20-F 1 d194450d20f.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, 2015

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 Select Market
Common shares, US$0.001 nominal value   NASDAQ Global Select 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  ¨    No  x

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

     4   
ITEM 4.  

Information on the Company

     30   
ITEM 4A.  

Unresolved Staff Comments

     85   
ITEM 5.  

Operating and Financial Review and Prospects

     85   
ITEM 6.  

Directors, Senior Management and Employees

     144   
ITEM 7.  

Major Shareholders and Related Party Transactions

     154   
ITEM 8.  

Financial Information

     156   
ITEM 9.  

The Offer and Listing

     157   
ITEM 10.  

Additional Information

     159   
ITEM 11.  

Quantitative and Qualitative Disclosures About Market Risk

     169   
ITEM 12.  

Description of Securities other than Equity Securities

     170   
ITEM 13.  

Defaults, Dividend Arrearages and Delinquencies

     172   
ITEM 14.  

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

     172   
ITEM 15.  

Controls and Procedures

     172   
ITEM 16A.  

Audit Committee Financial Expert

     173   
ITEM 16B.  

Code of Ethics

     173   
ITEM 16C.  

Principal Accountant Fees and Services

     173   
ITEM 16D.  

Exemptions from the Listing Standards for Audit Committees

     174   
ITEM 16E.  

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     174   
ITEM 16F.  

Change in Registrant’s Certifying Accountant

     174   
ITEM 16G.  

Corporate Governance

     174   
ITEM 17.**  

Financial Statements

     176   
ITEM 18.  

Financial Statements

     176   
ITEM 19.  

Exhibits

     177   

 

* 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,” “the 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, 2015, 2014 and 2013 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 (i) “U.S. dollars,” “US$” or “USD” are to the lawful currency of the United States of America, (ii) “Russian rubles,” “rubles” or “RUB” are to the lawful currency of the Russian Federation, (iii) “Algerian dinar” or “DZD” are to the lawful currency of Algeria, (iv) “Pakistani rupees” or “PKR” are to the lawful currency of Pakistan, (iv) “Bangladeshi taka” or “BDT” are to the lawful currency of Bangladesh, (v) “Ukrainian hryvnia,” “hryvnia” or “UAH” are to the lawful currency of Ukraine, (vi) “Kazakh tenge” or “KZT” are to the lawful currency of the Republic of Kazakhstan, (vii) “Uzbek som” or “UZS” are to the lawful currency of Uzbekistan, (viii) “Kyrgyz som” are to the lawful currency of Kyrgyzstan, (ix) “Armenian dram” are to the lawful currency of the Republic of Armenia, (x) “Tajik somoni” are to the lawful currency of Tajikistan, (xi) “Georgian lari” are to the lawful currency of Georgia, (xii) “Lao kip” are to the lawful currency of Laos and (xiii) “€,” “EUR” or “Euro” are to the single currency of the participating member states of the European and Monetary Union of the Treaty Establishing the European Community, as amended from time to time. In addition, references to “EU” are to the European Union, 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 “AB SEK” are to AB Svensk Exportkredit, references to “Bangladeshi T-Bill” are to Bangladeshi Treasury Bills and references to “Rendistato” are to the weighted average yield on a basket of Italian government securities produced and published by the Bank of Italy.

 

 

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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, Pakistani rupee and Bangladeshi taka amounts at the exchange rates provided by Bloomberg Finance L.P. and from Russian ruble, Ukrainian 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.

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 the reconciliations, our consolidated Adjusted EBITDA differs from the aggregation of Adjusted EBITDA of each of our reportable segments. 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 indicate 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.

Local currency financial measures. In the discussion and analysis of our results of operations, we present certain financial measures in local or “functional” currency terms. These non-GAAP financial measures include the results of operations of our reportable segments in jurisdictions with local functional currencies, and exclude the impact of translating the local currency amounts to U.S. dollars. We analyze the performance of our reportable segments on a functional currency basis to better measure the comparability of results between periods. Because changes in foreign exchange rates have a non-operating impact on the results of operations, our management believes that evaluating their performance on a functional currency basis provides an additional and meaningful assessment of performance to our management and to investors. For information regarding our translation of foreign currency-denominated amounts into U.S. dollars, see “Item 5—Operating and Financial Review and Prospects—Certain Factors Affecting our Financial Position and Results of Operations—Foreign Currency Translation” and Note 3 to our audited consolidated financial statements included elsewhere in their Annual Report on Form 20-F.

 

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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,” “plans,” “aims,” “seeks,” “believes,” “will,” “may,” “could,” “should” or the negative of these terms. All forward-looking statements, including discussions of strategy, plans, ambitions, objectives, goals and future events or performance, involve risks and uncertainties. Examples of forward-looking statements include:

 

    our plans to implement our strategic priorities, including with respect to our performance transformation; business to business growth and other new revenue streams; digitalizing our business model; portfolio and asset optimization; improving customer experience and optimizing our capital structure;

 

    our ability to generate sufficient cash flow to meet our debt service obligations and our expectations regarding working capital and the repayment of our debt;

 

    our expectations regarding our capital expenditures in and after 2016 and our ability to meet our projected capital requirements;

 

    our plans to upgrade and build out our networks and to optimize our network operations;

 

    our goals regarding value, experience and service for our customers, as well as our ability to retain and attract customers and to maintain and expand our market share positions;

 

    our plans to develop, provide and expand our products and services, including broadband services and integrated products and services, such as fixed-mobile convergence;

 

    our ability to execute our business strategy successfully and to complete, and achieve the expected benefits from, our existing and future transactions, such as our agreement with CK Hutchison Holdings Limited (“Hutchison”), which owns indirectly 100% of Italian mobile operator 3 Italia S.p.A. (“3 Italia”), to form an equal joint venture holding company that will own and operate our telecommunications businesses in Italy (a transaction we refer to as the “Italy Joint Venture” in this Annual Report on Form 20-F); our agreement with Warid Telecom Pakistan LLC (“WTPL”) and Bank Alfalah Limited (“Bank Alfalah”) to merge our telecommunications businesses in Pakistan (a transaction we refer to as the “Pakistan Merger” in this Annual Report on Form 20-F); and the sale by WIND Telecomunicazioni S.p.A. (“WIND Italy”) of 90% of the shares of Galata S.p.A. (“Galata”) to Cellnex Telecom Terrestre SA, formerly named Abertis Telecom Terrestre SAU (“Cellnex”);

 

    our ability to integrate acquired companies, joint ventures or other forms of strategic partnerships into our existing businesses in a timely and cost-effective manner and to realize anticipated synergies therefrom;

 

    our expectations as to pricing for our products and services in the future, improving our monthly average revenue per customer and our future costs and operating results;

 

    our plans regarding our dividend payments and policies, as well as our ability to receive dividends, distributions, loans, transfers or other payments or guarantees from our subsidiaries;

 

    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 plans regarding the marketing and distribution of our products and services, as well as our customer loyalty programs;

 

    our expectations regarding our competitive strengths, customer demands, market trends and future developments in the industry and markets in which we operate;

 

    possible consequences of resolutions 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”) through agreements, and any litigation or additional investigations related to or arising out of such agreements or investigations, any costs we may incur in connection with such resolutions, investigations or litigation, as well as any potential disruption or adverse consequences to us resulting from any of the foregoing, including the retention of a compliance monitor as required by the Deferred Prosecution Agreement (the “DPA”) with the DOJ and the final judgment and consent related to the settlement with the SEC (the “Consent”), any changes in company policy or procedure suggested by the compliance monitor or undertaken by the company, the duration of the compliance monitor, and the company’s compliance with the terms of the resolutions with the DOJ, SEC, and OM; and

 

    other statements regarding matters that are not historical facts.

 

 

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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;

 

    risks related to currency fluctuations;

 

    risks that various courts or regulatory agencies with whom 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 possible consequences of the investigations by, and the agreements with, the DOJ, SEC and OM and any additional investigations or litigation that may be initiated relating 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 the retention of a compliance monitor;

 

    risks related to our strategic shareholders, lenders, employees, joint venture partners, representatives, agents, suppliers, customers and other third parties;

 

    risks associated with our existing and future transactions, including with respect to satisfying closing conditions, obtaining regulatory approvals and implementing remedies;

 

    risks related to the ownership of our shares; 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 any 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.

 

ITEM 3. Key Information

A. Selected Financial Data

The following selected consolidated financial data for the five years ended December 31, 2015 has been derived from our historical consolidated financial statements which have been audited by PricewaterhouseCoopers Accountants N.V., an independent registered public accounting firm, for the years ended December 31, 2015 and 2014 and Ernst & Young Accountants LLP, an independent registered public accounting firm, for the years ended December 31, 2013, 2012 and 2011. 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.” The data for 2014, 2013, 2012 and 2011 has been restated to reflect the classification of WIND Italy as a discontinued operation, and the restated data for 2012 and 2011 is unaudited. For more information, please see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture” and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

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     Year ended December 31,  
     2015     2014     2013     2012
Unaudited
    2011
Unaudited
 
     (In millions of US dollars, except per
share amounts)
 

Consolidated income statements data:

Service revenue

     9,332        13,231        15,472        15,607        14,304   

Sale of equipment and accessories

     190        218        391        422        360   

Other revenue

     103        68        103        49        12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     9,625        13,517        15,966        16,078        14,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

          

Service costs

     1,956        2,962        3,595        3,626        3,483   

Cost of equipment and accessories

     231        252        438        400        466   

Selling, general and administrative expenses

     4,563        4,743        6,256        4,962        4,663   

Depreciation

     1,550        1,996        2,245        2,188        2,129   

Amortization

     517        647        808        1,062        1,193   

Impairment loss

     245        976        2,963        391        483   

Loss on disposals of non-current assets

     39        68        93        199        92   

Total operating expenses

     9,101        11,644        16,398        12,828        12,509   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     524        1,873        (432     3,250        2,167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance costs

     829        1,077        1,213        1,058        822   

Finance income

     (52     (52     (90     (151     (122

Other non-operating losses/(gains)

     42        (121     (84     (34     30   

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

     (14     38        159        9        35   

Net foreign exchange (gain)/ loss

     314        556        12        (52     102   

(Loss)/profit before tax

     (595     375        (1,642     2,420        1,300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     220        598        1,813        730        276   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/profit for the year from continuing operations

     (815     (223     (3,455     1,690        1,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/profit after tax for the period from discontinued operations

     262        (680     (633     (314     (755

(Loss)/profit for the year

     (553     (903     (4,088     1,376        269   

Attributable to:

          

The owners of the parent (continuing operations)

     (917     33        (1,992     1,853        1,298   

The owners of the parent (discontinued operations)

     262     

 

(680

    (633    
(314

   
(755

Non-controlling interest

     102        (256     (1,463     (163     (274
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (553     (903     (4,088     1,376        269   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings/(loss) per share from continuing operations

          

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

   $ (0.52   $ 0.02      $ (1.16   $ 1.14      $ 0.85   

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

   $ (0.52   $ 0.02      $ (1.16   $ 1.14      $ 0.85   

Earnings/(loss) per share from discontinued operations

          

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

   $ 0.15      $ (0.39   $ (0.37   $ (0.19   $ (0.50

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

   $ 0.15      $ (0.39   $ (0.37   $ (0.19   $ (0.50

Weighted average number of common shares (millions)

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

Dividends declared per share

   $ 0.035      $ 0.035      $ 1.24      $ 0.80      $ 0.80   

 

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     As of December 31,  
     2015     2014     2013(2)     2012     2011  
     (In millions of US dollars)  

Consolidated balance sheets data:

          

Cash and cash equivalents

     3,614        6,342        4,454        4,949        2,325   

Working capital (deficit)(1)

     (156     (938     (2,815     (2,421     (3,074

Property and equipment, net

     6,239        11,849        15,493        15,666        15,165   

Intangible assets and goodwill

     6,447        18,002        24,546        27,565        28,601   

Total assets

     33,854        41,042        49,747        54,737        54,039   

Total liabilities

     29,960        37,066        40,669        39,988        39,137   

Total equity

     3,894        3,976        9,078        14,749        14,902   

 

(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.

 

     Year ended December 31,  
     2015      2014      2013      2012
Unaudited
     2011
Unaudited
 
     (In millions of US dollars)  

Other data:

              

Adjusted EBITDA *

     2,875         5,560         5,677         7,090         6,064   

 

* 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 before tax for the year, the most directly comparable IFRS financial measure, is presented below.

 

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Reconciliation of Adjusted EBITDA to profit before tax for the year

 

     Year ended December 31,  
     2015     2014     2013     2012
Unaudited
    2011
Unaudited
 
     (In millions of US dollars)  

Adjusted EBITDA

     2,875        5,560        5,677        7,090        6,064   

Depreciation

     (1,550     (1,996     (2,245     (2,188     (2,129

Amortization

     (517     (647     (808     (1,062     (1,193

Impairment loss

     (245     (976     (2,963     (391     (483

Loss on disposals of non-current assets

     (39     (68     (93     (199     (92

Finance costs

     (829     (1,077     (1,213     (1,058     (822

Finance income

     52        52        90        151        122   

Other non-operating losses/(gains)

     (42     121        84        34        (30

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

     14        (38     (159     (9     (35

Net foreign exchange loss/(gain)

     (314     (556     (12     52        (102

(Loss)/profit before tax

     (595     375        (1,642     2,420        1,300   

SELECTED OPERATING DATA

The following selected operating data as of and for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 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,  
     2015      2014      2013      2012      2011  

Selected company operating data(1):

              

End of period mobile customers (in millions):

              

Russia

     59.8         57.2         56.5         56.1         57.2   

Algeria(2)

     17.0         17.7         17.6         16.7         16.2   

Pakistan

     36.2         38.5         37.6         36.1         34.2   

Bangladesh

     32.3         30.8         28.8         25.9         23.8   

Ukraine(2)

     25.4         26.2         25.8         25.1         23.2   

Kazakhstan

     9.5         9.8         9.2         8.6         8.4   

Uzbekistan

     9.9         10.6         10.5         10.2         6.4   

Other Countries(3)

     6.2         6.3         6.1         5.7         5.4   

Italy

     21.1         21.6         22.3         21.6         21.0   

Total mobile customers(4)

     217.4         218.7         214.4         206.0         197.4   

Mobile MOU (5)

              

Russia

     311         304         291         276         243   

Algeria(2)

     209         210         216         274         289   

Pakistan

     336         238         226         214         206   

Bangladesh

     209         197         184         216         209   

Ukraine(2)

     543         508         501         513         483   

Kazakhstan

     285         309         290         213         148   

Uzbekistan

     528         523         471         474         425   

Other Countries

              

Kyrgyzstan

     281         293         265         272         303   

Armenia

     353         374         339         269         257   

 

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     As of December 31,  
     2015      2014      2013      2012      2011  

Tajikistan

     291         286         270         241         229   

Georgia

     235         228         244         237         207   

Laos

     100         103         106         97         233   

Italy

     269         264         237         207         197   

Mobile ARPU (5)

              

Russia

   US$ 5.2       US$ 8.6       US$ 10.6       US$ 10.8       US$ 11.0   

Algeria(2)

   US$ 6.0       US$ 7.9       US$ 8.4       US$ 9.0       US$ 9.8   

Pakistan

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

Bangladesh

   US$ 1.6       US$ 1.5       US$ 1.5       US$ 1.8       US$ 1.8   

Ukraine(2)

   US$ 1.8       US$ 3.1       US$ 4.7       US$ 5.2       US$ 5.2   

Kazakhstan

   US$ 4.4       US$ 5.8       US$ 7.1       US$ 7.6       US$ 8.3   

Uzbekistan

   US$ 5.7       US$ 5.6       US$ 5.3       US$ 4.6       US$ 4.1   

Other Countries

              

Kyrgyzstan

   US$ 4.9       US$ 5.5       US$ 6.6       US$ 5.5       US$ 5.5   

Armenia

   US$ 4.9       US$ 6.6       US$ 7.1       US$ 6.8       US$ 8.1   

Tajikistan

   US$ 8.1       US$ 9.2       US$ 10.0       US$ 8.6       US$ 8.8   

Georgia

   US$ 3.0       US$ 4.9       US$ 6.3       US$ 6.7       US$ 6.8   

Laos

   US$ 5.4       US$ 5.3       US$ 6.0       US$ 5.6       US$ 5.1   

Italy

   US$ 12.5       US$  14.6       US$ 16.3       US$ 18.5       US$ 21.7   

Annual churn (as a percentage) (5)

              

Russia

     53.8         60.1         63.9         63.2         62.8   

Algeria(2)

     38.5         28.0         31.6         29.5         23.4   

Pakistan

     33.3         26.0         23.0         25.2         29.5   

Bangladesh

     22.7         21.6         22.3         25.2         18.5   

Ukraine(2)

     23.5         24.9         35.3         29.8         28.9   

Kazakhstan

     54.6         50.5         48.6         55.8         47.4   

Uzbekistan

     45.9         48.1         53.5         55.1         59.7   

Other Countries

              

Kyrgyzstan

     67.6         65.7         65.6         66.1         52.3   

Armenia

     39.2         43.9         62.6         83.9         87.6   

Tajikistan

     76.8         77.1         77.9         72.7         67.4   

Georgia

     68.8         69.7         74.0         79.1         70.1   

Laos

     119.0         94.6         102.6         141.0         258.0   

Italy

     29.2         31.4         36.6         35.2         28.3   

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

              

Russia

     6.2         5.9         5.4         5.0         4.6   

Ukraine

     0.8         0.8         0.8         0.6         0.4   

Kazakhstan (6)

     5.2         5.6         5.4         4.8         4.4   

Uzbekistan(6)

     4.7         5.5         5.5         4.8         2.8   

Other Countries(3)(6)

     3.0         3.0         2.8         2.7         2.3   

Italy

     13.9         12.3         10.5         7.8         6.6   

Total broadband customers

     33.8         33.1         30.4         25.7         21.1   

 

(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.”
(2) The customer numbers for 2012 and 2011 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.
(3) Customer numbers for Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos.
(4) The customer numbers for 2015, 2014, 2013, 2012 and 2011 have been adjusted to remove customers in operations that have been sold.
(5) For Wind Telecom S.p.A. group companies acquired on April 15, 2011, Mobile MOU, ARPU and Churn are calculated based on the full year.
(6) Mobile broadband customers in Kazakhstan and Uzbekistan (as well as in Kyrgyzstan, Armenia, Tajikistan and Georgia) 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.

 

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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 American Depositary Shares (ADS). 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, cash flows and 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.

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 harm our business, financial condition, results of operations, cash flows and prospects.

Risks Related to Our Business

Substantial amounts of indebtedness and debt service obligations could materially decrease our cash flow, adversely affect our business and financial condition and prevent us from raising additional capital.

We have substantial amounts of indebtedness and debt service obligations. As of December 31, 2015, the outstanding principal amount of our external debt for bank loans, bonds, equipment financing, and loans from others amounted to approximately US$9.5 billion, excluding US$12.0 billion of indebtedness of WIND Italy. For more information regarding our outstanding indebtedness, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.” For more information on the Italy Joint Venture and the treatment of WIND Italy’s indebtedness and liabilities, see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture” and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

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Agreements under which we borrow funds contain obligations, which include covenants that impose on us certain operating and financial restrictions. Some of these covenants relate to our financial performance or financial condition, such as levels or ratios 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 a 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 or to which our creditors otherwise have recourse. 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” and Notes 17 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. Please also see “—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” for information regarding change of control provisions in some of our debt agreements.

Aside from the risk of default, given our substantial amounts of indebtedness 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 flexibility and resiliency in the face of general adverse economic and industry conditions.

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 risks that we now face related to our substantial indebtedness and debt service obligations 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, the European Union and other countries in connection with developments in Ukraine during 2014 and 2015, and additional sanctions which may be imposed in the 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 restricted by covenants in our financing agreements or affected by any downgrade of our credit ratings, even for reasons outside our control, which may materially 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, until the completion of the Italy Joint Venture, Euros, including capital expenditures and borrowings, while a significant amount of our revenue is denominated 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 values of the Russian, Ukrainian and Kazakh 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 and 2015, in particular, negatively impacted our results of operations and resulted in a foreign currency exchange loss in these periods. In addition, the significant devaluation of the Ukrainian hryvnia in 2014 and 2015 (partly due to the National Bank of Ukraine’s decision in February 2015 to suspend its interventions to support the currency), the Kazakh tenge in 2014 and 2015 (in the absence of a currency stabilization policy in Kazakhstan) and the Algerian dinar in 2015 negatively impacted revenues in our Ukraine, Kazakhstan and Algeria segments, respectively, and our results of operations.

 

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Currency fluctuations and volatility may impact our results of operations and result in foreign currency transaction and translation losses in the future. For example, in 2015, total operating revenues in functional currency terms were relatively stable compared to 2014, but in U.S. dollar terms, total operating revenues decreased by 29%. For more information about foreign currency translation and our results of operations, see the sections entitled “Item 5—Operating and Financial Review and Prospects—Results of Operations” and “—Certain Factors Affecting our Financial Position and Results of Operations—Foreign Currency Translation.” 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 our existing or future hedging strategies will sufficiently hedge against these risks.

In addition, exchange controls and currency restrictions in any of our geographic regions could materially 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 also face currency restrictions in some of our other countries of operation, including Ukraine, Algeria and Bangladesh. For more information on currency restrictions and exchange controls, see “—As a holding company, VimpelCom depends on the performance of its subsidiaries” and “—Risks Related to Our Markets—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 we can conduct business and currency control requirements restrict activities in certain markets in which we have operations.” 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 are subject to a DPA with the DOJ, a Consent with the SEC, and a settlement agreement with the OM. The agreements with the DOJ and the SEC require us to retain, at our own expense, an independent compliance monitor, and the DPA and the agreement with the OM require us to continue to cooperate with the agencies regarding their investigations of other parties. We will incur costs in connection with these obligations, which may be significant.

VimpelCom has reached resolutions through agreements with the DOJ, the SEC and the OM relating to the previously disclosed investigations under the FCPA and relevant Dutch laws pertaining to our business in Uzbekistan and prior dealings with Takilant Ltd. For more information regarding these resolutions, please see Note 24 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

On February 18, 2016, the U.S. District Court for the Southern District of New York (the “District Court”) approved the DPA between VimpelCom Ltd. and the DOJ and the guilty plea of Unitel LLC. On February 22, 2016, the District Court issued a final judgment approving VimpelCom’s Consent in the SEC investigation. Under the DPA and the Consent, VimpelCom agreed to appoint an independent compliance monitor (the “monitor”). Pursuant to the DPA and the Consent, the monitorship will continue for a period of three years, and the term of the monitorship may be terminated early or extended depending on certain circumstances, as ultimately determined and approved by the DOJ and SEC. The monitor will assess and monitor VimpelCom’s compliance with the terms of the DPA and the Consent by evaluating factors such as VimpelCom’s corporate compliance program, internal accounting controls, recordkeeping and financial reporting policies and procedures. The monitor may recommend changes to our policies, procedures, and internal accounting controls that we must adopt unless they are unduly burdensome or otherwise inadvisable, in which case we may propose alternatives, which the DOJ and the SEC may or may not accept.

Under the DPA and pursuant to the Consent, VimpelCom also represented that it has implemented and agreed that it will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws throughout its operations. Further, VimpelCom represented that it has undertaken and will continue to undertake a review of its existing internal accounting controls, policies, and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. As noted above, these obligations will be reviewed and tested by the monitor appointed under the DPA and the Consent. Due to the complexity of the markets in which VimpelCom operates, compliance with these obligations may occupy a significant portion of management’s time.

In connection with the company’s entry into the DPA, the Consent and the settlement agreement with the OM (the “Dutch Settlement Agreement”), the company was required to pay an aggregate of US$795 million in fines and disgorgement to U.S. and Dutch authorities. Additionally, the company has incurred significant costs in connection with its retention of legal counsel and other vendors/advisors and the internal investigation undertaken in connection with these matters. The company currently cannot estimate the additional costs that it is likely to incur in connection with compliance with the DPA, the Consent and the Dutch Settlement Agreement, including the ongoing obligations to cooperate with the agencies regarding their investigations of other parties, the monitorship, and the costs of implementing the changes, if any, to its policies and procedures required by the monitor. However, such costs could be significant.

 

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If we commit a breach of the DPA, we may be subject to criminal prosecution. Such criminal prosecution could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

Under the DPA, the DOJ will defer criminal prosecution of VimpelCom for the three-year term of the DPA. If the DOJ determines that VimpelCom has violated the DPA (including the monitoring provisions described in the preceding risk factor), the DOJ may in its sole discretion commence prosecution or extend the term of the DPA for up to one year. If VimpelCom remains in compliance with the DPA through its term, the charges against VimpelCom will be dismissed with prejudice after the conclusion of the DPA.

Failure to comply with the terms of the DPA could result in criminal prosecution by the DOJ, including (but not limited to) for the charged conspiracy to violate the anti-bribery and the books and records provisions of the FCPA and violation of the internal controls provisions of the FCPA that were included in the information that was filed in connection with the DPA. Under such circumstance, the DOJ would be permitted to rely upon the admissions we made in the DPA and would benefit from our waiver of certain procedural and evidentiary defenses.

Pursuant to the Consent, VimpelCom is permanently enjoined from committing or aiding and abetting any future violations of the anti-fraud, corrupt payments, books and records, reporting and internal control provisions of the federal securities laws and related SEC rules. Failure to comply with this injunction could result in the imposition of civil or criminal penalties, a new SEC enforcement action or both.

Any criminal prosecution by the DOJ as a result of a breach of the DPA or civil or criminal penalties imposed as a result of noncompliance with the Consent could subject us to penalties and other costs and could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

We may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC and OM, including additional investigations and litigation.

We may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC and OM. For example, none of the DPA, the Consent or the Dutch Settlement Agreement prevents these authorities from carrying out certain additional investigations with respect to the facts not covered in the agreements or in other jurisdictions, or prevents authorities in other jurisdictions from carrying out investigations into, or taking actions with respect to the issuance or renewal of our licenses (for example, in Uzbekistan) or otherwise in relation to, these or other matters. Furthermore, the Norwegian Government has stated that it plans to hold parliamentary hearings concerning the investigations. Similarly, the agreements do not foreclose potential third party or additional shareholder litigation related to these matters. For example, since the announcement of our US$900 million provision in the third quarter of 2015, two class action lawsuits have been filed against VimpelCom in relation to our prior disclosure regarding the investigations by the DOJ, SEC and OM. We may incur significant costs in connection with these or future lawsuits. Any collateral investigations, litigation or other government or third party actions resulting from these matters could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

In addition, ongoing media and governmental interest in the investigations, settlements and lawsuits and any announced investigations and/or arrests of our former executive officers could impact the perception of us and result in reputational harm to our company.

Efforts to merge with or acquire other companies or product lines, or to otherwise form strategic partnerships with third parties, may divert management attention and resources away from our business operations, and if we complete a merger, an acquisition or other strategic partnership, we may incur or assume additional liabilities or experience integration problems.

