20-F 1 d318647d20f.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

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2016

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

VEON LTD.

(formerly 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  ☒

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  ☒

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  ☒    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  ☒    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  ☒     Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ☐            Item 18  ☐

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  ☒


Table of Contents

TABLE OF CONTENTS

 

ITEM 1.

  Identity of Directors, Senior Management and Advisors      7  

ITEM 2.

  Offer Statistics and Expected Timetable      7  

ITEM 3.

  Key Information      7  

ITEM 4.

  Information on the Company      43  

ITEM 4A.

  Unresolved Staff Comments      97  

ITEM 5.

  Operating and Financial Review and Prospects      98  

ITEM 6.

  Directors, Senior Management and Employees      154  

ITEM 7.

  Major Shareholders and Related Party Transactions      164  

ITEM 8.

  Financial Information      168  

ITEM 9.

  The Offer and Listing      170  

ITEM 10.

  Additional Information      171  

ITEM 11.

  Quantitative and Qualitative Disclosures About Market Risk      185  

ITEM 12.

  Description of Securities other than Equity Securities      186  

ITEM 13.

  Defaults, Dividend Arrearages and Delinquencies      188  

ITEM 14.

  Material Modifications to the Rights of Security Holders and Use of Proceeds      188  

ITEM 15.

  Controls and Procedures      188  

ITEM 15T.

  Controls and Procedures      189  

ITEM 16.

  [Reserved]      189  

ITEM 16A.

  Audit Committee Financial Expert      189  

ITEM 16B.

  Code of Ethics      189  

ITEM 16C.

  Principal Accountant Fees and Services      190  

ITEM 16D.

  Exemptions from the Listing Standards for Audit Committees      190  

ITEM 16E.

  Purchases of Equity Securities by the Issuer and Affiliated Purchasers      190  

ITEM 16F.

  Change in Registrant’s Certifying Accountant      191  

ITEM 16G.

  Corporate Governance      191  

ITEM 16H

  Mine Safety Disclosure      192  

ITEM 17.

  Financial Statements      193  

ITEM 18.

  Financial Statements      193  

ITEM 19.

  Exhibits      194  

EXPLANATORY NOTE

On March 30, 2017, VimpelCom Ltd. changed its name to VEON Ltd. Please see Exhibit 1.2 to this Annual Report an Form 20-F.

References in this Annual Report on Form 20-F to “VEON” and the “VEON Group,” as well as references to “our company,” “the company,” “our group,” “the group,” “we,” “us,” “our” and similar pronouns, are references to VEON Ltd. as of March 30, 2017 and to VimpelCom Ltd. prior to March 30, 2017, an exempted company limited by shares registered in Bermuda, and its consolidated subsidiaries. References to VEON Ltd. are to VEON Ltd. alone as of March 30, 2017 and to VimpelCom Ltd. alone prior to March 30, 2017. 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, 2016, 2015 and 2014 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. VEON Ltd. adopted IFRS as of January 1, 2009.

In this Annual Report on Form 20-F, references to (i) “U.S. dollars” and “US$” 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) “Pakistani rupees” or “PKR” are to the lawful currency of Pakistan, (iv) “Algerian dinar” or “DZD” are to the lawful currency of Algeria, (v) “Bangladeshi taka” or “BDT” are to the lawful currency of

 

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Bangladesh, (vi) “Ukrainian hryvnia,” “hryvnia” or “UAH” are to the lawful currency of Ukraine, (vii) “Uzbek som” or “UZS” are to the lawful currency of Uzbekistan, (viii) “Kazakh tenge” or “KZT” are to the lawful currency of the Republic of Kazakhstan, (ix) “Kyrgyz som” are to the lawful currency of Kyrgyzstan, (x) “Armenian dram” are to the lawful currency of the Republic of Armenia, (xi) “Tajik somoni” are to the lawful currency of Tajikistan, (xii) “Georgian lari” are to the lawful currency of Georgia, (xiii) “Lao kip” are to the lawful currency of Laos and (xiv) “€,” “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 and references to “Bangladeshi T-Bill” are to Bangladeshi Treasury Bills.

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, Pakistani rupee, Algerian dinar, Lao Kip 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 Ongoing 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.

