

     (1.3 %)      (6.5 %)      (0.7 %) 
  

 

 

   

 

 

   

 

 

 
     (4.6 %)      (18.1 %)      6.0
  

 

 

   

 

 

   

 

 

 

 

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The tables below show for the periods indicated selected information about the results of operations in each of our reportable segments. For more information regarding our segments, see Note 7 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Segmentation of Total Operating Revenue

 

     Year ended December 31,  
     2014     2013     2012  
     (In millions of US dollars)  

Russia

     7,459        9,109        9,190   

Italy

     6,155        6,618        6,982   

Algeria

     1,692        1,796        1,843   

Africa & Asia

     1,668        1,710        1,880   

Ukraine

     1,062        1,610        1,676   

CIS

     1,873        1,946        1,755   

Intersegment and other

     (281     (243     (265
  

 

 

   

 

 

   

 

 

 

Total

     19,627        22,546        23,061