We seek from time to time to merge with or acquire other companies or product lines, or to form strategic partnerships through the formation of joint ventures or otherwise, for various strategic reasons, including to acquire more frequency spectrum, new technologies and service capabilities; add new customers; increase market penetration or expand into new markets. In particular, on January 30, 2015, we completed the sale by our 51.9% owned subsidiary, Global Telecom Holding S.A.E. (“GTH”), of a non-controlling 51% interest in Omnium Telecom Algérie SpA (“OTA”) to the Fonds National d’Investissement, the Algerian National Investment Fund (“FNI”) (see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Algeria Transaction and Settlement”); on August 6, 2015, we entered into an agreement with Hutchison, which owns indirectly 100% of Italian mobile operator 3 Italia, to form an equal joint venture holding company that will own and operate our telecommunications businesses in Italy (see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture”); and on November 26, 2015, we entered into an agreement with WTPL, the parent company and majority shareholder of Warid Telecom (Private) Limited (“Warid”), and Bank Alfalah to merge our telecommunications businesses in Pakistan (see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Pakistan Merger”). Our ability to successfully grow through acquisitions or strategic partnerships depends upon our ability to identify, negotiate, complete and integrate suitable companies and to obtain any necessary financing and the prior approval of any relevant regulatory bodies or courts. These efforts could divert the attention of our management and key personnel from our business operations. As a result of any such merger, acquisition or strategic partnerships or failure of any anticipated merger, acquisition or strategic partnership to materialize (including any such failure caused by regulatory or third-party challenges), we may also experience:

 

    difficulties in realizing expected synergies or integrating acquired companies, joint ventures or other forms of strategic partnerships, personnel, products, property and technologies into our existing business;

 

    increased capital expenditure costs;

 

    difficulties relating to the acquired or formed 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 our intellectual property;

 

    delays, or failure, in realizing the synergy benefits or costs of a merged or acquired or formed company or products;

 

    higher costs of integration than we anticipated;

 

    difficulties in retaining key employees of the merged or acquired business or strategic partnerships who are necessary to manage our businesses;

 

    difficulties in maintaining uniform standards, controls, procedures and policies throughout our businesses;

 

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

 

    adverse customer reaction to the business combination; and

 

    increased liability and exposure to contingencies that we did not contemplate at the time of the acquisition or strategic partnership.

 

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In addition, an acquisition or strategic partnership could materially impair our operating results by causing us to incur debt or requiring us to amortize merger or acquisition expenses and merged or acquired assets. We may not be able to assess ongoing profitability and identify all actual or potential liabilities or issues of a business prior to an acquisition, merger or strategic partnership. If we acquire, merge with or form strategic partnerships with businesses or assets which result in assuming unforeseen liabilities in respect of which we have not obtained contractual protections or for which protection is not available, this could harm our business, financial condition, results of operations, cash flows and prospects. As we investigate industry consolidation, our risks may increase. Our integration and consolidation of such businesses may also lead to changes in our operational efficiencies or structure. For information about our acquisitions, please see Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Further, we may not be able to divest some of our activities as planned, such as any intended towers sales (which could cause costs to be materially higher than anticipated), and the divestitures we carry out could negatively impact our business.

The Italy Joint Venture and the Pakistan Merger are subject to significant uncertainties and risks.

The Italy Joint Venture and the Pakistan Merger are subject to significant uncertainties and risks. For example, it is possible that each transaction does not complete due to a failure to obtain approvals from the relevant regulatory authorities or other consents in a timely manner, or at all. In the case of the Italy Joint Venture, EU competition approval may require the implementation of remedies by the parties, which may reduce or eliminate the expected cost synergies, be otherwise unacceptable to us, or which we may be unable to implement as required. In addition, in the case of the Pakistan Merger, we will not obtain control of Warid until completion, and, therefore, there can be no assurance that the counterparties will operate their business during the period prior to closing in the same way that we would, even though certain contractual restrictions will apply to the counterparties and Warid during the period between signing and closing.

Completion of the transactions is also subject to the satisfaction of other conditions, such as obtaining lender consents and the release of certain guarantees, as applicable. Even if the transactions do complete, there can be no assurance that we will not experience difficulties in integrating the operations of the respective companies, that we will realize expected synergies, or that we will not incur higher than expected costs. In addition, we expect that the completion of each of these transactions will require substantial time and focus from management, which could adversely affect their ability to operate the businesses.

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 LLP, TNS-Plus LLP, 2Day Telecom LLP, KAZEUROMOBILE LLP), Algeria (OTA), Uzbekistan (Buzton JV), Kyrgyzstan (Sky Mobile LLC, Terra LLC), Georgia (Mobitel LLC), Tajikistan (Tacom LLC), Laos (VimpelCom Lao Co., Ltd) and currently, Zimbabwe (Telecel Zimbabwe (Private) Limited), which is subject to an agreement for us to sell our stake in our equity investee in Zimbabwe. In addition, on August 6, 2015, we entered into an agreement with Hutchison, which owns indirectly 100% of Italian mobile operator 3 Italia, to form an equal joint venture holding company that will own and operate our telecommunications businesses in Italy (see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture”).

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. If disagreements develop with our partners, our business, financial condition, results of operations, cash flows and prospects may be harmed. 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 provisions, 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.”

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

 

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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 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, limitations on the making of loans and repayment of debts, 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 Telecom S.p.A. are restricted from making dividend distributions and certain other payments to VimpelCom by existing covenants in their financing documents. For more detail on Wind Telecom S.p.A. financings, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.” In addition, our subsidiary Kyivstar cannot expatriate dividends to VimpelCom because of restrictions imposed by the National Bank of Ukraine to regulate money, credit and currency in Ukraine. For further details on the restrictions on dividend payments, see “—Risks Related to Our Markets—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 we can conduct business and currency control requirements restrict activities in certain markets in which we have operations.” 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 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 deterioration in the relationship among our strategic shareholders.

As of March 15, 2016, our company’s largest shareholders, L1T VIP Holdings S.à r.l. (“LetterOne”) and Telenor East Holding II AS (“Telenor East”), and their respective affiliates, beneficially owned, in the aggregate, approximately 90.9% of our outstanding voting shares, with LetterOne beneficially owning approximately 47.9% of our voting shares and Telenor East beneficially owning approximately 43.0% of our 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. For more information on our largest shareholders, see “Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders” below.

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 ASA (“Telenor”), and we understand that LetterOne has an indirect minority interest in companies that compete with our subsidiaries in Ukraine, Kazakhstan and Georgia. It is possible that we will compete with Telenor and/or LetterOne in other markets in the future.

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, financial condition, results of operations, cash flows and prospects.

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 harm our business, financial condition, results of operations, cash flows and prospects. For more information on our two largest shareholders, see “Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders” below.

 

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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 their stake in our company, we would be deprived of those benefits, which could harm our business, financial condition, results of operations, cash flows and prospects. On October 5, 2015, Telenor announced its decision to divest its shares in VimpelCom and stated that it will explore all options to effect such divestiture. While we intend to cooperate with Telenor to ensure a successful divestiture of its stake, significant uncertainty exists surrounding the timing and manner of its announced divestiture, which could harm our business, financial condition, results of operations, cash flows and prospects.

On October 5, 2015, Telenor also announced that it will not convert its 305,000,000 VimpelCom voting preferred shares into VimpelCom common shares. If the preferred shares owned by Telenor are not converted by April 15, 2016, pursuant to the terms of VimpelCom’s bye-laws, the preferred shares will be immediately redeemed by VimpelCom at a redemption price of US$0.001 per share and will cease to be outstanding, with the effect of potentially increasing the percentage of voting shares held by other shareholders and decreasing Telenor’s percentage of voting shares. Some of our financing agreements (representing approximately US$1.4 billion in outstanding indebtedness) have “change of control” provisions that may require us to make a prepayment if a person or group of persons (with limited exclusions) acquire beneficial or legal ownership of or control over more than 50.0% of our share capital. If such a change of control provision is triggered and we fail to agree with lenders on the necessary amendments to the loan documentation and then fail to make any required prepayment, it could trigger cross-acceleration provisions of our other debt agreements, which could lead to our obligations being declared immediately due and payable. This could harm our business, financial condition, results of operations, cash flows and prospects. For more information, see Note 5 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

We may not be able to successfully implement our strategic priorities.

In August 2015, we announced the six strategic priority areas on which we intend to focus going forward. These comprise (i) new revenue streams, (ii) digital leadership, (iii) performance transformation, (iv) portfolio and asset optimization, (v) world class operations and (vi) structural improvements. Under these priority areas, we plan to streamline our business processes, digitalize our business model (which may include internal restructurings), improve customer experience and optimize our capital structure. However, there can be no assurance that our strategic priority areas will be successfully implemented and will not cause changes in our operational efficiencies or structure. In addition, the implementation of our strategic priorities could result in increased costs, conflicts with stakeholders, business interruptions and difficulty in recruiting and retaining key personnel, which could harm our business, financial condition, results of operations, cash flows and prospects. For more information on our strategic priority areas, see “Item 4—Information on the Company—Strategy.”

We may be adversely impacted by work stoppages and other labor matters.

Although we consider our relations with our employees to be generally good, there can be no assurance that our operations will not be impacted by unionization efforts, strikes or other types of labor disputes or disruptions. For instance, the implementation of internal operational and team adjustments necessary to implement our performance transformation strategy could result in employee dissatisfaction. For example, in February 2016 we experienced labor disruptions in Bangladesh in connection with internal restructurings. We may also experience strikes or other labor disputes or disruptions in connection with social unrest or political events such as the nationwide strikes in Bangladesh during the first quarter of 2015. Furthermore, work stoppages or slow-downs experienced by our customers or suppliers could result in lower demand for our services and products. In the event that we, or one or more of our customers or suppliers, experience a labor dispute or disruption, it could result in increased costs, negative media attention and political controversy, and harm our business, financial condition, results of operations, cash flows and prospects.

 

 

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

Our 51.9% owned subsidiary in Egypt, GTH, 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 is, and may in the future be, subject 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 “—Legal and Regulatory Risks—We could be subject to tax claims that could harm our business” and Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Risks Related to the Industry

The telecommunications industry is highly capital intensive and requires substantial and ongoing expenditures of capital.

The telecommunications industry 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, cash flows and prospects. For more information on our 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. For instance, in the year ended December 31, 2015, over at least 88% of our customers in each of the jurisdictions in which we operate were prepaid customers. We do not require our prepaid mobile customers to enter into long-term service contracts and cannot be certain that they will continue to use our services in the future. We require our contract mobile 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, pursuant to the contract terms and/or applicable legislation. 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, failure to accurately predict revenue could harm our business, financial condition, results of operations, cash flows and prospects.

We operate 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, cash flows and prospects:

 

    We cannot assure you that our revenue will grow in the future, as competition puts pressure on our 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, and we may be unable to deliver superior customer experience relative to our competitors, which may negatively impact our revenue and market share;

 

    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;

 

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    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 that provide similar services;

 

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

 

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

 

    Competitors may reach customers more effectively through a better use of digital and physical distribution channels;

 

    Competitors, particularly current and 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;

 

    Competitors may partner with OTT players to provide integrated customer experiences, and we may be unable to implement offers, products and technology to support our commercial partnerships; and

 

    In markets where we do not have converged offerings, our existing service offerings could become disadvantaged as compared to those offered by converged competitors (who can offer combinations of fixed-line, broadband, public WiFi, TV and mobile).

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

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 or equipment 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.

Further, we operate or are considering developing third generation mobile technologies (“3G”) networks or fourth generation/long term evolution mobile technologies (“4G/LTE”) networks in markets in which we operate. 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 brand, business, financial condition, results of operations and prospects may be harmed in the event of cyber-attacks or severe systems and network failures leading to the loss of integrity and availability of our telecommunications services and/or leaks of confidential information, including customer information.

        Our operations and business continuity depend on how well we protect and maintain our network equipment, information technology (“IT”) systems and other assets. Due to the nature of the services we offer across our geographical footprint, we are exposed to cybersecurity threats that could negatively impact our business activities through service degradation, alteration or disruption. Cybersecurity threats could also lead to the compromise of our physical assets dedicated to processing or storing customer information, financial data and strategic business information, exposing this information to possible leakage and unauthorized dissemination. These events could result in reputational harm, lawsuits against us by customers or other third parties, violations of data protection laws, adverse actions by telecommunications regulators and other authorities, loss of revenue from business interruption, loss of market share and significant additional costs. In addition, the potential liabilities associated with these events could exceed the cyber insurance coverage we maintain.

 

 

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Although we devote significant resources to the development and improvement of our IT and security systems, including the appointment of a Director of Cyber Security in 2015, we could still experience cyber-attacks and IT and network failures and outages, due to factors including:

 

    unauthorized access to customer and business information;

 

    accidental alteration or destruction of information during processing due to human errors;

 

    the spread of malicious software that compromises the confidentiality, integrity or availability of technology assets;

 

    alteration of technology assets caused, accidentally or voluntarily, by employees or third parties;

 

    accidental misuse of assets by users with possible degradation of both network services and available computing resources (e.g. denial-of-service);

 

    malfunction of technology assets or services caused by obsolescence, wear or defects in design or manufacturing;

 

    faults during standard or extraordinary maintenance procedures; and

 

    unforeseen absence of key personnel.

From time to time we have experienced cyber-attacks of varying degrees to gain access to our computer systems and networks. As of the date of this Annual Report on Form 20-F, we have suffered minor direct and indirect cybersecurity incidents, that have been promptly contained by the response teams, generating limited or negligible impacts. However, such attacks may be successful in the future and may develop over long periods of time during which they can remain undetected.

Furthermore, we are subject to data protection laws and regulations of state authorities regarding information security in jurisdictions in which we operate. For example, data protection laws and regulations in Russia establish two categories of information with corresponding levels of protection – state secret and other data (personal data of customers, correspondence privacy and information on rendered telecommunication services), and operators must implement the required level of data protection. Operators are directly liable for actions of third parties to whom they forward personal data for processing. If severe customer data security breaches are detected, regulatory authorities could sanction our company, including suspending our operations for some time and levying fines and penalties. Violation of data protection laws is a criminal offense in some countries, and individuals can be imprisoned or fined. Our failure to comply with data protection laws and regulations, and our inability to operate our fixed-line or wireless networks, as a result of cybersecurity threats may result in significant expense or loss of market shares. These events, individually or in the aggregate, could harm our brand, business, financial condition, results of operations and prospects.

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 our respective networks, or that originate from outside our respective networks and terminate on our respective networks. A significant increase in our interconnection costs, or decrease in our interconnection rates, 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, cash flows 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 or other technical or operational issues. We cannot be sure that our network system will not be the target of a virus or subject to other technical or operational issues, or, if it is, that we will be able to maintain the integrity of our customers’ data or that a virus or other technical or operational issues will not disrupt 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 events, including natural disasters, military conflicts, power outages, terrorist acts, government shutdown orders, equipment or system failures, human error or intentional wrongdoings, such as breaches of our network or information technology security.

 

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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 the majority of our network-related equipment from a small number of suppliers, principally Alcatel-Lucent, Ericsson, Huawei, Nokia Solutions and Networks, Sirti and ZTE Corporation although some of the equipment that we use is available from other suppliers. 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. From time to time, we have experienced delays in receiving equipment. In addition, our suppliers could become the subject of export restrictions or other sanctions that could limit or prevent our suppliers from providing certain equipment to us. For example, the U.S. Department of Commerce’s Bureau of Industry and Security recently imposed restrictions on exports and reexports of U.S. products, software and technology to ZTE Corporation and three of its affiliates. 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, we entered into agreements with Mobile TeleSystems PJSC (“MTS”) in late 2014 and PJSC MegaFon (“MegaFon”) in late 2015 for the joint planning, development and operation of 4G/LTE networks in 36 regions of Russia and ten regions of Russia, respectively, and, in late 2015, we signed an amendment to the agreement with MTS to share 4G/LTE radiofrequencies in 20 of those 36 regions. In addition, in the first quarter of 2015, our wholly owned subsidiary, WIND Italy, sold 90% of the shares of its wholly owned towers subsidiary, Galata, to Cellnex, and WIND Italy has a tower services agreement with Galata for the provision of a broad range of services on the sites contributed to Galata by WIND Italy and the sites subsequently built by Galata hosting WIND Italy’s equipment. Our business could be materially harmed if our agreements with these or other third parties were to terminate or if negative developments (financial, legal, regulatory or otherwise) regarding such parties, or a dispute between us and such parties, causes the parties to no longer be able to deliver the required services or otherwise fulfill 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 equipment used on our networks. In addition, many of our mobile products and services are sold to customers through third party channels. The third party retailers, agents 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, agents or dealers, we may face difficulty in finding new retailers, sales agents or dealers that can generate the same level of revenue. Any negative developments regarding the third parties on which we depend could materially harm our business, financial condition, results of operations, cash flows and prospects.

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 and restrictions on the construction of towers or other infrastructure. 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. For example, our widely recognized logos, such as “Beeline” (Russia, Kazakhstan, Uzbekistan, Armenia, Tajikistan, Georgia, Laos and Kyrgyzstan), “Kyivstar” (Ukraine), “Djezzy” (Algeria), “Mobilink” (Pakistan) and “banglalink” (Bangladesh), have played an important role in building brand awareness for our services and products. 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 adverse litigation outcomes could harm our business, financial condition, results of operations, cash flows and prospects.

 

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We depend on our senior management and 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, including the local management teams of our subsidiaries. In the markets in which we operate, competition for personnel with relevant expertise is intense. There is sometimes limited availability of individuals with the requisite knowledge of the telecommunications industry, the relevant experience and, in the case of expatriates, the ability or willingness to accept work assignments in certain of these jurisdictions. The loss of any key personnel or an inability to attract, train, retain and motivate qualified members of senior management or key personnel could have an adverse impact on our ability to implement new business models and could harm our business, financial condition, results of operations, cash flows 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 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, Algeria, Ukraine, Kazakhstan, Tajikistan, Armenia, Uzbekistan, Kyrgyzstan and Pakistan. As we expand certain areas of our business and provide new services, such as mobile financial services (“MFS”), we may be subject to additional laws and regulations.

Certain regulations may require us to reduce roaming prices and mobile and/or fixed-line termination rates, 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. For example, a proposed regulation in the European Union may abolish end-user roaming charges in the European Union, and other jurisdictions in which we operate (including Russia, Kazakhstan, Kyrgyzstan and Armenia) are considering the regulation of roaming prices, which could negatively impact our roaming margins.

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. 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.

Adverse regulations or regulatory actions could place significant competitive and pricing pressure on our operations, could result in fines or other penalties and could harm our business, financial condition, results of operations, cash flows and prospects. 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 Notes 24 and 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. 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, cash flows 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.

 

 

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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 harm our business, financial condition, results of operations, cash flows and prospects. Investigations of any actual or alleged violations of such laws or policies related to us could harm our business, financial condition, results of operations, cash flows and prospects.

Please see also “Risks Related to Our Business—We are subject to a DPA with the DOJ, a Consent with the SEC, and a settlement agreement with the OM. The agreements with the DOJ and the SEC require us to retain, at our own expense, an independent compliance monitor, and the DPA and the agreement with the OM require us to continue to cooperate with the agencies regarding their investigations of other parties. We will incur costs in connection with these obligations, which may be significant”, “—If we commit a breach of the DPA, we may be subject to criminal prosecution. Such criminal prosecution could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects” and “—We may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC and OM, including additional investigations and litigation.”

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

We may be exposed to fraud or other misconduct committed by our employees, joint venture partners, representatives, agents, suppliers, customers 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. The risk of liability for fraud and other misconduct could increase as we expand certain areas of our business, such as MFS, which requires us to hold customer funds in e-accounts.

We regularly review and update our policies and procedures and internal controls which are primarily designed 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, customers and other third parties. However, there 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, customers or other third parties.

New or proposed changes to laws or new interpretations of existing 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 changes 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 Pakistan, new regulations and draft laws have been proposed that could separately (i) require any mobile operator with over a 25% market share, such as our Pakistan subsidiary, to seek Pakistan Telecommunication Authority approval before changing its tariffs; and (ii) introduce obligations on telecommunications operators requiring them to upgrade systems and security as well as maintain backups and retain mobile data for a sufficient period of time as well as allow for real time recording of data for extended periods.

Following various terrorist attacks, the Government of Pakistan introduced Standard Operating Procedures (“SOP”) requiring all mobile operators to re-verify their entire prepaid unverified customer base through biometric verification. For our Pakistan subsidiary, this involved the re-verification of more than 38 million SIM cards, and SIM cards that could not be verified had to be blocked by the operators. As a result of the re-verification, our Pakistan subsidiary lost customers and retained 87% of its subscriber base. In Bangladesh, the regulator initiated similar SIM re-verification requirements to be completed between January 2016 and April 2016, as well as new SIM registration requirements with biometric verification starting from December 2015.

 

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Such requirements could result in customer losses and claims from legitimate customers that are incorrectly blocked, as well as fines, license suspensions and other liabilities for failure to comply with the requirements. To the extent re-verification and/or new verification requirements are imposed in the jurisdictions in which we operate, it could have an adverse impact on our business, financial condition, results of operations and prospects.

In addition, certain jurisdictions in which we operate, including Russia (in 2014) and Kazakhstan (in 2015), have adopted data processing laws, which prohibit the collection and storage of personal data on servers located outside of the respective jurisdictions. Violation of these laws by an operator may lead to a seizure of the operator’s database and equipment and/or a ban on the processing of personal data by such operator, which, in turn, could lead to the inability to provide services to customers. See “—Risks Related to the Industry—Our brand, business, financial condition, results of operations and prospects may be harmed in the event of cyber-attacks or severe systems and network failures leading to the loss of integrity and availability of our telecommunications services and/or leaks of confidential information, including customer information.”

In Ukraine, a law titled “On electronic communications” is expected to be adopted in 2016 to, among other things, increase the authority of the national regulatory authority to analyze communication services markets to determine significant market power operators. The draft legislation also includes a new list of regulatory restrictions for significant market power operators, including controls on wholesale and retail tariffs and infrastructure sharing.

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 are unable to pass on this expense to customers. These taxes could have an adverse impact on our business, financial condition, results of operations and prospects in Pakistan and on our group.

In certain jurisdictions in which we operate, the relevant regulators set mobile termination rates (“MTRs”). If any such regulator set MTRs that are lower for us than the MTRs of our competitors, our interconnect costs may be higher and our interconnect revenues may be lower, relative to our competitors. In Algeria, for example, the MTRs set by the regulator are significantly lower for OTA than for our competitors. For a discussion of developments in the regulation of MTRs, and other important government regulations impacting our business, see Exhibit 99.2—Regulation of Telecommunications.

In addition, we are subject to certain sanctions and embargo laws and regulations of the United Nations, European Union, and certain other jurisdictions in connection with our activities and such laws and regulations may be expanded or amended from time to time in a manner that could materially adversely affect our business, financial condition, results of operations, cash flows and prospects. There can be no assurance that, notwithstanding our compliance safeguards, we will not be found in the future to have been in violation of applicable sanctions and embargo laws, particularly as the scope of such laws may be unclear and subject to discretionary interpretations by regulators, which may change over time. Moreover, certain of our financing arrangements include representations and covenants requiring compliance with or limitation of activities under sanctions laws of additional jurisdictions enumerated in the financing arrangements, as well as mandatory prepayment requirements in the event of a breach thereof. See “—Risks Related to Our Business—Substantial amounts of indebtedness and debt service obligations could materially decrease our cash flow, adversely affect our business and financial condition and prevent us from raising additional capital.”

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. Such regulatory actions could adversely impact our ability to carry out divestitures in the relevant jurisdictions.

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 business, financial condition, results of operations, cash flows and 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 Algeria Segment,” “—Description of Operations of the Pakistan Segment,” “—Description of Operations of the Bangladesh Segment,” “—Description of Operations of the Ukraine Segment,” “—Description of Operations of the Kazakhstan Segment,” “—Description of Operations of the Uzbekistan Segment,” “—Description of Operations in HQ and Others” and “—Description of Operations of the Italy Business Unit.”

 

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

The success of our operations is dependent on the maintenance of our licenses to provide telecommunications services in the jurisdictions in which we operate. Most of our licenses are granted for specified terms, and there can be no assurance that any license will be renewed upon expiration. All of the Russian telecommunication licenses up for renewal in 2015 have been successfully renewed, as well as all other material licenses for our operations. However, some of our licenses will expire in the near term, including certain licenses in Russia, Algeria, Uzbekistan and Kyrgyzstan, which are due for renewal in 2016. These licenses are also subject to ongoing review by the relevant regulatory authorities. 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. Furthermore, the governments in certain jurisdictions in which we operate may hold auctions (including auctions for 4G spectrum) in the future. If we are unable to maintain or obtain licenses for provision of telecommunications services or if our licenses are not renewed or are renewed on less favorable terms, our business and results of operations could be materially harmed. See also “Risks Related to Our Business—We may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC and OM, including additional investigations and litigation.” For more information about spectrum allocations and 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.”

We face uncertainty regarding our frequency allocations and may experience limited spectrum capacity for providing wireless services.

To establish and commercially launch mobile telecommunications networks, we need to receive frequency allocations for bandwidths within the frequency spectrums in the regions in which we operate. There are a limited number of frequencies available for mobile operators in each of the regions in which we operate or hold licenses to operate. We are dependent on access to adequate frequency allocation in each such market in order to maintain and expand our 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, cash flows 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, as well as allotted frequency bands for different mobile communications technologies, 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, cash flows 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 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, which could harm our business, financial condition, results of operations, cash flows and prospects.

 

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

We are party to lawsuits and other legal, regulatory and antitrust proceedings, the final outcome of which is uncertain. Litigation and regulatory proceedings are inherently unpredictable. For more information on these disputes, see “Item 4—Information on the Company—Legal Proceedings” and Notes 24 and 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) could harm our business, financial condition, results of operations, cash flows 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, Kyrgyzstan and Tajikistan. These claims have resulted, and future claims may result, in additional payments, including fines and penalties, to the tax authorities.

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. For more information regarding tax claims, and their effects on our financial statements, see “Item 4—Information on the Company—Legal Proceedings” and Notes 24 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

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 we may ultimately face. From time to time, we may also identify tax contingencies for which we have not recorded an accrual. Such unaccrued tax contingencies could materialize and require us to pay additional amounts of tax.

For example, significant tax reforms were implemented in Ukraine in 2015. The tax reforms, in part, changed the mechanism for the calculation of corporate profit tax and required the use and registration of electronic VAT invoices, and we may face fines for failure to comply with the new rules. In addition, a new tax law in Uzbekistan became effective on January 1, 2016, pursuant to which mobile telecommunications companies are subject to income tax rates based on profitability levels (7.5% tax for profitability levels up to 20%, and 50% tax for profitability levels exceeding 20%). In Bangladesh, a 3% supplementary duty was imposed on mobile usage from July 2015, and a 1% surcharge was implemented on mobile services from March 9, 2016. Such changes could have an adverse impact on our business, financial condition, results of operations or cash flows in these countries and on our group.

 

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The introduction of 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 also 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, cash flows 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, cash flows 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 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.