As of November 5, 2016, VEON Ltd. owns a 50.0% share of the Italy Joint Venture (as defined herein). We account for the Italy Joint Venture using the equity method. We do not control the Italy Joint Venture. All information related to the Italy Joint Venture is the sole responsibility of the Italy Joint Venture’s management, and no information contained herein, including, but not limited to, the Italy Joint Venture’s financial and industry data, market projections and strategy, has been prepared by or on behalf of, or approved by, our management. VEON Ltd. is not making, and has not made, any written or oral representation or warranty, express or implied, of any nature whatsoever, with respect to any Italy Joint Venture information included in this Annual Report on Form 20-F, other than the financial information that is derived directly from our financial statements.

Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.

On November 5, 2016, we completed a transaction to form a joint venture holding company with CK Hutchison Holdings Limited (“Hutchison”), through which we jointly own and operate our historical WIND and Hutchison’s historical 3 Italia telecommunications businesses in Italy. Italy is no longer a reportable segment. We account for the Italy Joint Venture using the equity method. However, financial and operational information for Italy is included in this Annual Report on Form 20-F because completion of the Italy Joint Venture occurred ten months into the 2016 financial year, and because the Italy Joint Venture is a significant part of our business.

From January 1, 2016 to November 5, 2016, we classified our Italian business unit as an asset held for sale and discontinued operation in our financial statements. In connection with this classification, VEON Ltd. no longer accounted for depreciation and amortization expenses of the Italian assets. The financial data for 2015, 2014, 2013 and 2012 reflects the classification of Italy as an asset held for sale and a discontinued operation.

 

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The data for 2012 is unaudited. The intercompany positions were disclosed as related party transactions and balances. The transaction was successfully completed on November 5, 2016. Under the transaction, VEON Ltd. contributed its entire shareholding in the operations in Italy, in exchange for a 50% interest in the newly formed Italy Joint Venture. As a result, the company does not control the Italy Joint Venture’s operations in Italy. Please refer to Notes 6, 13 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F for further information.

Non-IFRS Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin are non-IFRS financial measures. VEON calculates Adjusted EBITDA as profit/(loss) 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 5—Certain Performance Indicators—Adjusted EBITDA.” 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 5—Certain Performance Indicators—Adjusted EBITDA” below.

Capital Expenditures. In this Annual Report on Form 20-F, we present capital expenditures, which are purchases of new equipment, new construction, upgrades, software, other long-lived assets and related reasonable costs incurred prior to intended use of the non-current asset, accounted at the earliest event of advance payment or delivery. Long-lived assets acquired in business combinations are not included in capital expenditures. In this Annual Report on Form 20-F, we present capital expenditures for all periods excluding our historical Italian operations (WIND) following its classification as asset held for sale and a discontinued operation and excluding the Italy Joint Venture. We also present capital expenditures without licenses. Reconciliation of capital expenditures to cash paid for purchase of property, plant and equipment and intangible assets, the most directly comparable IFRS financial measure, is presented in “Item 5—Key Information—Liquidity and Capital Resources—Future Liquidity and Capital Requirements” below. For more information, please see “—Accounting Treatment of our Historical WIND Business and the new 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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Functional currency financial measures. In the discussion and analysis of our results of operations, we present certain financial measures in functional currency terms. These non-IFRS financial measures include the results of operations of our reportable segments in jurisdictions with local functional currencies, and exclude the impact of translating the functional currency amounts to U.S. dollars. We analyze the performance of our reportable segments on a functional currency basis to increase the comparability of results between periods. Because changes in foreign exchange rates have a non-operating impact on the results of operations (as a result of translation to US$, our reporting currency), 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 Ongoing Factors Affecting Our Financial Position and Results of Operations—Foreign Currency Translation” and Notes 2 and 5 to our audited consolidated financial statements included elsewhere in their Annual Report on Form 20-F.

Market and Industry Data

This Annual Report on Form 20-F contains industry, market and competitive position data that are based on the industry publications and studies conducted by third parties noted herein and therein, as well as our own internal estimates and research. These industry publications and third-party studies generally state that the information that they contain has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these publications and third-party studies is reliable, we have not independently verified the market and industry data obtained from these third-party sources. While we believe our internal research is reliable and the definition of our market and industry are appropriate, neither such research nor these definitions have been verified by any independent source.

Certain market and industry data in this Annual Report on Form 20-F is sourced from the report of Analysys Mason, dated March 16, 2017. Mobile penetration rate is defined as mobile connections divided by population. Population figures for the mobile penetration rates provided by Analysys Mason are sourced from the Economist Intelligence Unit. Mobile connections are on a three-month active basis such that any SIM card that has not been used for more than three months is excluded.