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. The amount of unused interest expense deduction may be carried forward to future years. Based on these rules, WIND Italy currently is not able to deduct all of its interest expenses, though it is able to carry forward accrued and unused deductions to future fiscal years. 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 WIND Italy’s and VimpelCom’s business, financial condition, results of operations, cash flows and prospects.

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.

 

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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 and delays in implementing our operating or business plans; and

 

    a more challenging operating environment.

If we are found to be involved in practices that do not comply with applicable laws or regulations, we may be exposed to significant fines, the risk of prosecution or the suspension or loss of our licenses, frequency allocations, authorizations or various permissions, any of which could harm our business, financial condition, results of operations, cash flows and prospects.

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. Our subsidiary PJSC VimpelCom is deemed to be a strategic enterprise under the Russian Foreign Investment Law. As a result, 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 PJSC 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 Government Commission on Control of Foreign Investment in the Russian Federation, or 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 the FAS, which could materially harm our business, financial condition, results of operations, cash flows and prospects.

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. 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 relatively low levels. 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 and low oil prices continue to pose potentially significant macroeconomic risks to our group.

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, have negatively impacted and continue to have an adverse effect on the Russian economy and economic outlook and may also negatively impact our ability to raise external financing, particularly if the sanctions are broadened. 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 strategies. 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, cash flows and prospects.

 

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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, cash flows and prospects.

Deterioration of 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, cash flows 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 Russia and Ukraine.

The current situation in Russia and Ukraine, and the related responses of the United States, member states of the European Union, the European Union itself and certain other nations, have the potential to materially adversely affect our business in Russia and Ukraine where we have significant operations, which in turn could materially harm our financial condition, results of operations, cash flows and prospects.

In connection with the situation in Russia and Ukraine, the United States, the European Union and a number of countries have imposed (i) sanctions that block the property of certain designated businesses, organizations and individuals, (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. The U.S. and EU sanctions (including the sectoral sanctions) apply to entities owned and/or controlled by sanctions designated entities and individuals and, accordingly, may extend beyond Russia and Ukraine. In addition, the United States and the European Union have implemented certain export control restrictions related to Russia’s energy sector and military capabilities. Ukraine has also enacted sanctions with respect to certain Russian entities and individuals. Russia has responded with countermeasures to such international and Ukrainian restrictions and sanctions, currently including limiting the import of certain goods from the United States, the European Union, Ukraine and other countries, imposing visa bans on certain persons, and imposing restrictions on the ability of Russian companies to comply with sanctions imposed by other countries. Russia recently announced sanctions against Turkey in response to an incident involving Russian and Turkish military aircraft in November 2015, including imposing a ban on Russian companies hiring Turkish workers and the imposition of visa requirements, as of January 1, 2016. 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, Ukraine, Russia, and/or other countries, could materially adversely affect our business, financial condition, results of operations, cash flows and prospects.

Ukraine has assigned a “temporary occupied territories” status to Crimea and an “anti-terrorist operation zone” status to certain Eastern Ukraine regions which are currently not under the Ukrainian government’s control, and has imposed certain restrictions and prohibitions on trade in goods and services in such territories. Kyivstar shut down its network in Crimea in 2014 as well as its network in certain parts of Eastern Ukraine in 2015 and, in each case, has written off the relevant assets. Under terms of its telecommunications licenses, Kyivstar is obliged to provide services throughout Ukraine. Kyivstar has notified the regulatory authorities that Kyivstar has stopped providing services in these areas and has requested clarification from such authorities regarding telecommunications operations in such areas. Since September 2014, legislation has been in effect in Ukraine that authorizes the cancellation of telecommunications licenses for sanctioned parties. There can be no assurance that the escalation of the current situation will not lead to the cancellation or suspension of, or other actions under, certain or all of our Ukrainian telecommunications licenses, or other sanctions, which could have a material adverse effect on our business in Ukraine, which in turn could harm our business, financial condition, results of operations, cash flows and prospects.

The situation in Crimea and Eastern Ukraine has resulted, and may in the future result, in damage or loss of assets, disruption of services, and regulatory issues which has, and may in the future, adversely impact our group. In addition, if there were an extended continuation or further increase in conflict in Crimea, Eastern 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 and/or in the global capital markets generally, which could adversely impact our group. Moreover, the instability in Crimea and Eastern Ukraine specifically, and in the region more generally, economic sanctions and related measures, and other geopolitical developments (including with respect to the current conflict and international interventions in Syria) could harm our business, financial condition, results of operations, cash flows and prospects. In particular, we could be materially adversely impacted by a continued decline of the Russian ruble against the U.S. dollar or the Euro and the general economic performance of Russia.

 

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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 are often complex and have resulted, and may in the future result, in conflicts, which could materially harm our business, financial condition, results of operations, cash flows and prospects. 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.

Further, the nature of much of the legislation in emerging markets, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of the legal systems in emerging markets, place the enforceability and, possibly, the constitutionality of, laws and regulations in doubt and result in ambiguities, inconsistencies and anomalies. The legislation often contemplates implementing regulations that have not yet been promulgated, leaving substantial gaps in the regulatory infrastructure. Any of these factors could affect our ability to enforce our rights under our licenses or our contracts, or to defend our company against claims by other parties.

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 2015, our subsidiary in Pakistan was ordered to shut down parts of its mobile network and services on a regular basis due to the security situation in the country. In addition, our subsidiary in Ukraine shut down its network in Crimea in 2014 as well as its network in certain parts of Eastern Ukraine in 2015. Governments or other factions, including those asserting authority over specific territories in areas of conflict, could make inappropriate use of the network, attempt to compel us to operate our network in conflict zones or disputed territories and/or force us to broadcast propaganda or illegal instructions to our customers or others (or face consequences for failure to do so). Forced shutdowns, inappropriate use of our network and/or compelling us to operate our network and/or broadcast propaganda or illegal instructions could materially harm our business, financial condition, results of operations, cash flows and prospects.

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.

Social instability in the countries in which 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.

 

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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, financial condition, results of operations, cash flows and prospects.

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 we 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 applications. Such banking risk cannot be completely eliminated by diversified borrowing and conducting credit analyses. 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 exchange controls or other currency restrictions, which could prevent us from making payments, including the repatriation of dividends and payments to third party suppliers. For example, in Pakistan, foreign currency financing agreements must be registered with the State Bank of Pakistan, and if there is a default, any default interest payment may require regulatory approval. In Bangladesh, strict foreign exchange regulations require regulatory approval before a company can engage in certain foreign exchange transactions. In Ukraine, our subsidiary Kyivstar cannot expatriate dividends to VimpelCom because of restrictions imposed by the National Bank of Ukraine to regulate money, credit and currency in Ukraine. For more information about currency restrictions in our countries of operations, see “Risks Related to Our Business—We are exposed to foreign currency exchange loss and currency fluctuation and convertibility risks.” Furthermore, local banks have limitations on the amounts of loans that they can provide to single borrowers, which could limit the availability of local currency financing in these countries. There can be no assurance that we will be able to obtain approvals under the foregoing restrictions or limitations, each of which could harm our business, financial condition, cash flows, results of operations and prospects.

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. See “—Risks Related to Our Business—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” for more information about Telenor’s announcement on October 5, 2015 that it will not convert its VimpelCom preferred shares.

 

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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—Consolidated Statements and Other 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.

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 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, VimpelCom’s shareholders 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 an international communications and technology company committed to bringing the digital world to each and every customer. Currently, the company provides voice and data services through a range of traditional and broadband mobile and fixed-line technologies and operates in Russia, Algeria, Pakistan, Bangladesh, Ukraine, Kazakhstan, Uzbekistan, Kyrgyzstan, Armenia, Tajikistan, Georgia, Laos, Zimbabwe and Italy. The operations of the VimpelCom Group covered a territory with a total population of approximately 732 million as of December 31, 2015. We provide services under the “Beeline,” “Kyivstar,” “banglalink,” “Mobilink,” “Djezzy” and “WIND” brands. As of December 31, 2015, we had 217.4 million mobile customers (on a combined basis, including Italy) and 59,125 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, as amended (the “Companies Act”), 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

 

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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 PJSC “Vimpel-Communications” (formerly OJSC “Vimpel-Communications”) 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 Commonwealth of Independent States (“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 PJSC VimpelCom became the first Russian company since 1903 to list shares on the New York Stock Exchange.

 

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

 

    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 (2006) and Armenia (2006).

 

    In 2009 and 2010, Telenor ASA, the parent company of the Telenor Group, and Altimo Holdings & Investments Ltd. combined their ownership of PJSC VimpelCom and Ukrainian mobile operator Kyivstar under a new company called VimpelCom Ltd. 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 Select Market from the New York Stock Exchange.

 

    On January 30, 2015, VimpelCom completed the sale by its subsidiary GTH of a non-controlling 51% interest in OTA to the FNI in Algeria (see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Algeria Transaction and Settlement”).

 

    In 2015, VimpelCom launched a new strategic framework to transform its business models in order to embrace the opportunities of the digital age. See “—Strategy.”

 

    On August 6, 2015, VimpelCom and its subsidiary VimpelCom Amsterdam B.V. entered into an agreement with Hutchison, which owns indirectly 100% of Italian mobile operator 3 Italia, to form an equal joint venture holding company that will own and operate our telecommunications businesses in Italy (see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture” and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F). Completion of the transaction is subject to the satisfaction or waiver of certain conditions precedent, including obtaining regulatory approvals, and is expected to occur around the end of 2016. WIND Italy and 3 Italia will continue to operate separately pending completion.

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.”

 

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Leadership

During 2015 and the beginning of 2016, 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;

 

    Jeremy Roffe-Vidal as Group Chief Human Resources Officer;

 

    Christopher Schlaeffer as Chief Digital Officer;

 

    Jon Eddy as Head of Emerging Markets;

 

    Alexander Matuschka as Group Chief Performance Officer;

 

    Rozzyn Boy as Chief Communications and Brand Officer;

 

    Stephen Collins as Group Chief Corporate and Regulatory Officer;

 

    Erik Aas as Head of Bangladesh;

 

    Dmitriy Shukov as Head of Uzbekistan;

 

    Oleksandr Komarov as Head of Kazakhstan; and

 

    Yernar Nakisbekov as Head of Kyrgyzstan.

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

Organizational Structure

VimpelCom Ltd. is the holding company for a number of operating subsidiaries and holding companies in various jurisdictions. In the third quarter of 2015, we adopted a new regional structure, consisting of four strategic regions. Accordingly, our reporting structure is divided into the four following business units, all of which report to our headquarters in Amsterdam:

 

    Russia;

 

    Emerging Markets (which includes our operations in Algeria, Pakistan and Bangladesh);

 

    Eurasia (which includes our operations in Ukraine, Kazakhstan, Uzbekistan, Kyrgyzstan, Armenia, Tajikistan and Georgia); and

 

    Italy.

Notwithstanding the foregoing, in accordance with accounting rules, we disclose eight reportable segments, based on economic environments and stages of development in different geographical areas, requiring different investment and marketing strategies. On January 1, 2015, management decided to separately present certain operating units as separate reportable segments to enhance understanding of the business and better reflect the actual structure of the VimpelCom Group. Accordingly, our reportable segments consist of the eight following segments:

 

    Russia;

 

    Algeria;

 

    Pakistan (which was split out of the former “Africa & Asia” reportable segment);

 

    Bangladesh (which was split out of the former “Africa & Asia” reportable segment);

 

    Ukraine;

 

    Kazakhstan (which was split out of the former “CIS” reportable segment);

 

    Uzbekistan (which was split out of the former “CIS” reportable segment); and

 

    HQ and Others (which includes our operations in Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos, as well as certain internal adjustments. Prior to January 1, 2015, the results of our operations in Kyrgyzstan, Armenia, Tajikistan and Georgia were included in the former “CIS” reportable segment, and the results of our operations in Laos were included in the former “Africa & Asia” reportable segment).

 

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Italy is no longer a reportable segment subsequent to its classification as an asset held for sale and discontinued operation following the signing of an agreement with CK Hutchison Holdings Ltd. to combine the company’s operations in Italy with 3 Italia in an equal joint venture. However, financial and operational information for Italy is included in this Annual Report on Form 20-F because completion of the Joint Venture in Italy has not occurred and operations in Italy is a significant part of our business. For more information please see Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on
Form 20-F.

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 15, 2016. Unless 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)    

PJSC VimpelCom

   Russia      100%(6)    

“Kyivstar” JSC

   Ukraine      100%(7)    

LLP “KaR-Tel”

   Kazakhstan      75.0%(8)    

LLP “2 Day Telecom”

   Kazakhstan      59%(9)    

LLP “TNS-Plus”

   Kazakhstan      49%(10)   

LLC “Tacom”

   Tajikistan      98.0%(11)   

LLC “Unitel”

   Uzbekistan      100%(12)   

LLC “Mobitel”

   Georgia      80.0%(13)   

CJSC “ArmenTel”

   Armenia      100%(14)   

LLC “Sky Mobile”

   Kyrgyzstan      50.1%(15)   

VimpelCom Lao Co. Ltd.

   Lao PDR      78.0%(16)   

Weather Capital S.à r.l.

   Luxembourg      100%(17)   

Weather Capital Special Purpose 1 S.A.

   Luxembourg      100%(18)   

Global Telecom Holding S.A.E.

   Egypt      51.9%(19)   

Omnium Telecom Algeria S.p.A.

   Algeria      23.7%(20)   

Optimum Telecom Algeria S.p.A.

   Algeria      23.7%(21)   

Pakistan Mobile Communications Limited

   Pakistan      51.9%(22)   

Banglalink Digital Communications Limited

   Bangladesh      51.9%(23)   

 

(1) VimpelCom Amsterdam B.V. holds 100% directly.
(2) VimpelCom Amsterdam B.V. holds 92.24% directly. Wind Telecom S.p.A. holds 7.76% of its own shares.
(3) Wind Telecom S.p.A. holds 100% directly.
(4) WIND Acquisition Holdings Finance S.p.A. owns 100% directly. Upon completion of the Italy Joint Venture, Weather Capital S.à.r.l. will own a 50% interest through a joint venture holding company. See “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture.”
(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 0.01% directly and VimpelCom Holdings B.V. holds 73.80% indirectly. Kyivstar holds 26.19% of its own shares.

 

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(8) PJSC VimpelCom holds 75.0% indirectly through a wholly owned Dutch/Luxembourg holding company and a Swiss holding company.
(9) PJSC VimpelCom holds 59% indirectly through a number of subsidiaries.
(10) VimpelCom Holdings B.V. holds 49% indirectly through wholly owned Dutch and Kazakh holding companies.
(11) VimpelCom Holdings B.V. holds 98.0% indirectly through a wholly owned Swiss holding company.
(12) PJSC VimpelCom holds 100% indirectly through wholly owned Dutch and BVI holding companies.
(13) VimpelCom Holdings B.V. holds 80.0% indirectly through a number of wholly owned subsidiaries.
(14) PJSC VimpelCom owns 100% directly.
(15) PJSC VimpelCom holds 50.1% indirectly through a wholly owned Dutch/Luxembourg holding company and Swiss and Cypriot holding companies.
(16) PJSC VimpelCom holds 78.0% indirectly through two wholly owned Dutch and Dutch/Luxembourg holding companies.
(17) VimpelCom Holdings B.V. owns 100% directly.
(18) Weather Capital S.à r.l. owns 100% directly.
(19) 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.
(20) Global Telecom Holding S.A.E. holds a controlling interest of 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.”
(21) Omnium Telecom Algeria S.p.A. holds 99.99% directly. See “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Algeria Transaction and Settlement.”
(22) Global Telecom Holding S.A.E. holds 100% of Pakistan Mobile Communications Limited (“PMCL”) indirectly through two wholly owned Maltese subsidiaries. WTPL and Bank Alfalah together will acquire approximately 15% of the shares of PMCL (reducing Global Telecom Holding S.A.E.’s indirect holding to approximately 85%) in exchange for the acquisition of 100% of the shares of Warid by PMCL and Warid will be subsequently merged into PMCL. See “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Pakistan Merger.”
(23) Global Telecom Holding S.A.E. holds 99.99% indirectly through a wholly owned 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 prepaid and postpaid subscriptions as of December 31, 2015.

 

Mobile Service Description   Russia   Algeria   Pakistan   Bangladesh   Ukraine   Kazakhstan   Uzbekistan   Other Countries   Italy

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

  Prepaid

90.7%

  Prepaid

92.6%

  Prepaid

98.1%

  Prepaid

93.6%

  Prepaid

90.6%

  Prepaid

89.7%

  Prepaid

98.3%

  Prepaid

(4)

  Prepaid

92.6%

  Postpaid

9.3%

  Postpaid(3)
7.4%
  Postpaid

1.9%

  Postpaid

6.4%

  Postpaid

9.4%

  Postpaid

10.3%

  Postpaid

1.7%

  Postpaid

(4)

  Postpaid

7.4%

Value added and call completion services (1)

  Yes   Yes   Yes   Yes   Yes   Yes   Yes   Yes(4)   Yes

National and international roaming services (2)

  Yes   Yes   Yes   Yes   Yes   Yes   Yes   Yes (4)   Yes

Wireless Internet access

  Yes   Yes   Yes   Yes   Yes   Yes   Yes   Yes(4)   Yes

Mobile financial services

  Yes   No   Yes   Yes   Yes   Yes   Yes   No   No

Mobile bundles

  Yes   Yes   Yes   Yes   Yes   Yes   Yes   Yes(4)   Yes

 

(1) Value added services include messaging services, content/infotainment services, data access 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.

 

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(3) Includes postpaid and hybrid (monthly fee with recharge possibility) customers.
(4) For a breakdown of prepaid and postpaid subscriptions and a description of the mobile services we offer in Kyrgyzstan, Armenia, Tajikistan and Georgia, see “—Description of Operations in HQ and Others—Mobile Business in HQ and Others—Description of Mobile Services in HQ and Others.”

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, Kazakhstan and Uzbekistan. In Italy, we also use local loop unbundling (“LLU”), which allows us to use connections from Telecom Italia’s local exchanges to the customers’ premises.

In our fixed-line/mobile integrated business structure in Russia, Ukraine, Kazakhstan and Uzbekistan, fixed-line telecommunications use inter-city fiber optic and satellite-based networks.

In Italy, our fixed-line business uses an integrated network infrastructure with over 22,300 kilometers of fiber optic cable backbone and 1,636 LLU sites for direct customer connections.

Our fixed-line business in Pakistan includes internet and value added services (“VAS”) over a wide range of access media, covering major cities of Pakistan. In Armenia, our fixed-line business offers a wide range of services, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination and TCP/IP international transit, over our national networks. In addition, for international mobile operators, we provide voice call termination to our network in Georgia.

We do not offer fixed-line services in Algeria, Bangladesh, Kyrgyzstan, Tajikistan or Laos.

 

Fixed-Line Service Description    Russia      Algeria      Pakistan      Bangladesh      Ukraine      Kazakhstan      Uzbekistan      Other
Countries
    Italy  
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         No         Yes         No         No         Yes         Yes         Yes (1)      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         No         Yes         No         No         No         No         No        Yes   

•    generating revenue by providing 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         No         Yes         No         No         Yes         Yes         Yes (1)      Yes   

Consumer Voice Offerings

     Yes         No         No         No         No         Yes         Yes         Yes (1)      Yes   
Corporate Voice Offerings, which provide fixed-line voice services, data services, VAS and connectivity services to corporate customers, including large corporate customers, small and medium enterprises (or “SMEs”) and small office/home offices (or “SOHOs”)      Yes         No         Yes         No         Yes         Yes         Yes         Yes (1)      Yes   
Internet and Data Services, which provide internet and data transmission services to both consumer and corporate customers      Yes         No         Yes         No         Yes         Yes         Yes         Yes (1)      Yes   

 

(1) For a description of the fixed-line services we offer in Armenia and Georgia, see “—Description of Operations in HQ and Others—Fixed-line Business in HQ and Others.”

 

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For a description of our operations in each of our eight reportable segments in addition to the Italy business unit, see the sections entitled “—Description of Operations of the Russia Segment,” “—Description of Operations of the Algeria Segment,” “—Description of Operations of the Pakistan Segment,” “—Description of Operations of the Bangladesh Segment,” “—Description of Operations of the Ukraine Segment,” “—Description of Operations of the Kazakhstan Segment,” “—Description of Operations of the Uzbekistan Segment,” “—Description of Operations in HQ and Others” and “—Description of Operations of the Italy Business Unit.”

Strategy

In August 2015, we announced the six strategic priority areas on which we intend to focus going forward. These comprise (i) new revenue streams, (ii) digital leadership, (iii) performance transformation, (iv) portfolio and asset optimization, (v) world class operations and (vi) structural improvements. In creating these six priority areas, we have reflected the major trends facing the telecommunications industry including cost and pricing pressures, the rapid migration to data, the need to capture and monetize new revenue streams and the requirement to be flexible and agile in an increasingly digital world. We plan to implement these strategies as set forth below.

New revenue streams: Capitalize on new revenue streams created by data growth, fixed-mobile convergence and B2B opportunities.

The move toward a data-centric world is the single biggest industry change away from the traditional voice-heavy model. We are investing in our 3G and 4G/LTE networks to provide high speed services to our customers and support the continued strong growth of mobile data traffic. Key factors for success over the next few years for any telecommunications operator will be to better manage mobile data pricing and to monetize the growth in mobile data traffic. Therefore, we strive 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 maintain and ultimately grow ARPU. Mobile data offerings are already becoming a significant decision factor for certain customer segments, and we expect this trend to continue.

We believe that our customers have an increasing demand for seamless mobile and fixed-line services as they switch between devices and locations. With significant broadband infrastructure currently in place in five key markets (Russia, Ukraine, Italy, Kazakhstan and Armenia), we believe that we are well-positioned to capitalize on this convergence. Having launched convergent household bundles in Italy and having achieved increased retention and revenues as a result, we plan to continue to drive fixed mobile convergence adoption in other markets, launching integrated triple play and quadruple play bundles while smartly expanding our fixed footprint.

We also believe that there is significant business to business (“B2B”) growth potential in all of our markets, particularly with respect to small and medium enterprises interested in a variety of products like mobile and fixed convergence and big data management. By tapping into underserved customer segments, extending offerings and improving service quality, we plan to turn B2B into a major growth engine, unlocking opportunities across our segments.

Digital leadership: Offer innovative services and products and provide the best “value-for-money” data product portfolio, while staying highly price-competitive, in order to help ensure that VimpelCom is the natural choice for customers in a data-centric world.

We plan to achieve a digital leadership position in our markets by aiming to transform our telecommunications model and radically digitalizing the customer journey, providing a seamless omni-channel experience to customers across their needs. Full digitalization of the customer journey will allow us to drastically simplify the service model while offering the convenience of 24/7 digital services. In order to achieve this, we have begun building a rich ecosystem of digital touchpoints and state of the art tools enabling automated and accurate customer care interactions. We are undertaking a significant digitalization of our back-end processes and systems, including new, agile business support systems and operations support systems to support this transformation. Mobile financial services are an important service we offer, as we are active in countries with underdeveloped banking systems. In addition, we are exploring options to offer television and video services in all of our markets, as we are already doing in Russia with our Internet Protocol television (“IPTV”) offerings.

From the technology perspective, we have critically revisited our entire IT landscape. A large-scale transformation project has been launched, with the objective of enabling new capabilities such as omni-channel customer service, flexible product bundling and more real-time customer engagement.

 

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Performance transformation: Increase efficiency with a new operating model.

The objective of our performance transformation is to build a new global organizational operating model that will bring together all our operating companies and our HQ to truly operate as one group. We plan to achieve this by creating global and regional synergies for transactional services, consolidating our global expertise, and rethinking and improving the way we manage our networks and customer service. By streamlining business processes such as supply chain and procurement, and by making them truly global, we believe that we will be better placed to capture economies of scale. Our new business model is equipped with strong capabilities to drive profitability in order to function as a value creation engine for the future, which should enable us to considerably reduce our cost base. The freed-up funds will be the base for what we plan to be a major investment program, with the goal of reinventing VimpelCom as the most streamlined digital operator in the world.

Portfolio and asset optimization: Consolidate and rationalize telecommunications portfolio through in-market consolidation, monetization of tower portfolio, network sharing and disposal of non-core assets.

Today many of our markets are fragmented and may undergo a wave of consolidation. Being number one or a strong number two in a market makes a substantial difference and, to a certain extent, determines profitability. Therefore, in order to reinforce our strategic position, we intend to focus on our existing footprint, with selective in-country consolidation by acquiring either mobile and/or fixed broadband assets. To complement this strategy, we have disposed of certain non-core assets in Cambodia, Vietnam, Burundi, Canada, the Central African Republic and are in the process of selling our operation in Zimbabwe. We carefully scrutinize any investment in our legacy infrastructure that does not also support our data business, while aiming to ensure that we remain able to deliver a set of core traditional telephone services that fully meet customer expectations. We have made, and intend to make in the future, selective moves to a more asset light network model with strategic network sharing partnerships and acceleration of monetization of our tower portfolio. Our implementation of our portfolio and asset optimization in 2015 included:

Algeria transaction

In January 2015, we closed the sale by GTH of a non-controlling 51% interest in OTA, which operates under the brand name Djezzy, to the FNI (the “Algeria Transaction”). The partnership with the FNI strengthened Djezzy’s position and prospects, with greater opportunities for our operations in Algeria. The closing of the Algeria Transaction also enabled us to commence a transformation program in Djezzy. See “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Algeria Transaction and Settlement” for more information.

Italy tower sale

In March 2015, we successfully completed the sale by WIND Italy of 90% of the shares of Galata, a towers business owning 7,377 towers in Italy, for approximately US$770 million. At the same time WIND Italy entered into 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. See “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Network and Tower Sharing Agreements” for more information.

Russian network sharing

In December 2015, we signed an amendment to an agreement with MTS to share 4G/LTE radiofrequencies in 20 regions of Russia, and we entered into an agreement with MegaFon for joint planning, development and operation of 4G/LTE networks in ten regions of Russia. See “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Network and Tower Sharing Agreements” for more information.

Italy Joint Venture

In August 2015, we entered into an agreement with Hutchison, which owns indirectly 100% of Italian mobile operator 3 Italia, to form an equal joint venture holding company that will own and operate our telecommunications businesses in Italy. The joint business of WIND Italy and 3 Italia is expected to have over 31 million mobile customers and the strength and scale to drive competition in Europe’s fourth largest telecoms market. See “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture” for more information.

 

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Pakistan Merger

In November 2015, we entered into an agreement with WTPL, the parent company and majority shareholder of Warid, and Bank Alfalah Limited to merge our telecommunications businesses in Pakistan. The combined business of PMCL and Warid is expected to have around 10,000 towers and serve over 45 million customers. See “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Pakistan Merger” for more information.

Zimbabwe disposal

In November 2015, we entered into an agreement with ZARNet (Private) Limited (“ZARNet”) to sell our indirect equity stake in Telecel Zimbabwe (Private) Limited. The transfer of ownership to ZARNet is subject to the satisfaction of customary closing conditions.

World class operations: Create a superior customer experience, optimize distribution and develop superior pricing capabilities, while continuously upgrading networks.

We are undertaking a systematic effort, involving dedicated analytics and research, to continuously optimize customer experience and drive superior pricing through integrated mobile bundles that combine traditional voice with SMS and, most importantly, data. We believe that these measures will provide value to our customers while at the same time protecting our revenue stream from cannibalization among various services, such as SMS and instant messaging. In order to optimize our distribution, we focus on what we believe to be the most efficient channels in each market. We expect these actions to reduce churn and significantly reduce our retention and commercial costs, while maintaining and strengthening our position as a market leader in Net Promoter Score (“NPS”).

In order to deliver on our goal of being a world class operator, we have focused and will continue to focus on building a solid and experienced management team. In 2015, our executive team was rebuilt, and 75% of our executives are new to the company, but not to the industry or their respective fields of expertise. Through the changes to our executive team and wider managerial changes in our group, we have laid a strong foundation to help us manage the challenges ahead. One focus of the team is to further strengthen a culture of ethical behavior with a zero tolerance approach to unethical conduct.

Structural improvements: Optimize capital structure.

Although important steps have been taken over the past two years to address our capital structure, we plan to make further structural improvements. This will remain a focal point going forward.

In 2014 and 2015, we refinanced a total of US$26 billion in debt, reducing our cost of debt to 6.3% in 2015 (from 8.2% in 2014) and substantially extending our debt maturity schedule. Also in 2014, we secured a revolving credit facility with our relationship banks for US$1.8 billion, substantially improving our liquidity profile.

In addition, in 2015, we announced two major transactions that helped improve our capital structure. Firstly, following the successful closing of the Algeria Transaction, the proceeds from which were used to pay down indebtedness, we successfully completed a tender for US$1.8 billion of outstanding bonds. In addition, US$500 million was repaid under our revolving credit facility and RUB bonds were also bought back at a time when interest rates reached 20% and above. Secondly, through the three successive refinancings of the WIND Italy debt in 2014 and 2015, a more sustainable capital structure was created. Upon the completion of the Joint Venture, we expect to reduce our net debt to EBITDA ratio substantially.

Competitive Strengths

We believe that the following competitive strengths will enable us to retain our customer base, capitalize on growth opportunities in the markets in which we operate and maintain and expand our current market share positions.

Diversified Operations and Cash Flows

Our business is diversified across geographies, with operations in 14 countries as of December 31, 2015. Our geographic diversity helps insulate us from concentrated risks associated with potential economic or political instability in a particular country or region. This diversification also allows us to benefit from diversified cash flows across our businesses, creating a strong liquidity position. With respect to our largest markets, we are the number one mobile operator in Ukraine, Algeria, Pakistan and Uzbekistan, the number two mobile operator in Bangladesh and Kazakhstan and the third-ranked mobile operator in Russia and Italy, each based on the number of customers as of December 31, 2015.

 

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Attractive emerging markets portfolio with significant upside

We are one of the leading international mobile operators with established leadership positions in emerging markets. We believe that several of these markets have significant upside potential stemming from low mobile voice and data penetration rates. Penetration rates in Bangladesh, Pakistan and Uzbekistan are 83%, 65% and 66%, respectively, as of December 31, 2015, below Western European levels.

Further, in certain of these markets, the proliferation of affordable smartphones and bundled mobile packages is driving growth in the uptake of mobile data and VAS. We believe our customers are using connectivity in new ways: with the expansion of access to content, applications, messaging, entertainment and social networking, and, as a result, demand for data services in these markets is growing. We believe we can leverage our market position in these countries to capitalize on increases in penetration rate and data usage. In addition, the telecommunications markets in Bangladesh, Pakistan and Eurasia have a large potential for customer base growth and revenue growth from relatively low penetration rates particularly with respect to SMEs. In these markets, we seek to leverage our knowledge and experience across our emerging markets footprint and in our more mature markets to capture this growth.

Solid financial profile with proven access to multiple funding sources

Historically, we have significantly grown our business while seeking to impose strict financial discipline in order to develop a solid capital structure and maintain strategic leverage and strong liquidity positions. Through the completion of financing activities of approximately US$21 billion in 2014 and approximately US$5 billion in 2015, we have substantially improved our debt maturity profile and liquidity position and significantly lowered our annual interest costs.

We have established a long-standing network of relationships with a large number of local and international financial institutions that have to date consistently provided us with the short- and long-term resources required to finance our operations, and grant us the liquidity to fund our working capital needs. We also have a strong track record in the public debt markets as in the past we have raised significant amounts of capital through bond issuances by our subsidiaries. Moreover, we are supported by a strong equity value cushion from our underlying group portfolio, with a total VimpelCom Group market cap of US$5.8 billion as of December 31, 2015. As a listed company, we also have access to the public equity markets as an additional source of funding and liquidity. We believe that our financial discipline, solid debt and cash positions and balanced mix of funding sources will enable us to continue to execute our business plan and support our group.

Recognized local brand names

We market our mobile services under local brand names in each of our markets. We benefit from a high level of brand awareness due to our local market leading positions. 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. In Ukraine, we market our mobile services primarily under the “Kyivstar” brand. This high level of brand awareness enables us to up-sell and cross-sell our products and introduce new services that require a strong level of trust from consumers, such as MFS. We also have powerful brands for our operations in Africa and Asia, including “Djezzy,” “Mobilink” and “banglalink”. In Italy, the “WIND” brand is well-established and enjoys high recognition. We believe that we have maintained the strength of these brands by offering innovative new products and services to provide our customers with faster access and easier usage and through our continuing commitment to providing high-quality customer service.

Broad distribution network

We have large sales and distribution networks for mobile and fixed-line services in the markets where we operate, which serve to enhance our brand visibility, maintain customer contact and expand the services we provide to our customers. These networks are used for both sales and customer care, allowing high standards of customer service. Our network consists of our own branded shops, franchise network, simple retail agreements with local retail competitors and networks of strategic retail partners. An efficient mix of these channels helps us to maintain our competitive market positions across all of our markets.

 

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Consistent leader in customer experience

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 stabilize churn in a majority of our markets. We also believe that we have provided particularly high levels of customer service to our corporate customers. By optimizing the customer experience and driving superior pricing through integrated mobile bundles that combine traditional voice with SMS and, most importantly, data, as of December 31, 2015, we have achieved the highest customer experience scores among peers in Bangladesh, Kyrgyzstan, Ukraine, Uzbekistan, Armenia and Algeria in terms of NPS, a market tool used to measure customer loyalty.

Optimized pricing structure supporting strong margins

Acknowledging differences in competitive situations and consumer behavior across markets, we undertake a systematic effort, involving dedicated analytics and research, to develop optimal pricing structures. We believe that this approach to pricing enables us to extract value from all of our market segments and allows us to 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. We believe that such pricing supports strong Adjusted EBITDA margins compared to our global peers.

Experienced management team

Our management teams across our group have extensive experience operating in the telecommunications industry. These seasoned management teams have been successful in developing a portfolio of mobile network operations in competitive and rapidly evolving emerging markets, as well as in developed, mature markets. We also ensure that we have seasoned and experienced management teams for each of our operations. We believe that our management teams put us in a strong position to successfully implement our business strategy worldwide.

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, 2015, approximately 9.3% of our customers in Russia were on postpaid plans and approximately 90.7% 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 amount 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 2015, we have optimized our portfolio of voice tariff options and simplified roaming pricing.

 

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Mobile Voice Services

  

Description

Roaming(2)   

In Russia, as of December 31, 2015, we had active roaming agreements with 588 GSM networks in 214 countries, respectively, in Europe, Asia, North America, South America, Australia and Africa. Additionally, we provided GPRS roaming with 466 networks, in 178 countries, and LTE roaming with 78 networks in 63 countries.

 

PJSC VimpelCom offers a 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, 2015, we provided our Russian customers with CAMEL roaming through 278 operators in 133 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.

 

Mobile VAS

  

Description

Basic VAS Package    Caller-ID; voicemail; call forwarding; conference calling; call blocking and call waiting
Messaging Services    SMS; MMS; voice messaging and SMS services (including information services such as news, weather, entertainment chats and friend finder)
Content/infotainment services    Voice services (including referral services); content downloadable to telephone (including music, pictures, games and video); and customized ringtones (RBT)

Mobile financial services

  

Mobile payment; banking card; trusted payment; banks notification and mobile insurance

 

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 55 regions as of December 31, 2015.

 

Access is offered through USB modems in every region of Russia. We offer special wireless “plug and 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 and Shared Everything Bundle Service in 2015, offering options for multiple SIM cards for one account and making it convenient for customers to manage their account across multiple devices. Bundled tariff plan penetration was at 34.4 % as of December 31, 2015.
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)

 

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Wireless Internet Access

  

Description

  

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

 

Mobile television and video streaming

 

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

 

Apple Carrier Billing (offering App Store, iTunes and Apple 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 and security.
Mobile virtual private network (“VPN”)    We offer 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 compass service for fleet and assets management via GPS / GLONASS with special devices (trackers) or with smartphones and tablets. We intend to continue developing these services for more accurate geo-positioning and big data information and to create tasks and task management for end-users via mobile apps.
Corporate SMS services    We provide direct connection to SMS centers for large companies and aggregators. We continued with the project of reducing spam SMS messages received by our customers in 2015 and made significant progress, as the average number of spam SMS per month is below one, as of December 31, 2015.

 

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Other Data Services

  

Description

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 in Russia.
Mobile Cloud Solutions    We are also continuing to develop our cloud product portfolio and there are several cloud solutions (such as MSO 365, Megaplan and 1C Counting) that we launched in 2015.

Mobile voice network operator (“MVNO”) services. In March 2016, we announced an agreement with SIM TELECOM to launch Russia’s first expatriate MVNO customer solution. Since 2014, SIM TELECOM has sold our tariff plans for non-residents of Russia and migrant workers under the SIM SIM brand. As part of the agreement, we acquired a 50.3% controlling interest in SIM TELECOM. We expect SIM SIM to become an MVNO within our network in Russia by the end of March 2016 and to launch new tariff plans and services (including translation, transportation and legal assistance services) for expatriates in Russia.

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, 2015, the number of owned retail mono-brand stores was 1,455 compared to 1,188 owned retail mono-brand stores as of December 31, 2014, and as of December 31, 2015, the number of owned modules was 42 compared to 56 owned modules as of December 31, 2014. As of December 31, 2015, we had 118 “Know How” stores, a format developed with ION in the form of a joint venture, and 34 “Know How” stores as a new format of multibrand stores with regional dealers.

In order to promote Beeline’s retail chain and increase mobile data devices penetration in 2015, Beeline began purchasing wholesale equipment (phones and accessories) to sell to dealers for further realization, launched eight platinum programs, broadened the range of brand devices to 6 to 8 SKUs and became the first operator in Russia to introduce a smartphone with Voice over LTE (“VoLTE”).

Specialized customer care. Beeline continued to improve customer service to improve NPS in 2015. Its successful mobile self-service application for iOS, Android and WindowsPhone, which allows customers to manage all charged Beeline services, has been downloaded more than 14 million times as of December 31, 2015. Other examples of customer care include filtering spam SMS messages, free anti-virus protection and the introduction of shared everything bundle services, offering the option of multiple SIM cards for one account, making it convenient for customers to manage their account across multiple devices. Also, we introduced an initiative to increase transparency of content subscription costs and ban undesired subscriptions 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. NPS has improved partly as a result of the improved customer care, and Beeline surpassed a large competitor in 2015 and narrowed the gap to the leader in NPS in Russia.

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 our licenses prior to their 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 their expiration.

In addition to the seven super-regional GSM licenses, we hold a GSM license for the Orenburg region, and in total, our GSM licenses cover approximately 97% of Russia’s population.

3G Licenses

PJSC VimpelCom holds one of three 3G licenses in Russia. The license expires on May 21, 2017 and we plan to apply for renewal of this license prior to its expiration.

 

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4G/LTE License

In July 2012, PJSC 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 PJSC 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; and 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, PJSC VimpelCom launched 4G/LTE services as of June 1, 2013. PJSC VimpelCom was required to extend services to six regions in Russia by December 1, 2013, which condition was met. PJSC 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, PJSC 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 the 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.

According to Analysys Mason Research, as of December 31, 2015, there were approximately 249.8 million customers in Russia, representing a penetration rate of approximately 175.8%.

The Russian mobile telecommunications market is highly competitive. Analysys Mason Research estimates that the top three mobile operators, MTS, MegaFon and PJSC VimpelCom, collectively held approximately 85.2% of the mobile market in Russia as of December 31, 2015. 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.

 

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The following table shows our and our primary mobile competitors’ respective customer numbers in Russia as of December 31, 2015:

 

Operator

   Customers 
(in millions)
 

MTS

     78.4   

MegaFon

     74.5   

VimpelCom

     59.8   

Tele2

     35.2   

 

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

MTS. One of our primary competitors in Russia is MTS. According to Analysys Mason Research, as of December 31, 2015, MTS had approximately 78.4 million customers in Russia, representing a market share of 31.4%. 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, 3G and HSPA services. MTS holds a 4G/LTE FDD license identical to ours, which it received in July 2012. In addition, MTS holds a 4G/LTE TDD license for the Moscow region, which provides MTS with a potential advantage in quality of its 4G/LTE services in that region. MTS is leading in the 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. During 2012, Altimo sold its entire 25.1% stake in MegaFon to a private investor. According to Analysys Mason Research, as of December 31, 2015, MegaFon had approximately 74.5 million customers, representing a market share of 29.8%. MegaFon holds GSM900/1800 and 3G licenses to operate in all regions of Russia. MegaFon also holds a 4G/LTE FDD license identical to ours, which it received in July 2012. During 2013, MegaFon acquired Scartel, which had a 4G/LTE FDD license in the 2600 MHz band for all regions of Russia. In addition, MegaFon has a 4G/LTE TDD license for the Moscow region, which provides MegaFon with a potential advantage in quality of its 4G/LTE services in that region.

Tele2 (T2 RTK Holding LLC). In August 2014, Rostelecom and Tele2 Russia completed the merger of their mobile businesses to form a new national mobile operator in Russia to be operated as a joint venture under the Tele2 brand name. According to Analysys Mason Research, as of December 31, 2015, Tele2 had approximately 35.2 million customers, representing a market share of 14.1%. Tele2 is present in 64 regions of the country and owns licenses and spectrum in GSM900/1800, 3G, and 4G/LTE FDD technology identical to ours. Tele2 also has spectrum in the 450 MHz band, used for CDMA services, and spectrum in the 2300-2400 4G/LTE TDD band, in 39 regions of Russia. In October 2015, Tele2 launched its 3G and 4G/LTE services, which cover 90% and 75% of the population of the city and region of Moscow, respectively, with approximately 5,000 3G and 2,000 4G/LTE base stations.

Other Competitors in Russia. In addition to MTS, MegaFon and Tele2, we compete with a number of local, regional 2G and 4G/LTE 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 business to consumer (“B2C”) customer spending.

 

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During 2015, 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, 2015, we had about 5 million participants. The program was nominated and awarded as the best loyalty program in the telecoms industry at the 2015 National Competition Loyalty Awards in Russia. Bonuses can be used for partner services or applied to our monthly fees.

We also continued to encourage our high-value customers by providing unique benefits and discounts from Beeline and its partners. We launched our email campaign with different attractive partner offers, which had a high demand among premium clients. As of December 31, 2015, we had about 2 million customers with premium status. Our financial product, Beeline card (based on MasterCard), was nominated and awarded as the best loyalty card by Trade Mark. As of December 31, 2015, we had more than 500,000 customers using a Beeline card. Each month we have a partner of the month with exclusive benefits for the participants. We also launched a new project involving personalized birthday congratulations videos.

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.

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 Long Distance (“ILD”) and Domestic Long Distance (“DLD”) 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 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 quality of service (“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.

 

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Fixed-Line Services

  

Description

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 VAS    Our company offers an increasing range of VAS, including toll free (800) numbers, virtual PSTN number, session initiation protocol (“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 Society for Worldwide Interbank Financial Telecommunication (S.W.I.F.T.) and all Russian stock exchanges.
Fixed Corporate and Cloud Services   

We offer 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 telecommunications 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, which we intend to extend with other cloud services of third parties and existing Beeline products.

Managed Services   

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

 

We offer and deploy managed WiFi networks (indoor and outdoor) on client sites (offices, restaurants, shops, etc.) based on IEEE 802.11b/g/n/ac wireless technology. We offer VAS 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 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 a 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 and roaming services.

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, Kazakhstan, Uzbekistan and Baltic states. For operators in Ukraine, Kazakhstan, Uzbekistan, 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.

Roaming

We manage relations with roaming partners in order to provide mobile services to subscribers of international operators in Russia, as well as to our subscribers abroad. We implement a full range of services, including voice, SMS, data and LTE.

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 IPTV product is run in seven out of eight super-regions of Russia. We provide IPTV services in 118 cities in 34 regions of Russia, and as of December 31, 2015, we had more than 1.0 million IPTV customers.

Wireless Broadband Internet Access. As of December 31, 2015, we installed more than 10,500 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 April 26, 2016 and February 16, 2021. 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 2016:

 

    Local Communications Services license (excluding local communications services using payphones and multiple access facilities) in Moscow (August 30, 2016);

 

    Local Communications Services using multiple access facilities in Krasnodar (April 28, 2016), Moscow (September 21, 2016) and St. Petersburg (September 21, 2016);

 

    Leased Communications Circuits Services in Moscow (November 9, 2016), in Moscow (July 5, 2016), St. Petersburg (July 5, 2016), St. Petersburg (October 4, 2016), Nizhny Novgorod (July 5, 2016), Khabarovsk (July 5, 2016), Novosibirsk (July 5, 2016), Rostov-on-Don (July 5, 2016) and Krasnodar (July 5, 2016);

 

    Telematic Services in Moscow (April 26, 2016) and Krasnodar (November 17, 2016);

 

    Intra-zonal Communications Services in Moscow (October 24, 2016) and St. Petersburg (October 24, 2016); and

 

    Data Transmission Services licenses in Moscow (April 26, 2016).

 

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We have filed, or will file, applications for renewal for all of our licenses that expire in 2016.

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 regional cities in Russia;

 

    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; and

 

    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.

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 price 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 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.

 

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FTTB IPTV. TV service is provided on a monthly fee basis. Set-top boxes (“STBs”) can be rented or bought by customers. As a VAS for TV, we have launched 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, an option allowing the rewind of live channels without recording on STBs. Most IPTV sales are carried out in bundles with home internet and WiFi routers for 1 Russian ruble. Customers are able to rent or buy additional STBs to watch their TV channel pack on another TV set or WiFi bridges, which helps to eliminate extra physical wires.

xDSL Services. For xDSL services, we offer an unlimited tariff plan, and tariff plans that depend on 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, 2015, we had more than 56,000 cable TV customers.

Description of Operations of the Algeria Segment

Mobile Business in Algeria

Description of Mobile Services 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, as well as improved service quality and coverage, have led to increased public awareness of, and access to, the mobile telecommunications market.

Approximately 99% of the population of Algeria has access to mobile coverage. According to Analysis Mason Research, there were approximately 46.8 million subscriptions in Algeria as of December 31, 2015, representing a mobile penetration rate of approximately 116.1%.

In Algeria, we generally offer our customers mobile telecommunications services under prepaid and postpaid plans. As of December 31, 2015, prepaid, postpaid and hybrid (a monthly fee with recharge possibility) customers represented approximately 92.6%, 4.3% and 3.1%, respectively, of our customers in Algeria.

Call Completion Services and VAS

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

 

VAS

  

Description

Basic VAS    Caller-ID, call forwarding, conference calling, call blocking, and call waiting
Messaging Services    SMS, MMS (which allows customers to send pictures, audio and video to mobile phones and to e-mail), and mobile instant messaging
Content/chat/infotainment services    Sports related services, religious content, taxi applications and e-learning for customers
Data access services    On GPRS and EDGE, and 3G
RBT    Customized ring back tones

Roaming

In Algeria, we 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, as of December 31, 2015, included active roaming agreements with 432 GSM networks in 157 countries, GPRS roaming with 230 networks in 93 countries and

 

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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.

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. During 2015, the ARPT approved new interconnection rates for mobile operators, which was a favorable change for our business. The MTR for OTA increased from DZD 0.96 to DZD 1.1 and the MTRs for the other operators decreased from DZD 2.2 to DZD 1.8 to 1.9 for the other operators (see “—Competition—Mobile Business in Algeria” below). The new rates partially reduced the asymmetry among the operators, however the rate for OTA is still significantly lower than for our competitors (see “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—New or proposed changes to laws or new interpretations of existing laws in the markets in which we operate may harm our business”).

Sales of Equipment and Accessories

Handset offerings. In order to stimulate mobile phones, and, in particular, smartphone penetration, we offer 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 wireless internet access through GPRS/EDGE and 3G networks using special “plug and play” USB modems. In addition to providing internet access, USB modems generally provide other functions such as balance top-up, tariff changing and easy management of other services in the USB modem interface.

Website. In the first half of 2015, we underwent a commercial revamp of our product and image, with an increased focus on Facebook, Twitter and YouTube. Our new website is designed to have a more responsive layout and includes a new mobile version.

Mobile Telecommunications Licenses in Algeria

OTA was awarded a 2G license for a term of 15 years in 2001. The license expires in 2016 but may be renewed for two subsequent five-year terms at no additional cost. OTA has submitted the necessary applications for renewal and does not anticipate any material obstacles to renewal. In addition, OTA was awarded a 15-year license to operate a 3G telecommunications network in 2013 for an aggregate fee of US$38 million (based on then current exchange rates), which was paid in full in 2013. OTA acquired a very small aperture terminal (“VSAT”) data-voice license in 2003 and renewed the license in 2014 for an additional period of five years at no additional cost.

Under the terms of its 2G and 3G mobile licenses, OTA is required to pay annual frequency fees to the Algerian government and contributions for the universal service fund, numbering plan and research in an amount equal to 3.5% of “operator turnover” (which is equal to revenue less interconnection costs). For its 3G license, OTA is also required to pay an annual revenue sharing fee of 1% based on 3G operator turnover.

In January 2016, the regulator in Algeria launched a tender for awarding 4G licenses to the three mobile operators in Algeria. Bidding will be conducted in early April with the winners of the tender expected to be announced in May 2016. The commercial launch of 4G services in Algeria is expected in the second half of 2016.

OTA’s total license fees (spectrum charges plus revenue sharing) in Algeria were US$77.0 million, US$85.4 million and US$64.3 million for the years ended December 31, 2013, 2014 and 2015, respectively, of which US$19.6 million, US$30.9 million and US$29.2 million related to spectrum charges, and US$57.4 million, US$54.5 million and US$35.1 million related to revenue sharing, respectively, over the same periods.

Competition—Mobile Business in Algeria

In Algeria, there are three mobile operators: OTA; 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 OTA 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, 3G licenses were 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.

 

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In July 2014, OTA launched 3G services and, by the end of 2015, had expanded services to 29 provinces across the country, including Algiers and the largest provinces in terms of population. OTA’s launch of 3G services was later than its competitors, who began their 3G roll outs in December 2013.

In January 2016, the regulator in Algeria launched a tender for awarding 4G licenses to the three mobile operators in Algeria as described in “—Mobile Telecommunications Licenses in Algeria.”

Customer growth in Algeria’s mobile market is expected to slow, and attention is expected to shift to maintaining or improving the average revenue per user, supported by data revenue growth after the commercial launch of 3G networks.

The Algerian government has imposed MTRs between operators that directly impact revenue from call termination, which is one of the major services provided by all operators who provide wholesale services. For more information about MTRs, see Exhibit 99.2—Regulation of Telecommunications. OTA receives revenues from other operators for calls terminated to its customers on OTA’s network (regardless of whether OTA’s customer is actually on OTA’s network or roaming) and is required to pay interconnection fees to other operators for calls terminated to their customers. MTRs are regulated and determined each year by the ARPT upon approval of each operator’s reference interconnection offer (“RIO”). As of July 1, 2015, MTRs were as follows (price per minute): OTA, DZD 1.1; Ooredoo, DZD 1.8; and Mobilis, DZD 1.9.

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, 2015:

 

Operator

   Customers in
Algeria
(in millions)
 

Djezzy

     17.7   

Mobilis

     16.2   

Ooredoo

     13.0   

 

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.” We also launched an unlimited postpaid offer, “Infinity,” which was supported by OTT partnerships with WhatsApp, Opera Mini and the 3G “Be-Djezzy” applications. Our prepaid plans for residential customers include “Djezzy Good” and “Djezzy Go.” In July 2014, we 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. New 2015 offerings included handset migration promotions and smartphone and dongle promotions with data bonuses.

We sell our mobile telecommunications services through indirect channels (distributors) and through our “Djezzy” branded shops, of which there were 2,000 (both owned and rented), including 1,102 equipped with IT material and sales application, as of December 31, 2015. Our nine exclusive national distributors cover all 48 Wilayas (provinces) of Algeria and are distributing our products through over 70,000 points of sale authorized to sell airtime and over 12,500 points of sale authorized to sell SIMs.

As of December 31, 2015, we also had a pool of more than 300 agents in call centers, which focus on customer care, including retention, troubleshooting and handling complaints. 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). We provide customer support for the “Djezzy” brand through our call centers, which are open 24 hours a day and seven days a week. During 2015, OTA continued to enhance the quality of its customer service by auditing and addressing agent performance in several major cities, including Algiers, Oran, Constantine and Annaba.

 

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Fixed-line Business in Algeria

We do not offer fixed-line services in Algeria.

Description of Operations of the Pakistan Segment

Mobile Business in Pakistan

Description of Mobile Services in Pakistan

The telecommunications sector in Pakistan has experienced significant growth over the past ten years for 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 has provided a higher percentage of the population of Pakistan with access to mobile services as compared to before. The availability, affordability and ease of use of handsets have 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 has launched 3G services in 300 cities, becoming the first operator to reach 7 million 3G customers.

Approximately 90% of the population of Pakistan lives in areas with mobile coverage. According to the Pakistan Telecommunication Authority (or the “PTA”), there were approximately 125.9 million subscriptions in Pakistan as of December 31, 2015, representing a mobile penetration rate of approximately 65.3%. Pakistan has an internet penetration rate of 14% as of December 31, 2015, based on subscriber figures provided by the PTA.

In Pakistan, we offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2015, approximately 1.9% of our customers in Pakistan were on postpaid plans and approximately 98.1% of our customers in Pakistan were on prepaid plans.

In addition, we offer mobile financial services to our customers in Pakistan.

Call Completion Services and VAS

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

 

VAS

  

Description

Basic VAS    Caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting
Messaging Services    SMS, MMS (which allows customers to send pictures, audio and video to mobile phones and to e-mail), and mobile instant messaging
Content/chat/infotainment services    Music; live audio streaming; infotainment services for religious, sports, comedy, quotes, news, weather and other content; and IVR (Interactive Voice Response) Chat
Data access services    On GPRS, EDGE and 3G
RBT    Customized ring back tones
MFS    Mobile financial services

Roaming

In Pakistan, as of December 31, 2015, we had active roaming agreements with 301 GSM networks in 148 countries, covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. Additionally, we provided GPRS roaming with 198 networks in 101 countries and CAMEL roaming through 56 networks in 44 countries. Generally, each agreement with

 

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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.