Trademarks

We have proprietary rights to trademarks used in this Annual Report on Form 20-F which are important to our business, many of which are registered under applicable intellectual property laws. Solely for convenience, trademarks and trade names referred to in this Annual Report on Form 20-F may appear without the “®” or “TM” symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Each trademark, trade name or service mark of any other company appearing in this Annual Report on Form 20-F is the property of its respective holder.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 20-F contains estimates and forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our estimates and forward-looking statements are mainly based on our current expectations and estimates of future events and trends, which affect or may affect our businesses and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to numerous risks and uncertainties and are made in light of information currently available to us. Many important factors, in addition to the factors

 

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described in this Annual Report on Form 20-F, may adversely affect our results as indicated in forward-looking statements. You should read this Annual Report on Form 20-F completely and with the understanding that our actual future results may be materially different and worse from what we expect.

All statements other than statements of historical fact are forward-looking statements. The words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “seek,” “believe,” “estimate,” “predict,” “potential,” “continue,” “contemplate,” “possible” and similar words are intended to identify estimates and forward-looking statements.

Our estimates and forward-looking statements may be influenced by various factors, including without limitation:

 

   

our plans to implement our strategic priorities, including with respect to our performance transformation program; targets and strategic initiatives in the various countries in which we operate; 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 anticipated performance and guidance for 2017 and 2018;

 

   

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 and operational 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 operational and network development and network investment, such as expectations regarding the roll-out and benefits of 3G/4G/LTE networks or other networks; 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 synergies from, our existing and future transactions, such as the new joint venture with Hutchison, through which we will jointly own and operate our telecommunications businesses comprised of the historical Hutchison business, 3 Italia S.p.A. (“3 Italia”) and the historical VEON business, Wind Telecomunicazioni S.p.A. (“WIND”), in Italy (a transaction and resulting business that we refer to as the “Italy Joint Venture” in this Annual Report on Form 20-F) and our merger with Warid Telecom Pakistan LLC (“WTPL”) and Bank Alfalah Limited (“Bank Alfalah”), which resulted in the merger of our telecommunications businesses in Pakistan (a transaction we refer to as the “Pakistan Merger” in this Annual Report on Form 20-F);

 

   

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;

 

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

 

   

possible adverse consequences resulting from our agreements announced on February 18, 2016 with the U.S. Securities and Exchange Commission (“SEC”), the U.S. Department of Justice (“DOJ”), and the Dutch Public Prosecution Service (Openbaar Ministerie) (“OM”), including the Deferred Prosecution Agreement (the “DPA”) with the DOJ filed with the United States District Court for the Southern District of New York, the judgment entered by the United States District Court for the Southern District of New York related to the agreement with the SEC, including the consent incorporated therein (the “SEC Judgment”) and the settlement agreement with the OM (the “Dutch Settlement Agreement”), as well as any litigation or additional investigations related to or resulting from the agreements, including the DPA and the SEC Judgment, including the retention of an independent compliance monitor as required the DPA and the SEC Judgment, any changes in company policy or procedure resulting from the review by the independent compliance monitor or otherwise undertaken by VEON Ltd., the duration of the independent compliance monitor’s review, and VEON Ltd.’s compliance with the terms of the resolutions with the DOJ, SEC, and OM; and

 

   

other statements regarding matters that are not historical facts.

These statements are management’s best assessment of the company’s strategic and financial position and of future market conditions, trends and other potential developments. While they 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 a result of armed conflict) such as any harm, reputational or otherwise, that may arise due to changing social norms, our business involvement in a particular jurisdiction or an otherwise unforeseen development in science or technology;

 

   

in each of the countries in which we operate, risks relating to legislation, regulation, taxation and currency, including laws, regulations, decrees and decisions governing the telecommunications industry, costs of compliance, currency and exchange controls, currency fluctuations, taxation legislation, abrupt changes in the regulatory environment, laws on foreign investment, anti-corruption and anti-terror laws, economic sanctions and their official interpretation by governmental and other regulatory bodies and courts;

 

   

risks relating to a failure to meet expectations regarding various strategic initiatives, including, but not limited to, the performance transformation program;

 

   

risks related to solvency and other cash flow issues, including our ability to raise the necessary additional capital and incur additional indebtedness, the ability of our subsidiaries to make dividend payments, our ability to develop additional sources of revenue and unforeseen disruptions in our revenue streams;