Interconnect

We have several interconnection agreements with mobile and fixed-line operators in Pakistan and in the territories of Azad Jammu and Kashmir (“AJK”) and Gilgit-Baltistan (“GB”), 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 smartphones penetration, we offer our customers a broad selection of handsets and internet devices, which we source from a number of suppliers.

USB Modems. We generally offer our customers wireless internet access through GPRS/EDGE and 3G networks using special “plug and play” USB modems.

Mobile Telecommunications Licenses in Pakistan

Mobilink was awarded a 15-year 2G license in 1992. In 2007, Mobilink renewed its 2G license for a further term of 15 years. As of December 31, 2015, Mobilink had a balance of US$58.2 million to be paid to the PTA for the renewal of its 2G license. Such amount is payable in yearly installments of US$14.5 million, payable in December of each year until December 2019. In addition, in 2014, following a competitive auction process, Mobilink was awarded a 15-year license to operate a nationwide 3G telecommunications network in Pakistan for an aggregate initial spectrum fee of US$300.9 million which was paid at the time Mobilink acquired the license. These 2G and 3G licenses do not entitle Mobilink to provide services in AJK and GB.

In 2006, Mobilink was awarded a 15-year license to provide mobile telecommunications services in AJK and GB, requiring payment of a US$10 million license fee, 50% of which was payable prior to the issuance of the license and the balance was payable in 10 equal annual installments of US$500,000 (payable in U.S. dollars or equivalent Pakistani rupees). Mobilink expects to make the last of these payments in 2016.

Under the terms of its 2G and 3G licenses, as well as its license for services in AJK and GB, Mobilink must pay annual fees to the PTA and make universal service fund contributions and/or research and development fund contributions, as applicable (not all of the foregoing are applicable to all licenses), in a total amount equal to 2.5% of Mobilink’s annual gross revenues (less certain allowed deductions) for such services, supplemental to spectrum administrative fees.

In addition, Mobilink and its subsidiaries have other licenses, including long distance and international (LDI), WLL, local loop licenses, licenses to provide non-voice communication services, and licenses to provide class VAS in Pakistan, AJK and GB. The licensees must also pay annual fees to the PTA and make universal service fund contributions and/or research and development fund contributions, as applicable (not all of the foregoing are applicable to all licenses), in a total amount equal to 2.5% of the licensees’ annual gross revenues (less certain allowed deductions) for such services.

Mobilink’s total license fees (annual license fees plus revenue sharing) in Pakistan (excluding the yearly installments noted above) were US$22.3 million, US$20.7 million and US$21.1 million for the years ended December 31, 2013, 2014 and 2015, respectively. Mobilink’s total spectrum administrative fee payments in Pakistan were US$0.9 million, US$1.0 million and US$1.0 million for the years ended December 31, 2013, 2014 and 2015, respectively.

Competition—Mobile Business in Pakistan

According to the PTA, there were approximately 125.9 million customers in Pakistan as of December 31, 2015, representing a mobile penetration rate of approximately 65.3%, a decrease from 73.1% as of December 31, 2014, due to the biometric verification process of all cellular customers in 2014 and 2015. 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 (Private) Limited is a wholly owned company of Warid Telecom Pakistan LLC and Bank Alfalah Limited and launched its cellular services in Pakistan in May 2005. Zong is wholly owned by China Mobile. On November 26, 2015, we entered into an agreement with WTPL and Bank Alfalah to merge our telecommunications businesses in Pakistan, as described in more detail under “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Pakistan Merger.”

 

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During 2015, the Government of Pakistan and the PTA put in place additional security measures, in particular biometric verifications for all mobile subscriptions, which required re-verification of all existing customers (see “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—New or proposed changes to laws or new interpretations of existing laws in the markets in which we operate may harm our business”). During this re-verification, a restriction on SIM sales was enforced through retail channels, and SIM cards that could not be verified had to be blocked by the operators. By May 2015, Mobilink verified approximately 87% of customers, representing 99% of revenue, thereby outperforming the market in terms of retained customer base, based on subscriber figures provided by the PTA.

The following table shows our and our competitors’ respective customer numbers in Pakistan as of December 31, 2015:

 

Operator

   Customers in
Pakistan
(in millions)(1)
 

Mobilink

     36.2   

Telenor Pakistan

     34.9   

Zong

     24.1   

Ufone

     19.9   

Warid

     10.7   

 

Source: The Pakistan Telecommunication Authority.

(1) The total number of customers in Pakistan decreased during 2015 as a result of the SIM re-verification process and certain disconnections as described above.

Marketing and Distribution—Mobile Business in Pakistan

In Pakistan, we offer a portfolio of tariffs and products designed to cater to the needs 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 discounts for closed user groups and follow-up minutes based on bundle commitment. As of December 31, 2015, our sales channels include eight company stores, 21 business centers, a direct sales force of 129 employees, 350 exclusive franchise stores, 546 contractual direct-selling representatives, and over 207,000 non-exclusive third party retailers. For top-up, we offer prepaid scratch cards and electronic recharge options, which are distributed through the same channels. Mobilink SIMs are sold through more than 30,000 retailers, supported by biometric verification devices.

We have focused on MFS revenue generation by incentivizing retailers with customer engagement campaigns, and as of December 31, 2015, had over 59,094 MFS agents. In addition, we own Waseela Microfinance Bank Limited, a microfinance banking institution, which provides branchless MFS in Pakistan. MFS enable customers to perform financial transactions, financial payments, balance checks and other banking transactions through a mobile device such as mobile phones. Our automated customer service helpline operates 24 hours a day and seven days a week, and we operate three call centers in Lahore, Karachi and Islamabad. In addition, we have personnel in our regional corporate customer services operations to manage our high-end customer accounts.

Fixed-line Business in Pakistan

Description of Fixed-Line Services in Pakistan

Our fixed-line business in Pakistan includes internet and VAS 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, VPN services, VAS, 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, Rawalpindi and Islamabad), and P2P radios for connecting to our network. Our long-haul fiber optic network covers more than 6,500 kilometers and, supplemented by wired and wireless networks, over 100 cities across Pakistan.

We provide the following services for corporate and individual business 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; dedicated lines of data transmission; and dedicated line access and fixed-line mobile convergence.

 

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Competition—Fixed-line Business in Pakistan

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. 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 Pakistan

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 a dedicated sales force and account managers. For consumer DSL, we use direct sales channels, indirect sales channels and telesales. Our telesales are conducted in Lahore in the 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 Bangladesh Segment

Mobile Business in Bangladesh

Description of Mobile Services in Bangladesh

The mobile telecommunications industry was introduced late in Bangladesh. Since the launch of GSM technology in 1997, the industry has grown rapidly. The mobile penetration rate in Bangladesh increased from 0.8% in 2002 to 83% in 2015, according to the Bangladesh Telecommunications Regulatory Commission (the “BTRC”). Increased demand for mobile telecommunications services is largely due to the expansion of the Bangladeshi economy and the corresponding increase in disposable income, declining tariffs and handset prices 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; however, 3G usage is growing following the launch of 3G services in October 2013. The expanding 3G network is expected to increase ARPU as the use of the internet grows, with improving data speed presenting a significant opportunity for mobile operators in Bangladesh to increase their market shares in significant urban centers.

Currently in Bangladesh, more than 99% of the population lives in areas with mobile coverage, and all 64 district headquarters have access to 3G networks. According to the BTRC, there were approximately 133.7 million customers in Bangladesh, as of December 31, 2015. Since the launch of 3G services, internet penetration has increased from 22.9% in October 2013 to 33.7% in December 2015.

The telecommunications market in Bangladesh is largely comprised of prepaid customers. As of December 31, 2015, approximately 93.6% of our customers in Bangladesh were prepaid and approximately 6.4% were on postpaid plans.

Call Completion Services and VAS

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

Data access services are provided by using GPRS, EDGE and 3G technology. Customers can use data services both as pay-per-use or a pack.

 

VAS

  

Description

Basic VAS    Call forwarding, conference calling, call blocking, call waiting, caller line identification presentation, call me back and voicemail missed call alert
Messaging Services    SMS, MMS (which allows customers to send pictures, audio and video to mobile phones and to e-mail) and mobile instant messaging

 

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VAS

  

Description

Content/chat/infotainment services    News alert service, sports related content, job alerts, music streaming, mobile TV, content download, devotional content and agricultural helpline
RBT    Customized ring back tones

Roaming

In Bangladesh, we have active roaming agreements covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. As of December 31, 2015, Banglalink had active roaming agreements with 421 GSM networks in 160 countries and provided GPRS roaming with 312 networks in 115 countries, in addition to maritime roaming and in-flight roaming with Emirates Airlines and Malaysian Airlines. 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.

Interconnect

We have several interconnection agreements with mobile and fixed-line operators in Bangladesh 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 smartphones penetration, we offer our customers a broad selection of handsets and internet-capable devices, which we source from a number of suppliers. Currently, Banglalink does not offer handset subsidies.

Mobile Telecommunications Licenses in Bangladesh

In November 1996, Banglalink was awarded a 15-year GSM license to establish, operate and maintain a digital mobile telephone network to provide 2G services throughout Bangladesh. The license was renewed in November 2011 for a further 15-year term.

Following a competitive auction process, Banglalink was awarded a 15-year license to use 5 MHz of 3G spectrum on September 19, 2013, for which it paid a total cost of BDT 8,677.4 million (inclusive of 5% VAT) (US$111.6 million equivalent), including both a license acquisition fee and a spectrum assignment fee.

Under the terms of its 2G and 3G mobile licenses, Banglalink is required to pay to the BTRC (i) an annual license fee of BDT 50.0 million (equivalent to US$0.6 million) for each mobile license; (ii) 5.5% of Banglalink’s annual audited gross revenue, as adjusted pursuant to the applicable guidelines; and (iii) 1% of its annual audited gross revenue (payable to Bangladesh’s social obligation fund), as adjusted pursuant to the applicable guidelines. The annual license fees are payable in advance of each year, and the annual revenue sharing fees are each payable on a quarterly basis and reconciled at the end of each year.

Banglalink’s total license fees (annual license fees plus revenue sharing) in Bangladesh were equivalent to US$33.8 million, US$37.1 million and US$40.6 million for the years ended December 31, 2013, 2014 and 2015, respectively.

In addition to license fees, Banglalink pays annual spectrum charges to the BTRC, calculated according to the size of Banglalink’s network, its frequencies, the number of its customers and its bandwidth. The annual spectrum charges are payable on a quarterly basis and reconciled at the end of each year. Banglalink’s annual spectrum chargers were equivalent to US$8.4 million, US$9.1 million and US$9.9 million for the years ended December 31, 2013, 2014 and 2015, respectively.

Competition—Mobile Business in Bangladesh

The mobile telecommunications market in Bangladesh is highly competitive. The top three mobile operators, Grameenphone, Banglalink and Robi, collectively held approximately 88.1% of the mobile market in Bangladesh as of December 31, 2015, according to the BTRC. On September 9, 2015, Robi and Airtel announced a potential merger that could result in the creation of the second largest mobile telecommunications operator in Bangladesh. The operators have sought permission from the BTRC to proceed with the

 

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merger. The High Court has requested feedback on whether it should be directed to assess the market impact of the proposed merger of Robi and Airtel. This request was directed at Robi, Airtel, the BTRC and secretaries to the cabinet division, Bangladesh Competition Commission and ministries of commerce and telecommunications, and the responses to this are still pending. At the direction of the High Court, the BTRC organized a public hearing on the proposed Robi-Airtel merger on February 17, 2016.

The following table shows our and our competitors’ respective customer numbers in Bangladesh as of December 31, 2015:

 

Operator

   Customers in
Bangladesh
(in millions)
 

Grameenphone

     56.7   

Banglalink

     32.3   

Robi

     28.3   

Airtel

     10.7   

Teletalk

     4.1   

Citycell

     1.0   

 

Source: The Bangladesh Telecommunications Regulatory Commission.

Marketing and Distribution—Mobile Business in Bangladesh

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 (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 (mostly prepaid). We also offer business-specific VAS and special pricing based on volume and contractual commitment, which include field force tracking, fleet tracking, bulk SMS and corporate outbound dial service. We provide our large enterprise accounts with specialized customer service and enterprise relationship management. With rapid growth in the 3G network, we offer a wide range of 3G products which cater to the needs of different segments. As of December 31, 2015, Banglalink had covered more than 500 out of 517 Thanas (local administrative centers under the district level) with 3G coverage, and 11% of its customers were using 3G data service.

As of December 31, 2015, our sales and distribution channels included 12 company stores, a direct sales force of 72 enterprise sales managers and 80 zonal sales managers for mass market retail sales channels, 94 exclusive franchise stores, 53,611 retail SIM outlets, 213,116 top-up selling outlets and 1,164 Banglalink service points. Banglalink provides customer support through its call center, which is open 24 hours a day and seven days a week. The call center also includes a corporate customer service team that focuses on corporate customers and SMEs. Expansion of the call center is underway to ensure a high level of customer service as the customer base grows. Banglalink has consistently been ranked as the most recommended operator in Bangladesh in terms of NPS. Banglalink has established credit control and collection teams to improve invoice recovery rates.

Fixed-line Business in Bangladesh

We do not offer fixed-line services in Bangladesh.

Description of Operations of the Ukraine Segment

Mobile Business in Ukraine

Kyivstar 3G launch

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. Kyivstar launched 3G services in Ukraine in May 2015, and, as of December 31, 2015, offered 3G services in 500 localities and had more than 7.5 million 3G customers.

 

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Description of Mobile Services in Ukraine

Mobile Voice Services

As of December 31, 2015, approximately 9.4% of our customers in Ukraine were on postpaid plans and approximately 90.6% of our customers in Ukraine were on prepaid plans.

Call Completion and VAS

In Ukraine, we offer the same call completion and VAS as in Russia. For a description of these services, see “—Description of Operations of the Russia Segment—Mobile Business in Russia.”

Roaming

As of December 31, 2015, Kyivstar provided voice roaming on 472 networks in 198 countries, GPRS roaming on 400 networks in 164 countries and 3G roaming on 254 networks in 118 countries.

Wireless Internet Access

In Ukraine, we provide our customers with wireless internet access through GPRS/EDGE and 3G/HSPA networks. Our 3G internet services were commercially launched in May 2015 with the introduction of new retail portfolios, providing customers with data, voice and messaging bundles.

Mobile Telecommunications Licenses in Ukraine

In Ukraine, Kyivstar holds 900 MHz GSM and 1800 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 5, 2026.

On February 25, 2015, VimpelCom announced that Kyivstar was 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 Information of Ukraine. The license was issued on April 1, 2015 and is valid for a period of 15 years (until April 1, 2030).

We have also obtained a range of national and regional radio frequency licenses for the use of radio frequency resources in the referred standards and in specified standards—RRL and WiMax. Our network covers approximately 98% of Ukraine’s population (except the Anti-Terrorist Operation (“ATO”) zone where Kyivstar is not able to use and control its network).

Competition—Mobile Business in Ukraine

According to Analysys Mason Research, as of December 31, 2015, there were approximately 59.1 million customers in Ukraine, representing a penetration rate of approximately 132.0%. 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, 2015:

 

Operator

   Customers
(in millions)
 

Kyivstar

     25.4   

MTS Ukraine

     20.3   

Astelit

     10.7   

 

Source: Analysys Mason Research for all companies except Kyivstar.

Kyivstar competes primarily with MTS Ukraine, operating under the Vodafone brand, which is 100% owned by MTS and operates a GSM900/1800 network in Ukraine. Kyivstar also competes with Astelit, as well as with Trimob, a 100% affiliate company of Ukrtelecom to provide services under a 3G license, and with other small CDMA operators.

 

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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.

During 2015, Kyivstar started to sell bundled offers available when purchasing partners’ smartphones and simplified its offerings by introducing new tariff plans focused on on-net, off-net and data. In addition, Kyivstar launched a new line-up of plans for its mobile prepaid and postpaid subscribers and rebranded its corporate style (including new logo and website designs and branded products).

Customer Loyalty Programs

In Ukraine, Kyivstar has a loyalty program, “Kyivstar club,” which is available for subscribers on legacy tariffs only.

Fixed-line Business in Ukraine

Description of Fixed-line Services in Ukraine

Business Operations

In July 2015, we completed an internal reorganization, as a result of which, Golden Telecom LLC, the entity which previously owned our fixed-line network in Ukraine, was merged with and into Kyivstar.

We have constructed and own, as of December 31, 2015, a 43,240 kilometer fiber optic network, including 20,017 kilometers between cities, 14,342 kilometers inside cities, and 8,881 kilometers local FOL (Fiber Optical Line) 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 VAS. 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.

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 (excluding cities in Crimea and the ATO zone).

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.

 

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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 fixed-line and wireless internet services. We began providing fixed-line broadband services in Ukraine in 2008 and, as of December 31, 2015, provided services in 116 cities in Ukraine (excluding cities in Crimea and the ATO zone). In connection with these services, we have been engaged in a project to install FTTB for fixed-line broadband services in approximately 40,574 residential buildings in 116 cities, providing over 55,092 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, 2020   

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. We were the third largest B2B internet provider in the country as of December 31, 2015, according to a research conducted by “Expert Consulting” research agency. There is a high level of competition with more than 400 ISPs in Ukraine. Our main competitors in the corporate market for data services are also Ukrtelecom, Vega and Datagroup.

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, 2014 to December 31, 2015, we increased the number of our broadband customers in Ukraine (excluding customers in the ATO zone) by 3.9% from 778,432 to 808,477.

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 SME customers through dealerships, direct sales, own retail and agent networks.

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

 

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Fixed-line services have significant potential considering our existing market share in the B2B market and our ability to provide integrated solutions with mobile services, which creates brand preference. 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. During 2015, our consumer fixed-line internet services business was supported by below the line advertising, 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. We currently have four unlimited tariff plans with monthly fees, which offer different speeds up to 100 Mbps for active internet users. In addition, in 2015, we launched OTT TV services in partnership with Viasat.

Description of Operations of the Kazakhstan Segment

Mobile Business in Kazakhstan

Description of Mobile Services in Kazakhstan

In Kazakhstan, we offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2015, approximately 10.3% of our customers in Kazakhstan were on postpaid plans and approximately 89.7% of our customers in Kazakhstan were on prepaid plans.

Call Completion and VAS. In Kazakhstan, we offer similar call completion and VAS 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.”

Roaming

In Kazakhstan, we have active roaming agreements covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. As of December 31, 2015, we had active roaming agreements with 575 GSM networks in 191 countries and provided GPRS roaming with 433 networks in 156 countries and CAMEL roaming through 245 networks in 99 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.

Mobile Internet Services

In 2015, we launched new bundle plans with a wide pricing portfolio to cover all our customers’ mobile traffic needs and provide a better customer experience, while creating opportunities for the customer to purchase add-ons.

 

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We focus on smartphone penetration as a key factor for mobile internet revenue. During 2015, we started selling an affordable smartphone, Beeline Smart, which proved to be popular with current and new customers. We also launched lifestyle internet offers, for example, with unlimited WhatsApp, social networks and radio music. We focus specialized offers on the evolution of internet users and growth of their data ARPU by proposing unlimited access to their favorite OTTs.

Mobile Telecommunications Licenses in Kazakhstan

We hold a national license for GSM900/1800 and 3G for the entire territory of Kazakhstan, which license has an unlimited term, no license fee and can be terminated voluntarily by the operator.

On December 31, 2015, we received a proposal from the regulator in Kazakhstan regarding the allocation of frequencies (800 MHz and 1800 MHz) for the provision of 4G/LTE services. The licensing conditions include network coverage requirements and allocation of the specified frequencies (10 MHz of 1800 MHz and 10 MHz of 800 MHz). The provision of 4G/LTE services requires one fee of KZT 4.0 billion (approximately US$11.4 million as of December 31, 2015) to be paid by February 1, 2016, and an additional fee of KZT 22.0 billion (approximately US$62.8 million as of December 31, 2015) to be paid in one tranche of KZT 10.0 billion (approximately US$28.5 million as of December 31, 2015) by March 1, 2016, and a second tranche of KZT 12.0 billion (approximately US$34.2 million as of December 31, 2015) by December 1, 2016. We paid each of the first two amounts in a timely manner, and we intend to pay the remaining amount by the required date.

Competition—Mobile Business in Kazakhstan

Kazakhstan

According to Analysys Mason Research, there were approximately 27.4 million mobile customers in Kazakhstan as of December 31, 2015, representing a penetration rate of approximately 155.1%.

The following table shows our and our primary mobile competitors’ respective customer numbers in Kazakhstan as of December 31, 2015:

 

Operator

   Customers
(in millions)
 

Kcell

     10.4   

KaR-Tel

     9.5   

Tele2 Kazakhstan

     4.4   

AlTel

     3.1   

 

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

Marketing and Distribution—Mobile Business in Kazakhstan

In Kazakhstan, we divide our primary target customers into the following five large groups: large account corporate customers (business market); SME customers (business market); business to government or “B2G” customers (business market); high ARPU customers (consumer market); youth segment (consumer market); and mass market segment (consumer market).

In Kazakhstan, we offer a wide pricing portfolio focused on bundle plans. During 2015, a new integrated bundle, data add-ons and lifestyle bundles were added to the pricing portfolio for the consumer segment.

In September 2015, we obtained control over KAZEUROMOBILE LLP (“KEM”), a joint venture in Kazakhstan, due to a change in the corporate governance structure. We have an indirect 51% stake in KEM, whose primary activity is the retail sale of telecommunication devices and related accessories, and KEM has 111 sale points in 39 cities in Kazakhstan.

Customer Loyalty Program

We have a loyalty program in Kazakhstan, with which we aim to increase the duration of the relationship with, and ARPU of, our customers. As of December 31, 2015, we had 2.5 million customers participating in this program in Kazakhstan.

 

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Fixed-line Business in Kazakhstan

Description of Fixed-line Services in Kazakhstan

Business Operations

We focus on customer experience for large enterprises through offering high-quality services. Our main business clients are concentrated in the financial and oil & gas sectors, with a new focus on international companies. We provide the following services for corporate clients: high-speed internet access; local, long distance and international voice services over IP; local, intercity and international leased channels and IP VPN services; cloud services; and integrated corporate networks (including integrated network voice, data and other services).

We provide our services with the following technologies: fiber optic lines (more than 22,000 buildings are covered by our FTTB network); wireless technologies; satellite technologies; and TV-Everywhere platform (through the vendor, Computer Telephony Integration).

Wholesale Operations

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.

Residential and FTTB Operations

In Kazakhstan, we offer the same fixed-line broadband and wireless internet services as in Russia. For more information, see “—Description of Operations of the Russia Segment—Fixed-line Business in Russia.”

We also launched new products for Beeline subscribers, including OTT TV available on smart phones, TVs, tablets and PCs. In addition, we have launched VAS such as “Forsage” (to allow FTTB subscribers to restore initial speeds according to their tariff plans), “Turbo” (to allow subscribers to exceed the speeds in their tariff plans), “Invite your friend” (to attract and retain subscribers by providing bonuses which can be used to make broadband payments) and “Moving” (to keep login and password details). We also update our offers to reflect seasonal campaigns.

Licenses—Fixed-line Business Kazakhstan

We have a long distance license which is important to our fixed business in Kazakhstan. This license has an unlimited term, no license fee and covers services including long distance and international connection, traffic termination and transit.

Competition—Fixed-line Business in Kazakhstan

Business Operations

We provide internet, data transmission and traffic termination services in Kazakhstan, where we compete primarily with state-owned provider Kazakhtelecom, KazTransCom (owned by TeliaSonera), TransTelecom (owned by Temir Zholy, the national railway company), Astel (a leader in the provision of satellite services) and several other small local operators.

Marketing and Distribution—Fixed-line Business in Kazakhstan

In Kazakhstan, we are focusing 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.

Description of Operations of the Uzbekistan Segment

Mobile Business in Uzbekistan

Description of Mobile Services in Uzbekistan

In Uzbekistan, we offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2015, approximately 1.7% of our customers in Uzbekistan were on postpaid plans and approximately 98.3% of our customers in Uzbekistan were on prepaid plans.

Call Completion and VAS. In Uzbekistan, we offer the same call completion and VAS 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.”

 

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Roaming

In Uzbekistan, we have active roaming agreements covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. As of December 31, 2015, we had active roaming agreements with 499 GSM networks in 185 countries and provided GPRS roaming with 373 networks in 161 countries and CAMEL roaming through 235 networks in 103 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.

Mobile Internet Services

Our data strategy focuses on smartphone users, digitalization of services and creating new applications for data users. We seek to convert smartphone owners from non-data users to data users with 3G performance and 4G/LTE development, effective offers for smartphone users, regional marketing of smartphones and co-branded projects with smartphone vendors. Our long-term focus is to move our customers from pay-as-you-go to integrated bundles, and to increase data usage and ARPU with specific offer campaigns.

In Uzbekistan, we provide customers with wireless internet access over GPRS/EDGE/3G/4G/LTE networks. Our 3G/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 have begun to integrate mobile services of popular social networks.

Mobile Telecommunications Licenses in Uzbekistan

We hold a national license for GSM900/1800, 3G and 4G/LTE covering the entire territory of Uzbekistan. The license is granted for 15 years and requires annual license fee payments. The license expires on August 6, 2016, and we plan to apply for renewal of the license prior to its expiration.

Competition—Mobile Business in Uzbekistan

According to Analysys Mason Research, as of December 31, 2015, there were approximately 20.5 million mobile customers in Uzbekistan, representing a penetration rate of approximately 65.5%. The relatively low penetration rate is caused by the single-SIM profile of most Uzbek mobile subscribers.

The following table shows our and our primary mobile competitors’ respective customers in Uzbekistan as of December 31, 2015:

 

Operator

   Customers
(in millions)
 

Unitel

     9.9   

Ucell

     8.8   

UzMobile

     0.6   

UMS

     1.1   

Other

     0.2   

 

Source: Analysys Mason Research for all companies except Unitel.

In Uzbekistan, we compete primarily with Ucell (owned by TeliaSonera), UzMobile and Universal Mobile Systems (“UMS”). UMS is a joint venture between MTS, who re-entered the market in December 2014, and an Uzbek government-controlled entity. MTS owns a 50.01% stake and the government owns a 49.99% stake in UMS, which provides GMS services. UzMobile entered the market as a fourth operator in April 15, 2015 and, as a state-owned operator, has a number of advantages over the other operators, including state-sponsored project financing on favorable terms, temporary exemptions from license fees, spectrum fees and customs duties on imported equipment, permission to carry out construction and installation projects without competitive tenders and permission to obtain permits related to radio electronic facilities and high frequency devices. In September 2015, TeliaSonera announced that it will exit from Uzbekistan, along with the other markets in Eurasia in which it operates, without providing a specific timeframe for such exit.

 

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Marketing and Distribution—Mobile Business in Uzbekistan

In Uzbekistan, we divide our primary target customers into the following 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.

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

In the business market, we offer a wide range of telecommunications services and tariff plans to the mobile B2B segment, and we have the largest market share among mobile operators in Uzbekistan. To address various business goals, we allow corporate customers to construct price plans that take into account their particular business needs. Our current B2B priorities are the development of the large account corporate segment, attracting new segments with the introduction of M2M solutions and big data and increasing the number of data users.

Customer Loyalty Program

We have a loyalty program in Uzbekistan, with which we aim to increase the duration of the relationship with, and ARPU of, our customers. As of December 31, 2015, we had 4.5 million customers participating in this program in Uzbekistan.

Fixed-line Business in Uzbekistan

Description of Fixed-line Services in Uzbekistan

Business Operations

In Uzbekistan, we provide a wide range of fixed-line services, such as network access and hardware and software solutions, including configuration and maintenance. We have our own basic fiber optic digital network in the cities of Tashkent, Samarkand, Bukhara, Navoi, Zarafshan, Karshi, Termez, Andijan, Kokand, Namangan and Fergana, covering more than 472 kilometers, and copper cables, covering more than 135 kilometers, that allow users to connect and to access services in nearly all regions of Uzbekistan.

We provide the following services for corporate and individual business 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, through our copper cable network and our modern digital fiber optic network; dedicated lines of data transmission; and dedicated line access and fixed-line mobile convergence.

Currently, the most popular services on the Uzbek telecommunications market are internet services.

Wholesale Operations

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.

Residential and FTTB Operations

In Uzbekistan, we offer the same fixed-line broadband and wireless internet services as in Russia. For more information, see “—Description of Operations of the Russia Segment—Fixed-line Business in Russia.”

Licenses—Fixed-line Business in Uzbekistan

We have fixed-line, data and long distance licenses which are important to our fixed business in Uzbekistan. These licenses will expire between July 5, 2016 and December 20, 2029, require the payment of annual fees and cover services including local, long distance and international communications, data transmission and internet. We plan to file applications for renewal of the licenses that expire in 2016 prior to their expiration.

Competition—Fixed-line Business in Uzbekistan

We operate large independent fixed-line services in Uzbekistan, where we compete with the state-owned provider, Uztelecom, as well as East Telecom, Sarkor Telecom, Sharq Telecom and EVO. There is a high level of competition in the capital city of Tashkent, but the fixed-line internet market in most of the regions remains undeveloped.

 

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Marketing and Distribution—Fixed-line Business in Uzbekistan

One of our priorities in Uzbekistan is the development of information and communication technology (“ICT”), which supports economic development in Uzbekistan. Our strategy includes maintaining our current market position by retaining our large corporate client customer base.

Description of Operations in HQ and Others

Our operations in Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos are included in HQ and Others.

Mobile Business in HQ and Others

Description of Mobile Services in HQ and Others

In the countries in HQ and Others, we generally offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2015, we had the following percentages of postpaid and prepaid customers:

 

Payment Plan

   Kyrgyzstan     Armenia     Tajikistan     Georgia     Laos  

Postpaid

     4.7     11.7     0.1     0.4     5.3

Prepaid

     95.3     88.3     99.9     99.6     94.7

Call Completion and VAS. In the countries in HQ and Others, we offer the same call completion and VAS as in Russia (except for location based services).

Roaming. In the countries in HQ and Others, we have roaming arrangements with a number of other networks, which vary by country of our operations.

 

Country

  

Roaming Agreements (as of December 31, 2015)

Kyrgyzstan

   Voice roaming on 461 networks in 148 countries
  

GPRS roaming on 218 networks in 88 countries

CAMEL roaming on 132 networks in 66 countries

Armenia

   Voice roaming on 417 networks in 173 countries
   GPRS roaming on 316 networks in 130 countries
   CAMEL roaming on 209 networks in 96 countries

Tajikistan

  

3G roaming on 144 networks in 44 countries

Voice roaming on 199 networks in 87 countries

   GPRS roaming on 178 networks in 81 countries
   CAMEL roaming on 111 networks in 59 countries

Georgia

   Voice roaming on 208 networks in 88 countries
   GPRS roaming on 165 networks in 77 countries
   CAMEL roaming on 118 networks in 59 countries

Laos

   Voice roaming on 402 networks in 137 countries
   GPRS roaming on 211 networks in 457 countries
   CAMEL roaming on 28 networks in 17 countries

 

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Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our 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.

Interconnect

We have several agreements with mobile and fixed-line operators in each of the countries in our HQ and Others segment 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.

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 each of Kyrgyzstan, Tajikistan and Georgia. We have promotional zero-zones for major local and international social networks in each of these countries to lower the entry barrier for new data users and stimulate consumption for existing ones. We also focus on smartphone penetration growth in each of these countries as the major source of effective demand for our mobile internet services.

In Kyrgyzstan, we provide our customers with wireless internet access through GPRS/EDGE/3G/HSPA+ networks. We launched our 3G/HSPA+ network in Kyrgyzstan in December 2010. USB modems were commercially launched for prepaid and contract customers in November 2009. During 2014, we launched attractive internet options to promote data usage during idle hours and spread the network load in Kyrgyzstan, and we succeeded in branded smartphone distribution, which increased our data user base. In 2015, following an open tender process, we bought 5 MHz of 800 MHz spectrum (for an equivalent of approximately US$4.4 million) with a commitment to buy an additional 5 MHz of 800 MHz spectrum in 2016, for the deployment of a 4G/LTE network in 2016.

In Armenia, we provide our customers with wireless internet access over GSM/GPRS/EDGE/3G networks. 3G services were commercially launched in 2009. For small screen customers, we launched data bundles with internet access for a daily fee with unlimited data usage and a limit on speed only after a certain amount of usage.USB modems were commercially launched in July 2009. We offer customers a USB modem and SIM card with a pre-installed special internet rate data plan.

In Tajikistan, we provide our customers with wireless internet access via GSM/EDGE and 3G networks. USB modems were launched in January 2008. We provide internet services for smartphones and feature phones, as well as for USB dongles. During 2015, Tacom launched, for the first time, integrated mobile bundles in Tajikistan. In addition, we offer 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/LTE networks. We were awarded a 4G/LTE license with a 15-year term in January 2015 as a result of a tender process in Georgia. We launched our 4G/LTE network in February 2015. During 2015, Mobitel launched a numbers of competitive 4G/LTE offers, such as 4G/LTE integrated bundles and data bundles, 4G/LTE smartphones with bonuses and bundles, and promotional campaigns on WiFi routers and modems.

In Laos, we offer our customers wireless internet access through GPRS/EDGE and 3G networks using special “plug and play” USB modems. In addition to providing internet access, USB modems generally provide other functions such as balance top-up, tariff changing and easy management of other services in USB modem interfaces.

 

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Mobile Telecommunications Licenses in the countries in HQ and Others

 

Country

  

Licenses (as of December 31, 2015)

  

License Expiration

Kyrgyzstan

  

National license to use radio spectrum of 800 MHz for the entire territory of Kyrgyzstan (technology neutral)

 

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

 

National license to use radio spectrum of GSM900/1800 MHz and 3G licenses for the entire territory of Kyrgyzstan

 

National license for electric communication service activity

 

National license for BS transmission

  

September 28, 2025

 

 

October 30, 2019

 

 

 

May 30, 2016

 

 

 

Unlimited term

 

 

December 3, 2019

 

Armenia

   Network operation license for the entire territory of Armenia    March 3, 2028
   National licenses to use radio spectrum of 900 MHz, 1800 MHz and 2100 MHz for the entire territory of Armenia (technology neutral)    March 3, 2023

Tajikistan

   GSM-900/1800 license, 3G license and data services license (with permission to use of 800 MHz frequency for LTE services) for the entire territory of Tajikistan   

May 12, 2019; July 13, 2020; and

December 9, 2020, respectively

Georgia

  

GSM1800 10 MHz frequency licenses

 

GSM900 5.49 MHz frequency licenses

 

LTE 800 10 MHz frequency licenses

  

February 1, 2030

 

February 1, 2030

 

February 1, 2030

Laos

   2G, 3G, WLL, ISP licenses for the entire territory of Laos   

January 23, 2022 (2G and WLL); annual

renewal (3G and ISP)

Competition—Mobile Business in HQ and Others

Kyrgyzstan

According to Analysys Mason Research, as of December 31, 2015, there were approximately 8.0 million customers in Kyrgyzstan, representing a penetration rate of approximately 139.5%.

The following table shows our and our primary mobile competitors’ respective customers in Kyrgyzstan as of December 31, 2015:

 

Operator

   Customers
(in millions)
 

Alfa Telecom

     3.4   

Sky Mobile

     2.7   

Nur Telecom

     1.6   

 

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

 

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Armenia

According to Analysys Mason Research, as of December 31, 2015, there were approximately 3.6 million customers in Armenia, representing a penetration rate of approximately 119.7%.

The following table shows our and our primary mobile competitors’ respective customers in Armenia as of December 31, 2015:

 

Operator

   Customers
(in millions)
 

K-Telecom

     2.1   

ArmenTel

     0.8   

Orange Armenia

     0.7   

 

Source: Analysys Mason Research for all companies except ArmenTel.

Tajikistan

According to Analysys Mason Research, as of December 31, 2015, there were approximately 10.7 million customers in Tajikistan, representing a penetration rate of approximately 123.3%.

The following table shows our and our primary mobile competitors’ respective customers in Tajikistan as of December 31, 2015:

 

Operator

   Customers
(in millions)
 

Babilon Mobile

     4.6   

TCell

     2.7   

MegaFon TJ

     1.9   

Tacom

     1.2   

Other

     0.3   

 

Source: Analysys Mason Research for all companies except Tacom.

Georgia

According to Analysys Mason Research, as of December 31, 2015, there were approximately 5.4 million customers in Georgia, representing a penetration rate of approximately 125.1%.

The following table shows our and our primary mobile competitors’ respective customers in Georgia as of December 31, 2015:

 

Operator

   Customers
(in millions)
 

Magticom

     2.1   

Geocell

     2.0   

Mobitel

     1.3   

 

Source: Analysys Mason Research for all companies except Mobitel.

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 4.8 million customers in Laos as of December 31, 2015.

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 and Lao Asia Telecom. 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 Finance).

 

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The following table shows our and our primary mobile competitors’ customer numbers in Laos as of December 31, 2015:

 

Operator

   Customers
(in millions)
 

Unitel

     2.5   

LTC

     1.5   

VimpelCom Lao Co.

     0.2   

ETL

     0.6   

 

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

Marketing and Distribution—Mobile Business in HQ and Others

All our mobile operations in the countries in HQ and Others, except for Laos, 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.

In Kyrgyzstan, we offer twelve Kyrgyz som-based price plans (including internet price plans for our mass market and high ARPU customers) for our mass market customers and three price plans for SME and large account customers.

In Armenia, we offer several Armenian dram-based prepaid and contract tariff plans, each one targeted at a different type of customer.

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 three Georgian lari-based prepaid tariff plans and 10 contract-based postpaid tariff plans for our SOHO, SME and large account corporate customers. As part of a portfolio simplification project, we reduced the number of our contract-based postpaid tariff plans from 22 to 12.

In Laos, we offer pricing plans for contract, prepaid and internet services for residential and corporate customers, with most tariffs quoted in Lao kip. Local price plans include plans for heavy users, handset packages and closed user groups for families and communities. We distribute mobile services and products through one distributor, five wholesalers and 40 promoters.

Customer Loyalty Programs

We have active loyalty programs in each of Kyrgyzstan and Armenia, with which we aim to increase the lifetime and ARPU of our customers. As of December 31, 2015, we had 1.5 million and 330,000 customers participating in the loyalty programs in Kyrgyzstan and Armenia, respectively.

Fixed-line Business in HQ and Others

Description of Fixed-line Services in HQ and Others

In Armenia and Georgia, we offer certain fixed-line services, as described below. We do not offer fixed-line services in Kyrgyzstan, Tajikistan or Laos.

 

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Business Operations

Armenia. Our subsidiary ArmenTel provides a range of telecommunications services in Armenia, including PSTN-fixed and IP telephony, internet, data transmission and network access, domestic and international voice termination and TCP/IP international transit traffic services. We operate a nationwide network in Armenia and provide the following services for corporate and individual customers: local telephony services; international and domestic long distance services; broadband access services (including ADSL and fiber optic lines); and VoIP services.

Wholesale Operations

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 PJSC VimpelCom directly.

Armenia. Our subsidiary ArmenTel is the Armenian incumbent operator offering countrywide wholesale services, such as leased line service and wholesale broadband services, as well as wholesale international voice termination and origination services for other local operators and service providers.

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 PJSC VimpelCom directly.

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

Residential and FTTB Operations

Armenia. In Armenia, we offer PSTN-fixed and IP telephony services, as well as fixed-line broadband internet access based on ADSL and FTTB technologies, dial-up services and wireless internet access based on CDMA technology. In the third quarter of 2015, we also launched FMC services and currently offer FMC bundles to subscribers (for example, fixed internet plus mobile data, or fixed internet plus mobile voice plus mobile data).

Licenses—Fixed-line Business in HQ and Others

Armenia. We operate a nationwide fixed-line network in Armenia on the basis of a general (fixed and mobile) network operation license, expiring on March 3, 2028. We also have a license to use 450MHz frequency band for the provision of fixed wireless voice telephony and broadband services in rural areas in Armenia, which expires on March 3, 2023.

Competition—Fixed-line Business in HQ and Others

Business Operations

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. There are more than 10 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 HQ and Others

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.

Description of Operations of the Italy Business Unit

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

On August 6, 2015, we entered into an agreement with Hutchison, which owns indirectly 100% of Italian mobile operator 3 Italia, to form an equal joint venture holding company that will own and operate our telecommunications businesses in Italy (see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture” and Note 6 to our

 

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audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.). Completion of the transaction is subject to the satisfaction or waiver of certain conditions precedent, including obtaining regulatory approvals, and is expected to occur around the end of 2016. WIND Italy and 3 Italia will continue to operate separately pending completion.

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, 2015, approximately 7.4% of our customers in Italy were on postpaid plans and approximately 92.6% 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 VAS. Prepaid consumer customers can choose from tariff plans in which their prepaid credit is deducted on a per second basis at a per minute billing rate, or on a four weeks’ basis at a flat rate. In addition to these tariff plans, we offer a number of all-inclusive flat rate tariff plans to contract (on a monthly basis) and prepaid (on a four weeks basis) consumer customers that include a set amount of calling minutes, SMSs and gigabytes of mobile internet access for a fixed fee. Additional all-inclusive bundles specifically target young people (under 30 years old), seniors (over 60 years old) and digitally native customers (All-Digital), with accounts that are manageable only via digital channels such as web, mobile applications (apps) and social networks. We also have two offers for specific interests: All Inclusive Music and All Inclusive Movies.

Corporate Voice Offerings

   We provide corporate voice services to large corporate customers, SMEs and 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 apps is growing, with the aim of bringing greater mobility to business processes, we have 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 VAS for telephone and computer to our consumer and corporate customers. WIND Italy has continued 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 fee.

In Italy, we offer the following data services and VAS:

 

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Mobile VAS

  

Description

Mobile Internet    Our mobile customers can connect their mobile phones to the internet using GSM, GPRS, 3G or 4G/LTE technologies. Offers include bundles and innovative options like Open-Internet, which allows 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, 3G or 4G/LTE technologies. In addition, our customers can directly connect their PC to the internet using a dongle with a WIND SIM card.
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    During 2015, WIND Italy had a strong focus on innovative services based on using a mobile phone for payments with the aim of simplifying the customer’s life and improving the user experience. WIND Italy demonstrated this focus by renewing its partnership with Google and Microsoft for carrier billing and enhanced roll out of mobile ticketing. WIND Italy is continually improving the MyWind App and launched the Wind Talk App, an Instant Messaging App connected to the MyWind App with exclusive features of airtime, credit transfer, P2P, and direct Chat with WIND Customer Care and with WIND shops. WIND Italy continues its focus and interest on new services and in 2014 introduced a concept called “Digital Home & Life” in the main WIND store in Rome. 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.

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 496 international operators in 219 countries as of December 31, 2015.

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.

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 3G. WIND Italy acquired a 3G 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 3G license, WIND Italy has coverage in all Italian regional capitals.

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

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.

 

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In the Italian mobile telecommunications market, our principal competitors are Telecom Italia, operating under the “TIM” brand name, Vodafone Italy, operating under the “Vodafone” brand name, and Hutchison, operating under the “3 Italia” brand name. Telecom Italia and Vodafone Italy have well established positions in the Italian mobile market and each has a greater market share than WIND Italy. Hutchison 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 and the other operators. During 2015, the entire market continued to reduce in size as a consequence of operators focusing on more robust pricing strategies and less aggressive use of promotions, as well as customers moving their telecommunication needs to single SIM cards with all-inclusive bundles (instead of splitting traffic across multiple SIM cards) and deactivating their additional SIM cards.

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.

Based on our internal estimates, the four network operators in Italy offered mobile telecommunications services to approximately 86 million registered customers as of December 31, 2015, representing a penetration rate of approximately 141% of the Italian population. As of December 31, 2015 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.

The following table shows our and our competitors’ respective customer numbers in Italy as of December 31, 2015:

 

Operator

   Customers
(in millions)
 

Telecom Italia

     30.9   

Vodafone Italy

     25.7   

WIND Italy

     21.1   

3 Italia

     10.3   

 

Source: Analysys Mason Research for all companies except WIND Italy.

Based on our internal estimates, as of December 31, 2015, excluding MVNOs, Telecom Italia had a market share of 35%, followed by Vodafone Italy with 28.5%, WIND Italy with 24.7% and Hutchison with 11.8%. On August 6, 2015, we entered into an agreement with Hutchison, which owns indirectly 100% of Italian mobile operator 3 Italia, to form joint venture, as described in more detail under “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture.”

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.

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 and WIND branded and unbranded handsets through a significant number of points of sale. As of December 31, 2015, we had 153 WIND owned stores and approximately 481 exclusive franchised outlets operating under the WIND name. WIND Italy also utilizes 949 non-exclusive points of sale, 631 electronic chain store outlets and approximately 4,133 other points of sale in smaller towns managed by SPAL TLC S.p.A. (“SPAL”), our largest distributor in Italy in terms of points of sale, in which WIND Italy held a 33% stake until July 2015, when WIND Italy’s shareholding in SPAL terminated. The exclusive distribution arrangement terminated in February 2016. We also sell a portion of our consumer services online through the WIND website.

 

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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 model development will be carried out using a methodology based on NPS, as 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. Using this measurement, it will be possible for us 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, 2015. Our direct customers mainly comprise LLU customers.

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 mainly to direct 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 discount to fixed-line customers who also are mobile subscribers with an All Inclusive postpaid or prepaid offer.
   For LLU customers only, WIND continues to offer 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 (Infrastructure as a Service), 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 VAS, 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.

 

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Fixed-Line Services

  

Description

Corporate Voice Offerings

   We provide PSTN, ISDN and VoIP fixed-line voice services, data services, VAS 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 networks and unlimited internet access; in addition, our “Internet Pack” offer includes one WiFi 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. The Wind Smart Office Small and Large offer provides 3/6 simultaneous calls to and from landline phones, ADSL up to 20 MB, unlimited calls to all fixed and mobile national and international operators.

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 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 Italy and Fastweb accounted for approximately 94% of the total broadband fixed services actually accessed in the Italian market as of December 31, 2015.

Based on our internal estimates, as of December 31, 2015, Telecom Italia had approximately 7.0 million broadband customers in Italy, representing a market share of approximately 49.3% of broadband retail connections, followed by WIND Italy with approximately 2.3 million broadband customers, representing a market share of approximately 16.2% of broadband retail connections, Fastweb with approximately 2.2 million active broadband customers, representing a market share of approximately 15.5% of broadband retail connections and by Vodafone, with approximately 1.9 million broadband customers representing a market share of approximately 13.4% of broadband retail connections. All other fixed-line operators had in the aggregate approximately 0.8 million broadband customers, representing a market share of approximately 5.6% of broadband retail connections.

 

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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 2015, we have continued to adopt almost exclusively pull sales channels, which are more effective and efficient, in order to increase the fixed business marginality.

Regulatory

For a description of the regulations of our main 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.

Our fixed-line telecommunications business is also subject to certain seasonal effects. Among the influencing factors are the number of working days in a given period, as well as periods of vacations. Generally, our revenue from our fixed-line telecommunications business is lower when there are fewer working days in a period or a greater number of customers are on vacation such as the December holiday season and in 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/3G/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 benefit from the group’s purchasing scale and monitor the commercial terms across the group. We select suppliers based mainly on compliance with technical and functional requirements and total cost, 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 the 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 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 a technology that dynamically adapts the coding rate to the radio conditions in order to deliver optimum voice quality. HD Voice is a set of high definition codecs that provides high-definition voice quality during the call. VoLTE is a technology that enables voice calls over LTE network with higher voice quality and lower call setup times. These technologies are being implemented in commercial networks in the group’s operational companies after testing to ensure the quality of the network.

 

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In the area of data services, we have successfully launched Data Traffic Management (“DTM”) 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 the 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+ and 4G/LTE, and we are rolling out Single-RAN network technology to optimize our investments and support multiple mobile communications standards on a single network and set of equipment. We have acquired new spectrum in several operating companies to boost our network capacity, enhance spectral efficiency and enable the launch of new Radio Access Networks Technologies, recently including 3G on 2100MHz in Algeria, 3G on 2100MHz in Pakistan and 4G/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 successfully launched VoLTE technology within the Moscow area network on August 5, 2015, while continuing the SON (Self Optimized Network) pilot in Russia and Uzbekistan, which yielded highly positive results. In addition, we comply with Russian MNP regulations, which have allowed customers to port mobile numbers since December 2013.

In order to comply with the requirements of the 4G/LTE licenses that PJSC VimpelCom was awarded in Russia in July 2012, PJSC VimpelCom had launched 4G/LTE services in 55 regions in the Russian Federation as of December 31, 2015. PJSC VimpelCom is currently expanding and improving its access and transport network in other regions of Russia to comply with further requirements, as 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 4G/LTE services 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 opportunities from the big data approach. WIND established a Financed Projects team in 2008 to monitor, study and test technological and business trends from a medium/long-term perspective, in cooperation with internal business and technology divisions, 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 2015, the team was involved in research projects on: (i) the big data approach to extract information from mobile network traffic in order to identify patterns and to develop predictive models for traffic planning, tourist flows forecasting and to develop new applications related to sustainable mobility; (ii) solutions for security and privacy management of data (which project was concluded in November 2015); and (iii) environmentally friendly ICT solutions (“green ICT”), with a specific focus on green data centers.

As of December 31, 2015, WIND’s 4G/LTE core network infrastructure consisted of six Mobility Management Entities, two Home Subscriber Servers, six PDN Gateways and six Serving Gateway sites in 4G/LTE technology to 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 a movement to an all-IP network architecture with innovative telecommunication services and digital applications.

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 the 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. Consisting of the Big European Ring (main fiber ring) and a few rings in the Central, Ural, Siberia and South and North Caucasus regions, the network connects 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, and our network extends to Yakutsk, Vladivostok and Sakhalin. Two chords links provide additional protection and capacity for the Big European Ring. The total length of our Intercity optical cable network is 55,225 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 our connections to Kazakh, Uzbek and other Asian telecommunication operators.

We have built the intraregional (also called “zone”) transport networks that connect our sites in small towns and the countryside. The total length of local fiber cables is 45,601 kilometers and the total length of our zonal fiber cables is 56,885 kilometers. The local IP networks are constructed in more than 220 cities and 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 six international transit exchanges, 10 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 Kazakhstan. 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’ residences.

As of December 31, 2015, we had approximately 2.2 million customers connected to our FTTB network in Russia. The network operates in 141 cities across Russia, 30 across Kazakhstan and three across Uzbekistan. We have the largest FTTB network in Moscow and the core broadband market in Russia.

Ukraine

Our transport network is designed to provide a full range of telecommunications 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, Synchronous Digital Hierarchy (“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 (except for secondary towns) and can be self-healing which is necessary to prevent downtime 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 20,017 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 116 cities of Ukraine. The total length of fiber cables constructed within the cities is 23,223 kilometers.

 

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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.

Kazakhstan

Our subsidiaries TNS-Plus LLP and 2Day Telecom LLP provide a wide range of fixed-line telecommunications services, including internet access, ADSL, FTTB, WiFi, WiMax, VoIP, VPN and VSAT. TNS-Plus owns more than 12,621 kilometers of fiber optic main lines across Kazakhstan, which are based on Huawei SDH/DWDM equipment. As of December 31, 2015, we had approximately 216,218 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 100 nodes situated throughout Uzbekistan. The main technologies of our access networks are 14,264 ADSL ports and 30,456 FTTB 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, remote access telephone nodes, multi-service access nodes (“MSANs”), internet protocol digital customer line access multiplexers, fiber and copper wire access networks, fiber optic backbone network and data access network). Its network consists of 220,000 ADSL ports, 2,026 buildings provided with FTTB fiber access and 137 Central Offices (telephone exchanges, MSANs, remote nodes), of which 103 are digital. ArmenTel also 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.

Georgia

We generate international traffic termination revenue in Georgia via our mobile network infrastructure using our mobile switch connection.

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 22,300 kilometers of fiber optic cable backbone in Italy and 5,091 kilometers of fiber optic cable MANs, as of December 31, 2015. 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, 2015 we had 1,636 LLU sites for direct customer connections (approximately 64% 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.

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 75 Edge Routers for Business application, located in POPs to ensure optimal coverage of the national territory.

WIND has a commercial agreement with Metroweb to enable WIND to provide customers in Milan with access to “fiber to the home” technology. WIND began to offer high speed services in fiber to the home technology in Milan in 2013 under this contract, 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. In 2015, WIND, Vodafone Omnitel B.V and Italian investment funds, F2i SGR S.p.A. and Fondo Strategico Italiano S.p.A., signed a non-binding letter of intent to explore the building of a nationwide fiber infrastructure through Metroweb’s network. As of December 31, 2015, there were more than 5,000 kilometers of metropolitan area networks in WIND’s network in Italy.

 

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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 and for the language and 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 two 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 Algeria, our subsidiary OTA leases its headquarters, call center, transmission towers, sites for mobile switching centers and data centers and owns a small parcel of land used for a cable station in Ain Benian.

In Pakistan, our subsidiary PMCL owns a number of properties consisting of over 28,000 square meters in Karachi, Lahore, Faisalabad and Islamabad. These properties are used for PMCL’s operations and include call centers, data centers, office buildings and switching stations. PMCL also leases properties across Pakistan, AJK and GB, including its headquarters and BTS sites.

In Bangladesh, our subsidiary Banglalink does not own any material real property. Banglalink leases properties across Bangladesh, including its headquarters, call centers, towers, mobile switching centers and data centers.

In Ukraine, our subsidiary Kyivstar owns a series of buildings consisting of 34,057 square meters at Degtyarivska, 53 in Kyiv. We use these buildings for offices, call centers, switching centers and a print center. In addition, we own a number of buildings throughout Ukraine consisting of over 83,343 square meters that we use as office space, switching centers, call centers, sales centers, date centers and storage units.

In Kazakhstan, we own 18 buildings consisting of approximately 24,337 square meters which are used as administrative offices, technical centers and switching centers. In addition, we lease properties across Kazakhstan that we use for offices, sales centers, warehouses, archive centers, switching centers and parking.

In Italy, as of December 31, 2015, we owned certain properties where some of our telecommunications network equipment is located, including 287 radio centers (for all of which we own the towers and equipment rooms, and for approximately 120 out of 287, we also own the land where the radio centers are located), 586 towers, approximately 1,800 towers on rented locations, excluding roof top sites, on which antennas for radio coverage are installed (considering also the effect of the Galata transaction), and approximately 1,000 other minor towers. For information regarding the sale of a majority stake of WIND Italy’s tower subsidiary, Galata, see “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Network and Tower Sharing Agreements.”

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 Exchange Act

Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to 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.

 

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The following information is disclosed pursuant to Section 13(r) of the Exchange Act. 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 sent direct traffic to TCI and TCI sent both direct and transit traffic to ArmenTel. We (including ArmenTel) did not provide any telecommunications equipment or technology to TCI. However, in 2013 ArmenTel discontinued providing voice services under the agreement. During 2015, there was no gross revenue received from these activities involving TCI and no net profits. During 2015, ArmenTel provided telecommunications services to the Embassy of Iran in Yerevan. The gross revenue for these services in 2015 was approximately US$14,000 and net profits were approximately US$4,900. ArmenTel intends to continue the services to the Embassy of Iran.

 

    During 2001, our Russian subsidiary, PJSC 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 2015 was approximately US$2,400 and net profits were approximately US$1,733. PJSC VimpelCom intends to continue the services to the Embassy of Iran.

 

    During 2008, our Tajikistan subsidiary, LLC Tacom, began providing telecommunications services to the Embassy of Iran in Dushanbe. The gross revenue for these services in 2015 was approximately US$5,751 and net profits were approximately US$4,831. LLC Tacom intends to continue the services to the Embassy of Iran.

 

    During 2014, our Kyrgyzstan subsidiary, Sky Mobile LLC, began providing mobile telecommunications services to the Embassy of Iran in Bishkek. The gross revenue for these services in 2015 was approximately US$1,729 and net profits were approximately US$762. Sky Mobile LLC intends to continue the services to the Embassy of Iran.

 

    During 2015, our Algerian subsidiary, OTA and subsequently its wholly owned subsidiary, Optimum Telecom Algeria S.p.A. (“Optimum”), provided telecommunications services to the Embassy of Iran in Algiers. The gross revenue for these services in 2015 was approximately US$48.15 with no net profits. Optimum 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) and RighTel 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, TKC KIFZO and RighTel for the foreseeable future. During 2015, our gross revenue received from roaming arrangements with TCI, MTN Irancell and RighTel was approximately US$262,419, US$8,432 and US$182 respectively, and net losses were approximately US$17,871, US$80,626 and US$221 respectively. During 2015, we received no gross revenue from roaming arrangements with Taliya Mobile and TKC KIFZO with no net profits.

Telenor may be deemed an affiliate based on its indirect share ownership in us through Telenor East and the officers of the Telenor Group who are on our board. Telenor East has provided us with the information included below relevant to Section 13(r) of the Exchange Act. This information relates solely to activities conducted by Telenor 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 Telenor subsidiaries have entered into 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 Iranian operator pays the relevant Telenor subsidiaries’ roaming fees for use of its network by its customers.

Telenor subsidiaries were party to the following roaming agreements and interconnection agreements with Iranian telecommunication companies in 2015:

 

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(1) Telenor Norge AS, a Norwegian subsidiary, has roaming agreements with Mobile Telecommunication Company of Iran (“MCI”) and MTN Irancell. During 2015, Telenor Norge AS recorded net expenses related to these roaming agreements of US$4,683.21 to MCI and US$32,820.48 to MTN Irancell.

(2) Telenor Sverige AB, a Swedish subsidiary, has roaming agreements with MCI, MTN Irancell and Taliya Mobile. During 2015, Telenor Sverige AB recorded net revenues related to its roaming agreement with MCI of US$12,051.34, net expenses related to its roaming agreement with MTN Irancell of US$40,506.41 and net expenses related to its roaming agreement with Taliya Mobile of US$12,933.43.

(3) Telenor A/S, a Danish subsidiary, has roaming agreements with MCI and MTN Irancell. During 2015, Telenor A/S recorded net expenses related to its roaming agreement with MCI of US$28,199.77. No net expenses or net revenues were recorded in relation to Telenor A/S’s roaming agreement with MTN Irancell.

(4) Telenor d.o.o. Beograd Omladinskih brigada 90, a Serbian subsidiary, has a roaming agreement with MCI. During 2015, Telenor d.o.o. Beograd Omladinskih brigada 90 recorded net revenues of US$1,587.37 related to this roaming agreement.

(5) Telenor Hungary Plc, a Hungarian subsidiary, has a roaming agreement with MCI. During 2015, Telenor Hungary Plc, recorded net revenues of US$17,215.93 related to this roaming agreement.

(6) Telenor Bulgaria EAD, a Bulgarian subsidiary, has a roaming agreement with MCI. During 2015, Telenor Bulgaria EAD recorded net revenues of US$4,775.03 related to this roaming agreement.

(7) DiGi.Com Bhd, a Malaysian subsidiary, has a roaming agreement with MCI. During 2015, DiGi.Com Bhd recorded net revenues of US$5,428.35 related to this roaming agreement.

(8) Telenor Pakistan (Private) Ltd., a Pakistani subsidiary, has roaming agreements with MCI, MTN Irancell and Taliya Mobile. During 2015, Telenor Pakistan (Private) Ltd. recorded net expenses related to these roaming agreements of (i) US$1,929.64 to MCI, (ii) US$3,348.06 to MTN Irancell, and (iii) US$1.39 to Taliya Mobile.

(9) Total Access Communications Plc. (“dtac”), a Thai subsidiary, has roaming agreements with MCI and MTN Irancell. During 2015, dtac recorded net expenses related to these roaming agreements of US$292.61 to MCI and US$146.89 to to MTN Irancell.

(10) Telenor Global Services AS, a Norwegian subsidiary, has an interconnection agreement with Telecommunication Company of Iran, the parent company of MCI. During 2015, Telenor Global Services recorded a net expenses of US$516,061 related to this interconnection agreement.

Telenor and its subsidiaries intend to continue these agreements.

Legal Proceedings

In 2013, the Government of Pakistan issued a Statutory Regulatory Order levying activation tax on handsets, which order was challenged before the High Court by all cellular mobile operators in Pakistan, including PMCL. In 2014, the Government of Pakistan amended the Sales Tax Act 1990 through the Finance Act 2014 to impose obligations on the operators to recover, collect and pay sales tax on the registration of the International Mobile Equipment Identity (IMEI) numbers of handsets and the supply and issuance of SIM cards. The operators, including PMCL, commenced judicial review proceedings to challenge the legality of the amendments to the legislation. In 2015, pursuant to the Finance Act 2014, the Tax Department of Azad Jammu and Kashmir also issued a notice to PMCL for payment of such handset registration tax and SIM supply tax. PMCL challenged the notice before the Azad Jammu and Kashmir High Court. The three proceedings are ongoing in the respective High Courts.

In 2015, Pakistan tax authorities issued income tax show cause notices (“SCNs”) against PMCL purporting to disallow expenses for the years 2011 to 2013. Similar SCNs were also issued against the other cellular mobile operators. The majority of the disallowances in the SCNs are considered to be grossly exaggerated and without merit. PMCL has provided the tax authorities with information substantiating the expenses claimed. In the event an adverse order is passed by the tax authorities, PMCL intends to challenge the order in the appropriate appellate forums.

For more information regarding our other legal proceedings, please see Note 24 and Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. For information about certain risks related to current and potential legal proceedings, see “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks.”

 

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For details related to the resolution of 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 a DPA with the DOJ, a Consent with the SEC, and a settlement agreement with the OM. The agreements with the DOJ and the SEC require us to retain, at our own expense, an independent compliance monitor, and the DPA and agreement with the OM require us to continue to cooperate with the agencies regarding their investigations of other parties. We will incur costs in connection with these obligations, which may be significant,” “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—If we commit a breach of the DPA, we may be subject to criminal prosecution. Such criminal prosecution could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects,” and “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC and OM, including additional investigations and litigation.”

 

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.”

Basis of Presentation of Financial Results

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 rights of at least 20.0% and not more than 50.0%.

As a result of the agreement entered into with Hutchison to combine our operations in Italy with 3 Italia in an equal joint venture, we expect to lose control over our operations in Italy upon closing of the transaction. Consequently, we classified our Italian business unit as an asset held for sale and discontinued operation in our consolidated financial statements as of December 31, 2015. In connection with this classification, the company no longer accounts for depreciation and amortization expenses of the Italian assets. The amounts for 2014 and 2013 have been restated in the consolidated income statements, the consolidated statements of cash flows and the related notes to reflect the classification of Italy as held for sale and discontinued operations. It is not yet reasonably possible to predict the impact on the income statement that this transaction might have upon closing of the transaction. Following the reclassification, the intercompany positions between the continued continuing operations and discontinued operations are no longer eliminated. The positions are disclosed as related party transactions and balances. Please refer to Notes 6 and 25 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F for further information.

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 rate was different under IFRS from the statutory rate.

Critical Accounting Policies

Please refer to Notes 3 and 4 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

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. As of January 1, 2015, our reportable segments consist of the eight following segments:

 

    Russia;

 

    Algeria;

 

    Pakistan (which was split out of the former “Africa & Asia” reportable segment);

 

    Bangladesh (which was split out of the former “Africa & Asia” reportable segment);

 

    Ukraine;

 

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    Kazakhstan (which was split out of the former “CIS” reportable segment);

 

    Uzbekistan (which was split out of the former “CIS” reportable segment); and

 

    HQ and Others (which includes all results of our operations in Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos, as well as certain intercompany adjustments and HQ transactions. Prior to January 1, 2015, the results of our operations in Kyrgyzstan, Armenia, Tajikistan and Georgia were included in the former “CIS” reportable segment, and the results of our operations in Laos were included in the former “Africa & Asia” reportable segment).

Italy is no longer a reportable segment subsequent to its classification as a discontinued operation in connection with the Italy Joint Venture. However, financial and operational information for Italy is included in this Annual Report on Form 20-F because completion of the Italy Joint Venture has not occurred and Italy is a significant part of our business. Information for 2014 and 2013 has been restated to reflect the classification of Italy as a discontinued operation.

For more information regarding our organizational structure and segments and the Italy Joint Venture, see “Item 4—Information on the Company—Organizational Structure,” “Item 5—Operating and Financial Review and Prospects—Recent Developments and Trends—Italy Joint Venture” and Notes 6 and 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. On January 30, 2015, the company and its subsidiary GTH completed the sale of a non-controlling 51% interest in OTA to the FNI. For more information regarding our acquisitions and dispositions, see “—Recent Developments and Trends” and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. 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 unless required by IFRS applied by the group.

Recent Developments and Trends

Strategy update

In August 2015, we announced the six strategic priority areas on which we intend to focus going forward. One of these six strategic priority areas is performance transformation. The objective of our performance transformation is to build a new global organizational operating model that will bring together all our operating companies and our HQ to truly operate as one group. As a result of these, we managed to decrease expenses through more efficient capital expenditure (in 2015, our capital expenditures represented 18.2% of our consolidated total operating revenue, compared to 21.7% in 2014), following our initiative to move to a more asset light operating model. In 2015, we incurred transformation costs of US$138 million related to our performance transformation program and we expect to incur ongoing costs in the coming years. See “Item 4—Information on the Company—Strategy” for more information regarding our strategic priority areas.

Customer and revenue growth

The mobile markets in Russia, Algeria, Ukraine, Kazakhstan, Kyrgyzstan, Armenia, Georgia, Tajikistan and Italy 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 VAS 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, including Pakistan, Bangladesh, Uzbekistan and Laos, 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.

 

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Investigations

In February 2016, VimpelCom reached resolutions through agreements with the DOJ, the SEC and the OM relating to the previously disclosed investigations under the FCPA and relevant Dutch laws pertaining to VimpelCom’s business in Uzbekistan and prior dealings with Takilant Ltd. The relevant agreements have been approved by the authorities and pertinent courts. Pursuant to these agreements, the company agreed to pay an aggregate amount of US$795 million in fines and disgorgements to the SEC, the DOJ and the OM. We currently cannot estimate the additional costs that we are likely to incur in connection with compliance with the agreements, including the ongoing obligations to cooperate with the agencies regarding their investigations of other parties, the monitorship, and the costs of implementing the changes, if any, to our policies and procedures required by the monitor. However, the costs could be significant. For further details related to these settlements, please see “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business— We are subject to a DPA with the DOJ, a Consent with the SEC, and a settlement agreement with the OM. The agreements with the DOJ and the SEC require us to retain, at our own expense, an independent compliance monitor, and the DPA and the agreement with the OM require us to continue to cooperate with the agencies regarding their investigations of other parties. We will incur costs in connection with these obligations, which may be significant,” “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—If we commit a breach of the DPA, we may be subject to criminal prosecution. Such criminal prosecution could have a material negative effect on our business, financial condition, results of operations, cash flows and prospects,” “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We may face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC and OM, including additional investigations and litigation” and Note 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Italy Joint Venture

On August 6, 2015, VimpelCom, which owns indirectly 100% of WIND Italy, together with its subsidiary VimpelCom Amsterdam B.V., and Hutchison, which owns indirectly 100% of Italian mobile operator 3 Italia, together with certain of its subsidiaries, entered into a contribution and framework agreement to form an equal joint venture holding company (the “WIND JV”) that will own and operate their telecommunications businesses in Italy. Each of Hutchison and VimpelCom will indirectly hold 50% of the shares in the WIND JV, and therefore, as a consequence at the completion of the Italy Joint Venture, VimpelCom will no longer own a majority interest or have control over the operations of WIND Italy. Pursuant to the terms of a shareholders’ deed to take effect on completion of the Italy Joint Venture, no party may reduce its aggregate indirect holding in the WIND JV below 50% for the first year following completion. After the first year, either party may sell its shares in the WIND JV to third parties after offering a right of first offer to the other party. Three years following the completion of the Italy Joint Venture, each shareholder can invoke a buy/sell mechanism at any time.

By combining their respective businesses, 3 Italia and WIND Italy expect to gain the scale and more efficient cost structure needed to enable them to continue to offer innovative, competitively-priced telecommunications services and to compete in the Italian market place. The combined business is expected to service over 31 million mobile customers and 2.8 million fixed-line customers, and is expected to improve customer experience due to dedicated investment. VimpelCom expects that the Italy Joint Venture will bring cost synergies, including through network consolidation, location optimization and more efficient distribution.

Completion of the Italy Joint Venture is subject to the satisfaction or waiver of certain conditions precedent, which include, among others, obtaining regulatory approvals, including EU competition approval, as well as regulatory clearances by competent Italian authorities. WIND Italy and 3 Italia will continue to operate separately pending completion. WIND Italy formally notified the European Commission of the Italy Joint Venture on February 5, 2016. On March 30, 2016, the European Commission commenced a Phase II review of the Italy Joint Venture pursuant to the EU Merger Regulation (Council Regulation (EC) No 139/2004). The Italy Joint Venture will not occur unless both VimpelCom and Hutchison have agreed to any conditions, obligations, undertakings and/or modifications that may be required by regulatory authorities in granting their approvals.

VimpelCom and Hutchison have agreed that their respective valuations of WIND Italy and 3 Italia are on the basis that the final net cash and working capital of each respective group is not less than the agreed target net cash and working capital of each respective group. At completion, any shortfall in the net cash and working capital of each respective group compared to the agreed target amounts will be determined and, if one group’s shortfall amount is greater than the other group’s shortfall amount, VimpelCom or Hutchison, as the case may be, will pay 50% of the shortfall difference to the other party or, alternatively, may elect to direct to the other party dividends from the WIND JV in an amount equal to 50% of the shortfall difference. After the transaction is completed, there are no additional obligations to contribute funds by either party.

 

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Pursuant to the terms of the shareholders’ deed, VimpelCom and Hutchison have provided for a clear corporate governance structure to ensure a successful joint venture with an experienced, combined management team, supported by a board of six members, three of whom will be nominated by each of VimpelCom and Hutchison, respectively, and various committees. The right to appoint the chairman of the board will rotate between VimpelCom and Hutchison every 18 months, and the chairman will have a casting vote on certain fundamental business matters to help ensure the continuity of the business. Pending completion, WIND Italy is accounted for as a discontinued operation. Following the completion of the Italy Joint Venture, VimpelCom will no longer consolidate the financial results of WIND Italy, whose results will be calculated using the equity method. See Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. Completion of the transaction is subject to the satisfaction or waiver of certain conditions precedent, including obtaining regulatory approvals, is expected to occur around the end of 2016, and is subject to a termination longstop date of 18 months from signing if the conditions to closing have not been satisfied or waived. WIND Italy and 3 Italia will continue to operate separately pending completion.

It is not yet reasonably possible to predict the impact on the income statement that this transaction might have upon closing. Following the reclassification, the intercompany positions, results and cash flows between the continued and discontinued operations are no longer eliminated. The positions are disclosed as Related Party transactions and balances. Furthermore, in connection with the reclassification, we no longer account for depreciation and amoritization expenses of our Italian assets. The Italy Joint Venture doesn’t have any impact on VimpelCom’s current liquidity, as liquidity available at the WIND Italy level is not available to VimpelCom due to covenants in WIND Italy‘s debt agreements. The Italy Joint Venture is expected to result in a reduction of VimpelCom’s Net Debt/EBITDA ratio, thereby increasing VimpelCom’s funding capacity within its Net Debt/EBITDA covenant ratios, if and when needed.

Pakistan Merger

On November 26, 2015, WTPL, the parent company and majority shareholder of Warid, Bank Alfalah, International Wireless Communications Pakistan Limited (a wholly owned subsidiary of GTH) and PMCL entered into an agreement to merge their telecommunications businesses in Pakistan (the “Pakistan Merger”). WTPL and Bank Alfalah together will acquire approximately 15% of the shares of PMCL in exchange for the acquisition of 100% of the shares of Warid by PMCL and Warid will be subsequently merged into PMCL.

As of December 31, 2015, Warid was the fifth largest mobile operator in Pakistan, with an 8.5% market share, according to the Pakistan Telecommunication Authority. Warid is also currently developing its LTE network. The merged entity is expected to have population coverage of 81%, giving it the broadest 2G and one of the broadest 3G footprints in Pakistan, with the capability to accelerate focused investment in 4G/LTE. The combined business is expected to have around 10,000 towers and serve over 45 million customers.

VimpelCom believes that the Pakistan Merger will help PMCL drive ongoing improvements in NPS, given the focus on improving network experience and by building on Warid’s current standing as the leading operator in terms of NPS. In addition to enhancing PMCL’s network, VimpelCom believes that the expected synergies from the merger will improve PMCL’s cash flows.

The board of the merged company will be composed of seven directors, six of whom will be nominated by VimpelCom. VimpelCom expects the Pakistan Merger to complete within six months of signing, subject to customary closing conditions and obtaining approvals from the relevant regulatory authorities in Pakistan, including the Pakistan Telecommunication Authority, the State Bank of Pakistan and the Securities and the Exchange Commission of Pakistan. The Competition Commission of Pakistan approval for the Pakistan Merger, also a closing condition, was obtained on March 16, 2016 (subject to certain remedial actions, which will not, we believe, have a significant impact on the combined business). The merger is expected to close within six months from the closing of the transaction subject to the fulfillment of required regulatory processes in Pakistan.

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 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 to Optimum, a wholly owned subsidiary of OTA.

 

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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 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 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.

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 the 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 Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Network and Tower Sharing Agreements

In December 2014, our wholly owned subsidiary, PJSC VimpelCom, entered into an agreement with MTS for the 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 for shared use in 19 regions, and PJSC VimpelCom will build and operate 4G/LTE base stations for shared use in 17 regions of Russia. Within the first seven years of the project, PJSC 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 the first year of the project, the operators launched shared 4G/LTE networks in 31 of the 36 regions.

 

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In December 2015, PJSC VimpelCom and MTS signed an amendment to the December 2014 agreement described above. The amendment agreement provides for the sharing of 2600 MHz LTE frequencies in 20 of the 36 regions of Russia that were covered by the original 2014 agreement. In each of these regions, PJSC VimpelCom and MTS plan to share airwaves and radio frequency channels across all base stations that they jointly use pursuant to the 2014 agreement, and the amendment allows for further expansion of the list of regions covered by the agreement.

In December 2015, PJSC VimpelCom entered into an agreement with MegaFon for the joint planning, development and operation of 4G/LTE networks in ten regions of Russia. Under the terms of the agreement, MegaFon will build and operate 4G/LTE base stations for shared use in four regions, and PJSC VimpelCom will build and operate 4G/LTE base stations for shared use in six regions of Russia. Within the first seven years of the project, PJSC VimpelCom and MegaFon plan to share base stations, platforms, infrastructure and resources of the transportation network with each operator maintaining its own core network.

In March 2015, our wholly owned subsidiary, WIND Italy, sold 90% of the shares of its wholly owned towers subsidiary, Galata, to Cellnex. WIND Italy has a put option, and Cellnex has a call option, over the 10% of the share capital of Galata retained by WIND Italy. WIND Italy has a tower services agreement with Galata for an initial term of 15 years for the provision of a broad range of services on the sites contributed to Galata by WIND Italy and the sites subsequently built by Galata hosting WIND Italy’s equipment.The result of the transaction is included as part of results of discontinued operations.

Macroeconomic and Political Risks Concerning Russia and Ukraine and Other Countries

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 both 2014 and 2015, 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 and 2015. In addition, the significant devaluation of the Ukrainian hryvnia in 2015 (partly due to the National Bank of Ukraine’s decision in February 2015 to suspend its interventions to support the currency), the Kazakh tenge in 2015 (in the absence of a currency stabilization policy in Kazakhstan) and the Algerian dinar in 2015, negatively impacted revenues in our Ukraine, Kazakhstan and Algeria segments, respectively, and our results of operations 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 further 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 Russia and 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 Customers

We offer both postpaid and prepaid services to mobile customers. As of December 31, 2015, the number of our mobile customers reached approximately 217.4 million (including Italy). Mobile customers are generally customers in the registered customer base as of a given measurement date who engaged in a revenue generating activity at any time during the three months prior to such measurement date. Such activity includes any outgoing calls, customer fee accruals, debits related to service, outgoing SMS and MMS, data transmission and receipt sessions, but does not include incoming calls, SMS and MMS or abandoned calls. Our total number of mobile customers also 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 13 months (with respect to new customers) or if they have recharged their mobile telephone credit in the last 13 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.

 

 

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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,  
     2015     2014     2013  

Russia

     59.8        57.2        56.5   

Algeria

     17.0        17.7        17.6   

Pakistan

     36.2        38.5        37.6   

Bangladesh

     32.3        30.8        28.8   

Ukraine

     25.4        26.2        25.8   

Kazakhstan

     9.5        9.8        9.2   

Uzbekistan

     9.9        10.6        10.5   

HQ and Others(2)

     6.2        6.3        6.1   

Italy

     21.1        21.6        22.3   

Total number of mobile customers (including Italy)(1)

     217.4        218.7        214.4   

Percentage of prepaid customers

     93.8     94.3     92.4

 

(1) The customer numbers for 2015, 2014 and 2013 have been adjusted to remove customers in operations that have been sold.
(2) Include operations in Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos.

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 Algeria, Pakistan and Bangladesh segments measure mobile MOU based on billed minutes, which is calculated by the total number of minutes of usage for outgoing calls (and for Pakistan also includes minutes of usage generated from incoming revenue).

Our management does not analyze mobile MOU on a segment level in the HQ and Others segment 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 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 the HQ and Others segment 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,

 

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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-line 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. Mobile broadband customers in Kazakhstan and Uzbekistan (as well as in Kyrgyzstan, Armenia, Tajikistan and Georgia) 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.

Recent Accounting Pronouncements

Please refer to Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Results of Operations

Overview

Our total operating revenue was US$9,625 million for the year ended December 31, 2015, compared to US$13,517 million for the year ended December 31, 2014. Our operating profit was US$524 million for the year ended December 31, 2015, compared to US$1,873 million for the year ended December 31, 2014. The loss for the year attributable to the owners of the parent was US$655 million for the year ended December 31, 2015, compared to a loss of US$647 million for the year ended December 31, 2014.

We use the U.S. dollar as our reporting currency. The functional currencies of our group are the Russian ruble in Russia, 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 Uzbek som in Uzbekistan, the Kyrgyz som in Kyrgyzstan, the Armenian dram in the Republic of Armenia, the U.S. dollar in Tajikistan, the Georgian lari in Georgia, the Lao kip in Laos and the Euro in Italy.

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 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.

Consolidated results

Financial results for 2014 and 2013 are restated to reflect the classification of WIND Italy as a discontinued operation.

 

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     Year ended December 31,  
     2015      2014      2013  
     (In millions of US dollars)  

Service revenue

     9,332         13,231         15,472   

Sale of equipment and accessories

     190         218         391   

Other revenue

     103         68         103   
  

 

 

    

 

 

    

 

 

 

Total operating revenue

     9,625         13,517         15,966   
  

 

 

    

 

 

    

 

 

 

Operating expenses

        

Service costs

     1,956         2,962         3,595   

Cost of equipment and accessories

     231         252         438   

Selling, general and administrative expenses

     4,563         4,743         6,256   

Depreciation

     1,550         1,996         2,245   

Amortization

     517         647         808   

Impairment loss

     245         976         2,963   

Loss on disposals of non-current assets

     39         68         93   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     9,101         11,644         16,398   
  

 

 

    

 

 

    

 

 

 

Operating profit

     524         1,873         (432
  

 

 

    

 

 

    

 

 

 

Finance costs

     829         1,077         1,213   

Finance income

     (52      (52      (90

Other non-operating losses/(gains)

     42         (121      (84

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

     (14      38         159   

Net foreign exchange (gain)/ loss

     314         556         12   
  

 

 

    

 

 

    

 

 

 

(Loss)/profit before tax

     (595      375         (1,642
  

 

 

    

 

 

    

 

 

 

Income tax expense

     220         598         1,813   
  

 

 

    

 

 

    

 

 

 

(Loss)/profit for the year from continuing operations

     (815      (223      (3,455
  

 

 

    

 

 

    

 

 

 

(Loss)/profit after tax for the year from discontinued operations

     262         (680      (633
  

 

 

    

 

 

    

 

 

 

(Loss)/profit for the year

     (553      (903      (4,088
  

 

 

    

 

 

    

 

 

 

Attributable to:

        

The owners of the parent (continuing operations)

     (917      33         (1,992

The owners of the parent (discontinued operations)

     262         (680      (633

Non-controlling interest

     102         (256      (1,463
  

 

 

    

 

 

    

 

 

 
     (553      (903      (4,088

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

 

     Year ended December 31,  
     2015     2014     2013  

Service revenue

     97     97     97

Sale of equipment and accessories

     2     2     2

Other revenue

     1     1     1
  

 

 

   

 

 

   

 

 

 

Total operating revenue

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

Operating expenses

      

Service costs

     20     22     23

Cost of equipment and accessories

     2     2     3

Selling, general and administrative expenses

     47     35     39

Depreciation

     16     15     14

 

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     Year ended December 31,  
     2015     2014     2013  

Amortization

     5     5     5

Impairment loss

     3     7     19

Loss on disposals of non-current assets

     1     1     1
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     95     86     103
  

 

 

   

 

 

   

 

 

 

Operating profit

     5     14     (3)
  

 

 

   

 

 

   

 

 

 

Finance costs

     9     8     8

Finance income

     (1)     (0)     (1)

Other non-operating losses/(gains)

     1     (1)     (1)

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

     (0)     0     1

Net foreign exchange (gain)/loss

     3     4     0
  

 

 

   

 

 

   

 

 

 

Profit/(loss) before tax

     (6)     3     10
  

 

 

   

 

 

   

 

 

 

Income tax expense

     2     4     11

(Loss)/profit for the year from continuing operations

     (8)     (2)     (22)

(Loss)/profit after tax for the year from discontinued operations

     3     (5)     (4)
  

 

 

   

 

 

   

 

 

 

Profit/(loss) for the year

     (6)     (7)     (26)
  

 

 

   

 

 

   

 

 

 

Attributable to:

      

The owners of the parent

     (7)     (5)     (16)

Non-controlling interest

     1     (2)     (9)
  

 

 

   

 

 

   

 

 

 
     (6)     (7)     (26)
  

 

 

   

 

 

   

 

 

 

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,  
     2015      2014      2013  
     (In millions of US dollars)  

Russia

     4,602         7,459         9,109   

Algeria

     1,273         1,692         1,796   

Pakistan

     1,014         1,010         1,069   

Bangladesh

     604         563         504   

Ukraine

     622         1,062         1,610   

Kazakhstan

     598         755         839   

Uzbekistan

     711         718         673   

HQ and Others

        

Other Countries(1)

     470         566         602   

Intercompany eliminations and other

     (269      (308      (236
  

 

 

    

 

 

    

 

 

 

Total

     9,625         13,517         15,966   
  

 

 

    

 

 

    

 

 

 

 

(1) Total operating revenue for Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos.

 

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The following table shows the percentage of our total operating revenue represented by each reportable segment’s total operating revenue from external customers (excluding intersegment revenue) for each reportable segment for the periods indicated:

 

     Year ended December 31,  
     2015     2014     2013  

Russia

     47.8     55.2     57.1

Algeria

     13.2     12.5     11.2

Pakistan

     10.5     7.5     6.7

Bangladesh

     6.3     4.2     3.2

Ukraine

     6.5     7.9     10.1

Kazakhstan

     6.2     5.6     5.3

Uzbekistan

     7.4     5.3     4.2

HQ and Others

      

Other Countries(1)

     4.9     4.2     3.8

Intercompany eliminations and other

     (2.8 )%      (2.4 )%      (1.6 )% 
  

 

 

   

 

 

   

 

 

 

Total

     100.0      100.0     100.0
  

 

 

   

 

 

   

 

 

 

 

(1) Total operating revenue for Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos.

Segmentation of Adjusted EBITDA

 

     Year ended December 31,  
     2015      2014      2013  
     (In millions of US dollars)  

Russia

     1,825         2,980         3,815   

Algeria

     684         857         (212

Pakistan

     409         386         441   

Bangladesh

     242         219         187   

Ukraine

     292         484         781   

Kazakhstan

     276         349         390   

Uzbekistan

     437         461         347   

HQ and Others

        

Other Countries(1)

     221         228         264   

HQ and Other

     (1,511      (404      (336
  

 

 

    

 

 

    

 

 

 

Total

     2,875         5,560         5,677   
  

 

 

    

 

 

    

 

 

 

 

(1) Adjusted EBITDA for Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos.

Revenue

During the three years ended December 31, 2015, we generated revenue from providing voice, data and other telecommunication services through a range of traditional and broadband mobile and fixed technologies, as well as selling equipment and accessories.

Service Revenue

Our service revenue included revenue from airtime charges from postpaid and prepaid customers, monthly contract fees, time charges from customers online using internet services, interconnect fees from other mobile and fixed-line operators, roaming charges and charges for VAS such as messaging, data and infotainment. Roaming revenue includes both revenue from our customers who roam outside of their home country networks and revenue from other wireless carriers for roaming by their customers on our network. Roaming revenue does not include revenue from our own customers roaming while traveling across Russian regions within our network (so called “intranet roaming”).

 

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Sales of Equipment and Accessories and Other Revenue

We sold mobile handsets, equipment and accessories to our customers. Our other revenue included revenue from site sharing and other services provided by VimpelCom.

Expenses

Operating Expenses

During the three years ended December 31, 2015, we had two categories of operating expenses directly attributable to our revenue: service costs and the costs of equipment and accessories.

Service Costs

Service costs included interconnection and traffic costs, channel rental costs, telephone line rental costs, roaming expenses and charges for connection to special lines for emergencies.

Costs of Equipment and Accessories

Our costs of equipment and accessories sold represented the amount that was payable for these goods, net of VAT. We purchased handsets, equipment and accessories from third party manufacturers for resale to our customers for use on our networks.

In addition to service costs and the costs of equipment and accessories, during the three years ended December 31, 2015, our operating expenses included:

Selling, General and Administrative Expenses

Our selling, general and administrative expenses include:

 

    dealers’ commissions;

 

    salaries and outsourcing costs, including related social contributions required by law;

 

    marketing and advertising expenses;

 

    repair and maintenance expenses;

 

    rent, including lease payments for base station sites;

 

    utilities;

 

    provision for doubtful accounts;

 

    stock price-based compensation expenses;

 

    litigation provisions; and

 

    other miscellaneous expenses, such as insurance, operating taxes, license fees, and accounting, audit and legal fees.

Depreciation and Amortization Expense

We depreciated the capitalized costs of our tangible assets, which consisted mainly of telecommunications equipment including software and buildings that we owned. We amortized our intangible assets, which consisted primarily of telecommunications licenses, telephone line capacity for local numbers and customer relations acquired in business combinations.

Impairment Loss

Impairment loss represents losses from impairment of long-lived assets, including goodwill, as well as investments in associates.

 

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Loss on Disposals of Non-current Assets

Loss on disposal of non-current assets represents losses from disposal of non-current assets when they are sold or written off.

Finance Costs

We incurred interest expense on our vendor financing agreements, loans from banks, bonds, capital leases and other borrowings net of amounts capitalized. Our interest bearing liabilities carry both fixed and floating interest rates. On our borrowings with a floating interest rate, the interest rate is linked to LIBOR, AB SEK, MosPRIME, KIBOR, Bangladeshi T-Bill and Bank of Algeria Re-Discount Rate. Our interest expense depends on a combination of prevailing interest rates and the amount of our outstanding interest bearing liabilities. Of our interest bearing liabilities, taking into account the effect of hedges, 77% have fixed rates and 23% have floating rates.

Finance Income

Finance income represents income earned on cash deposited in banks and on loans provided to other parties.

Other Non-operating (Gains)/Losses

Our other non-operating (gains)/losses primarily include the effect of change of fair value of derivatives not designated as hedges and other assets when fair value assessment is required under IFRS, results of disposal of our investments and other non-operating activities.

Shares of (Profit)/Loss of Associates and Joint Ventures Accounted for Using the Equity Method

Shares of (profit)/loss of associates and joint ventures accounted for using the equity method represent our share in profit and loss of our joint ventures and associates accounted for using the equity method, primarily represented by Euroset.

Net Foreign Exchange Loss/(Gain)

The functional currencies of our group are the Russian ruble in Russia, 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 Uzbek som in Uzbekistan, the Kyrgyz som in Kyrgyzstan, the Armenian dram in the Republic of Armenia, the U.S. dollar in Tajikistan, the Georgian lari in Georgia, the Lao kip in Laos and the Euro in Italy. Monetary assets and liabilities denominated in foreign currencies are translated into our respective functional currencies on the relevant balance sheet date. We record changes in the values of such assets and liabilities as a result of exchange rate changes in our results of operations under the line item net foreign exchange (loss)/gain.

Income Tax Expense

The statutory income tax rate in Russia, Kazakhstan, Laos and Armenia in 2015, 2014 and 2013 was 20.0% for each country. In Algeria, the statutory income tax rate was 26% in 2015, 23% in 2014 and 25% in 2013. The statutory income tax rate in Pakistan was 32% in 2015, 33% in 2014 and 34% in 2013. The statutory income tax rate in Bangladesh was 45.0% in 2015, 2014 and 2013, respectively. The statutory income tax rate in Ukraine was 18% in 2015, 18% in 2014 and 19.0% in 2013. In Uzbekistan, the income tax rate was 7.5% in 2015, 8.0% in 2014 and 9.0% respectively in 2013 (and 8% local infrastructure development tax, which is assessed on income after corporate income tax). The statutory income tax rate in Kyrgyzstan in 2015, 2014 and 2013 was 10.0%. The statutory income tax rate in Georgia was 15.0% in 2015, 2014 and 2013 respectively. The statutory income tax rate in Luxembourg was 22.47% in 2015, 22.47% in 2014 and 22.05% in 2013 (and 6.75% regional tax, which is assessed on income). The statutory income tax rate in the Netherlands was respectively 25.0% in 2015, 2014 and 2013. The statutory tax rate of Tajikistan was 24.0% in 2015 and 25.0% in 2014 and 2013. The statutory income tax rate in Italy was 27.5% in 2015, 2014 and 2013 (and 4.82% in 2015, 4.55% in 2014 and 4.58% in 2013 as a regional tax, which is assessed on income).

Discontinued Operations

The line item discontinued operations represents the results of our operations in Italy, which is classified as an asset held for sale and discontinued operation. For more information, please see Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

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Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Total Operating Revenue

Our consolidated total operating revenue decreased by 29% to US$9,625 million during 2015 from US$13,517 million during 2014 primarily due to a decrease of total operating revenue of 38% in Russia, 25% in Algeria and 41% in Ukraine, largely related to the depreciation of functional currencies against the U.S. dollar in 2015, as described in greater detail below. The discussion of revenue by reportable segments includes intersegment revenue. Our management assesses the performance of each reportable segment on this basis because it believes the inclusion of intersegment revenue better reflects the true performance of each segment on a stand-alone basis.

Total Operating Expenses

Our consolidated total operating expenses decreased by 22% to US$9,101 million during 2015 from US$11,644 million during 2014, and represented 95% and 86% of total operating revenue in 2015 and 2014, respectively. The decrease in absolute terms was primarily due to a decrease in service costs and cost of equipment and accessories of US$1,027 million, lower impairment losses by US$731 million and a decrease in depreciation and amortization expenses of US$576 million. Such decreases in 2015 compared to 2014, were largely related to depreciation of functional currencies against the U.S. dollar in 2015, partially offset by recognized exceptional items in a total amount of US$1,051 million in 2015, including the US$900 million Uzbekistan provision in connection with the investigations by the SEC, DOJ and OM and transformation costs of US$138 million related to our performance transformation program. In 2014, we recognized exceptional items in a total amount of US$65 million, mainly related to the closing of the Algeria Transaction.

Service Costs

Our consolidated service costs decreased by 34% to US$1,956 million during 2015 from US$2,962 million during 2014. As a percentage of consolidated total operating revenue, our service costs decreased to 20% during 2015 from 22% during 2014. The decrease in absolute terms was primarily due to decreased revenues related to currency devaluations of functional currencies against the U.S. dollar.

Cost of Equipment and Accessories

Our consolidated cost of equipment and accessories decreased by 8% to US$231 million in 2015 from US$252 million in 2014. This decrease was primarily due to a devaluation of functional currencies against the U.S. dollar.

Selling, General and Administrative Expenses

Our consolidated selling, general and administrative expenses decreased by 4% to US$4,563 million during 2015 from US$4,743 million during 2014. This decrease was primarily due to the depreciation of functional currencies against the U.S. dollar, partially offset by recognized exceptional items in a total amount of US$1,051 million in 2015, including the US$900 million Uzbekistan provision in connection with the investigations by the SEC, DOJ and OM and transformation costs of US$138 million related to our performance transformation program. In 2014, we recognized exceptional items in a total amount of US$65 million, mainly related to the closing of the Algeria Transaction. For more information about our provisions, see Note 24 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. As a percentage of consolidated total operating revenue, our consolidated selling, general and administrative expenses increased to 47% in 2015 from 35% in 2014, mainly due to the exceptional items mentioned above.

Adjusted EBITDA

Our consolidated adjusted EBITDA decreased by 48% to US$2,875 million during 2015 from US$5,560 million during 2014, primarily due to decreased revenues related to currency devaluations and the exceptional items mentioned above.

Depreciation and Amortization Expenses

Our consolidated depreciation and amortization expenses decreased by 22% to US$2,067 million in 2015 from US$2,643 million in 2014. The decrease was primarily the result of depreciation of our functional currencies against the U.S. dollar.

Impairment Loss

Our consolidated impairment loss was US$245 million in 2015 compared to US$976 million in 2014. The impairment loss in 2015 primarily related to impairment of obsolete network equipment in Pakistan of US$ 52 million, in Russia of US$ 28 million, obsolete network equipment and goodwill in Ukraine of US$66 million and impairment of goodwill in Armenia of US$ 44 million. The impairment loss in 2014 primarily related to impairment of goodwill related to Ukraine of US$767 million, in Pakistan of US$163 million, and goodwill and other assets in Laos, Georgia, Bangladesh, Burundi and Central African Republic of US$172 million which was partially offset by an impairment release as a result of the sale of our debt and equity interest in Wind Canada of US$110 million.

 

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Loss on Disposals of Non-current Assets

Our consolidated loss on disposals of non-current assets decreased by 29% to US$39 million during 2015 from US$68 million during 2014, primarily due to depreciation of our functional currencies against the U.S. dollar.

Operating Profit

Our consolidated operating profit decreased to US$524 million in 2015 from US$1,873 million in 2014 due to an overall decrease in revenue and the exceptional items mentioned above, offset by lower impairment. Our consolidated operating profit as a percentage of total operating revenue in 2015 decreased to 5% from 14% in 2014.

Non-operating Profits and Losses

Finance Costs and Finance Income

Our consolidated finance costs decreased by 23% to US$829 million in 2015 from US$1,077 million in 2014, primarily due to a decrease in interest expense as a result of the redemption of certain bonds in April 2015 through a cash tender offer by VimpelCom Amsterdam B.V. that resulted in the repurchase of US$1,838 million of bonds, as well as lower U.S. dollar equivalents of ruble-denominated interest expenses as a result of the ruble depreciation. Our consolidated finance income remained at US$52 million in 2015.

Other Non-operating Losses/(Gains)

We recorded US$42 million in other non-operating losses during 2015 compared to US$121 million in gains during 2014. The change was primarily due to the positive movement in fair value of other derivatives of US$114 million recorded in 2014.

Shares of Loss/(Profit) of Associates and Joint Ventures Accounted for Using the Equity Method

We recorded a profit of US$14 million from our equity in associates and joint ventures in 2015 compared to a loss of US$38 million in 2014. The change was primarily due to the improved results of Euroset and the loss recorded on the sale of Wind Canada in 2014.

Net Foreign Exchange (Gain)/Loss

We recorded a loss of US$314 million from foreign currency exchange in 2015 compared to a loss of US$556 million from foreign currency exchange in 2014. The loss in 2015 was primarily due to a revaluation of our U.S. dollar net financial liabilities in both Russia and Ukraine primarily due to depreciation of the Russian ruble and the Ukrainian hryvnia against the U.S. dollar in 2015. The loss in 2014 was primarily due to revaluation of our U.S. dollar net financial liabilities in Russia due to depreciation of the Russian ruble against the U.S. dollar in 2014.

Income Tax Expense

Our consolidated income tax expense decreased by 63% to US$220 million in 2015 from US$598 million in 2014. The decrease in income taxes was primarily due to a decrease in provisions for future withholding taxes on intercompany dividends booked in 2015. In addition, our income tax expenses were higher in 2014 due to the tax consequences relating to the Algeria Transaction that were recorded in 2014.

(Loss)/profit for the year from continuing operations

In 2015, our consolidated loss for the year from continuing operations was US$815 million, compared to US$223 million of loss for 2014. The loss for 2015 was primarily attributable to exceptional items in total amount of US$1,051 million described above. See “—Recent Developments and Trends—Investigations” and Note 24 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

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(Loss)/profit after tax for the year from discontinued operations

In 2015, our consolidated profit after tax for the year from discontinued operations, which is comprised primarily of our operations in Italy, was US$262 million, compared to US$680 million of loss for 2014. In functional currency terms, total operating revenue in Italy decreased by 4% in 2015 compared to 2014, primarily due to a decrease in our mobile revenues and a decrease in fixed-line revenues, attributable to a decline in voice volumes and a decrease in indirect customer base (subscribers who access WIND’s network through Telecom Italia’s network but who are managed commercially by WIND, including both corporate and consumer subscribers). The 2015 results were positively influenced by the net effect of WIND Italy’s sale of 90% of the shares of its towers subsidiary, Galata, to Cellnex in the first quarter 2015 and a reduction in financial expenses resulting from refinancing activities carried out in 2014 and 2015.

Profit for the Year Attributable to the Owners of the Parent

In 2015, the consolidated loss for the year attributable to the owners of the parent was US$655 million compared to a loss of US$647 million in 2014. The movement was mainly due to an overall decrease in revenue and the exceptional items mentioned above.

Profit for the Year Attributable to Non-controlling Interest

Our profit for the year attributable to non-controlling interest was US$102 million in 2015 compared to a loss of US$256 million in 2014, mainly due to the profit recorded at GTH level. This primarily relates to the Algerian results and the change in ownership that occurred during 2015.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Total Operating Revenue

Our consolidated total operating revenue decreased by 15% to US$13,517 million during 2014 from US$15,966 million during 2013 primarily due to depreciation of the functional currencies of all operations, lower sale of equipment and accessories, as well as the impact of macroeconomic developments in Russia, Ukraine and Pakistan, as well as the delayed 3G launch in Algeria. The discussion of revenue by reportable segments includes intersegment revenue. Our management assesses the performance of each reportable segment on this basis because it believes the inclusion of intersegment revenue better reflects the true performance of each segment on a stand-alone basis.

Total Operating Expenses

Our consolidated total operating expenses decreased by 29% to US$11,644 million during 2014 from US$16,398 million during 2013, and represented 86% and 103% of total operating revenue in 2014 and 2013, respectively. This decrease was primarily due to depreciation of the functional currencies of all operations, a decrease in service costs of US$633 million, a decrease in selling, general and administrative expenses of US$1,513 million and lower impairment losses of US$1,987 million.

Service Costs

Our consolidated service costs decreased by 18% to US$2,962 million during 2014 from US$3,595 million during 2013. As a percentage of consolidated total operating revenue, our service costs decreased to 22% during 2014 from 23% during 2013. The decrease in absolute terms was primarily due to the overall decrease in revenue and the depreciation of the functional currencies of our operations.

Cost of Equipment and Accessories

Our consolidated cost of equipment and accessories decreased by 42% to US$252 million in 2014 from US$438 million in 2013 due to the depreciation of the functional currencies of our operations and decreased sales of equipment and accessories in Russia.

Selling, General and Administrative Expenses

Our consolidated selling, general and administrative expenses decreased by 24% to US$4,743 million during 2014 from US$6,256 million during 2013. This decrease was primarily due to the depreciation of the functional currencies of all operations and operational excellence programs, partially offset by an increase in frequency fees in Ukraine and higher network costs in Algeria, Pakistan and Bangladesh due to 3G rollout. In addition, in 2013 a provision of litigation was recorded for the Bank of Algeria claim, while in 2014 a provision was recorded for settlement with Cevital. As a percentage of consolidated total operating revenue, our consolidated selling, general and administrative expenses decreased to 35% in 2014 from 39% in 2013.

 

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Adjusted EBITDA

Our consolidated adjusted EBITDA decreased by 2% to US$5,560 million during 2014 from US$5,677 million during 2013, primarily due to an overall decrease in revenue, partially offset by lower service costs and lower selling, general and administrative expenses.

Depreciation and Amortization Expenses

Our consolidated depreciation and amortization expenses decreased by 13% to US$2,643 million in 2014 from US$3,053 million in 2013. The decrease was primarily the result of depreciation of the functional currencies in 2014, accelerated depreciation of network equipment in Pakistan in 2013 due to network modernization and lower amortization in Algeria due to a reduction in the charge on customer relationships recognized as part of our acquisition of Wind Telecom S.p.A. in 2011, only partially offset by increased depreciation as a result of accelerated roll out of our 3G network and the roll out of a 4G/LTE network in Russia.

Impairment Loss

Our consolidated impairment loss was US$976 million in 2014 in comparison with US$2,963 million in 2013. The impairment loss in 2014 primarily related to impairment of goodwill related to Ukraine of US$767 million, in Pakistan of US$163 million, and goodwill and other assets in Laos, Georgia, Bangladesh, Burundi and Central African Republic of US$172 million, which was partially offset by an impairment release as a result of the sale of our debt and equity interest in Wind Canada of US$110 million. The impairment loss in 2013 primarily related to impairment of goodwill related to Ukraine of US$2,085 million, in Laos of US$25 million and in Armenia of US$20 million, and impairment of the 4G/LTE telecommunication license in Uzbekistan of US$30 million. In addition, in 2013 we impaired our shareholder loans to Wind Canada in the amount of US$764 million.

Loss on Disposals of Non-current Assets

Our consolidated loss on disposals of non-current assets decreased by 27% to US$68 million during 2014 from US$93 million during 2013 primarily due to lower equipment write-offs during 2014 in our Russia segment.

Operating Profit

Our consolidated operating profit increased to US$1,873 million in 2014 from an operating loss of US$432 million in 2013 due to the reasons described above, primarily lower impairment losses in 2014 and a one-off charge for the Bank of Algeria claim in 2013.

Non-operating Profits and Losses

Finance Costs and Finance Income

Our consolidated finance costs decreased by 11% to US$1,077 million in 2014 from US$1,213 million in 2013, primarily due to lower U.S. dollar equivalents of ruble-denominated interest expenses as a result of the ruble depreciation. Our consolidated finance income decreased by 42% to US$52 million in 2014 from US$90 million in 2013, primarily due to lower interest earned on deposits and interest income from loans to Wind Canada that were fully impaired in 2013.

Other Non-operating Losses/(Gains)

We recorded US$121 million in other non-operating gains during 2014 compared to US$84 million in gains during 2013. The change was primarily due to the positive movement in fair value of other derivatives of US$114 million while in 2013 we had gains recorded for indemnity claims of US$84 million.

Shares of Loss/(Profit) of Associates and Joint Ventures Accounted for Using the Equity Method

We recorded a loss of US$38 million from our equity in associates and joint ventures in 2014 compared to a loss of US$159 million in 2013. The change was primarily due to lower losses from our investment in Wind Canada in 2014 due to full impairment of loans to Wind Canada in 2013.

 

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Net Foreign Exchange (Gain)/Loss

We recorded a loss of US$556 million from foreign currency exchange in 2014 compared to US$12 million foreign currency exchange loss in 2013. The loss in 2014 was primarily due to revaluation of our U.S. dollar financial liabilities primarily due to depreciation of the ruble to the U.S. dollar in 2014 and revaluation of our U.S. dollar financial assets due to depreciation of the ruble to the U.S. dollar in 2013.

Income Tax Expense

Our consolidated income tax expense decreased by 67% to US$598 million in 2014 from US$1,813 million in 2013. The decrease in income taxes was primarily due to lower profits in Russia in 2014 and one-off withholding tax charges over the accumulated earnings that were booked in 2013. The one-off charges booked in 2013 mainly related to withholding tax on anticipated dividend distribution by our subsidiaries in Russia and Algeria. In addition, the 2013 tax position includes the write-off of the tax receivable in Algeria in the amount of US$551 million as part of the settlement with the Algerian government recorded in 2013.

(Loss)/profit for the year from continuing operations

In 2014, our consolidated loss for the year from continuing operations was US$223 million, compared to US$3,455 million of loss for 2013. The movement was primarily attributable to the lower impairment losses in 2014 and a one-off charge for the Bank of Algeria claim in 2013.

(Loss)/profit after tax for the year from discontinued operations

In 2014, our consolidated loss after tax for the year from discontinued operations was US$680 million, compared to US$633 million of loss for 2013. The higher loss is mainly due to lower EBITDA and an increase in net finance expenses as a result of higher one-off interest expense subsequent to the refinancing transactions, completed in April and July 2014.

Profit for the Year Attributable to the Owners of the Parent

In 2014, the consolidated loss for the year attributable to the owners of the parent was US$647 million compared to a US$2,625 million loss in 2013. The movement was due to losses for the year as a result of above mentioned factors, substantially lower impairment losses in 2014 and a one-off charge for the Bank of Algeria claim in 2013.

Profit for the Year Attributable to Non-controlling Interest

Our loss for the year attributable to non-controlling interest was US$256 million in 2014 compared to a loss of US$1,463 million in 2013, due to lower net losses in our consolidated subsidiaries that are not wholly owned by us. This primarily relates to GTH and its losses related to the Algeria Transaction in 2013.

Russia

Results of operations in US$

 

            ‘14 – ‘15
% change
US$
    ‘14 – ‘15
% change
functional
currency
    ‘13 – ‘14%
change
US$
    ‘13 – ‘14%
change
functional
currency
 
     Year ended December 31,           
     2015      2014      2013           
                   
     (In millions of US dollars)                           

Service revenue

     4,433         7,249         8,745         (38.8 )%      (2.0 )%      (17.1 )%      (1.8 )% 

Sale of equipment and accessories

     162         197         350         (17.7 )%      27.2     (43.8 )%      (28.5 )% 

Other revenue

     7         14         15         (48.5 )%      (15.8 )%      (6.7 )%      11.5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     4,602         7,459         9,109         (38.3 )%      (1.2 )%      (18.1 )%      (2.8 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

                 

Service costs

     1,232         2,073         2,434         (40.6 )%      (5.0 )%      (14.8 )%      1.4

Cost of equipment and accessories

     193         221         381         (12.6 )%      37.3     (41.9 )%      (27.3 )% 

Selling, general and administrative expenses

     1,352         2,185         2,479         (38.1 )%      (1.4 )%      (11.8 )%      4.6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     1,825         2,980         3,815         (38.8 )%      (1.5 )%      (21.9 )%      (7.8 )% 
  

 

 

   &n