 

   

risks that various courts or regulatory agencies with whom we are involved in legal challenges, tax disputes or appeals may not find in our favor;

 

   

risks relating to our company and its operations in each of the countries in which we operate, 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, intellectual property rights protection, labor issues, interconnection agreements, equipment failures and competitive product and pricing pressures;

 

   

risks related to developments from competition, unforeseen or otherwise, in each of the countries in which we operate including our ability to keep pace with technological change and evolving industry standards;

 

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risks associated with developments in 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 review by the independent compliance monitor;

 

   

risks related to the activities of 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 realizing the expected synergies of closed transactions, such as the Italy Joint Venture and/or the Pakistan Merger, satisfying closing conditions for new transactions, obtaining regulatory approvals and implementing remedies;

 

   

risks associated with data protection, cyber-attacks or systems and network disruptions, or the perception of such attacks or failures in each of the countries in which we operate, including the costs that would be associated with such events and the reputation harm that could arise therefrom;

 

   

risks related to the ownership of our American Depositary Receipts, including those associated with VEON Ltd.’s status as a Bermuda company and a foreign private issuer; 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. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 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. Therefore, you are cautioned not to place undue reliance on these forward-looking statements. 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, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

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 as of and for each of the five years ended December 31, 2016 has been derived from our historical consolidated financial statements, which as of and for the years ended December 31, 2016, 2015 and 2014 have been audited by PricewaterhouseCoopers Accountants N.V., an independent registered public accounting firm, and as of and for the years ended December 31, 2013 and 2012,

 

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have been audited by Ernst & Young Accountants LLP, an independent registered public accounting firm, except as noted below. 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 2015, 2014, 2013 and 2012 reflects the classification of WIND as a discontinued operation, and the data for 2012 is unaudited. The data for 2016 reflects 10 months of WIND classified as a discontinued operation and two months of WIND classified as an equity investment. For more information, please see “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture” and Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

     Year ended December 31,  
     2016     2015(1)     2014(1)     2013     2012
Unaudited
 
     (in millions of U.S. dollars, except per share
amounts and as indicated)
 

Consolidated income statements data:

          

Service revenue

     8,553       9,313       13,200       15,472       15,607  

Sale of equipment and accessories

     184       190       218       391       422  

Other revenue

     148       103       68       103       49  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     8,885       9,606       13,486       15,966       16,078  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

          

Service costs

     1,769       1,937       2,931       3,595       3,626  

Cost of equipment and accessories

     216       231       252       438       400  

Selling, general and administrative expenses

     3,668       4,563       4,743       6,256       4,962  

Depreciation

     1,439       1,550       1,996       2,245       2,188  

Amortization

     497       517       647       808       1,062  

Impairment loss

     192       245       976       2,963       391  

Loss on disposals of non-current assets

     20       39       68       93       199  

Total operating expenses

     7,801       9,082       11,613       16,398       12,828  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     1,084       524       1,873       (432     3,250  

Finance costs

     830       829       1,077       1,213       1,058  

Finance income

     (69     (52     (52     (90     (151

Other non-operating losses/(gains)

     82       42       (121     (84     (34

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

     (48     (14     38       159       9  

Impairment of associates and joint ventures accounted for using the equity method

     99       —         —         —         —    

Net foreign exchange (gain)/ loss

     (157     314       556       12       (52

Profit/(loss) before tax

     347       (595     375       (1,642     2,420  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     635       220       598       1,813       730  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/profit for the year from continuing operations

     (288     (815     (223     (3,455     1,690  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit/(loss) after tax for the period from discontinued operations

     920       262       (680     (633     (314

Profit on disposal of discontinued operations, net of tax

     1,788       —         —         —         —    

Profit/(loss) after tax for the period from discontinued operations

     2,708       262       (680     (633     (314

Profit/(loss) for the year

     2,420       (553     (903     (4,088     1,376  

Attributable to:

          

The owners of the parent (continuing operations)

     (380     (917     33       (1,992       1,853  

The owners of the parent (discontinued operations)

     2,708       262       (680     (633     (314

Non-controlling interest

     92       102       (256     (1,463     (163
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,420       (553     (903     (4,088     1,376  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings/(loss) per share from continuing operations

          

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

     (0.22     (0.52     0.02       (1.16     1.14  

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

     (0.22     (0.52     0.02       (1.16     1.14  

Earnings/(loss) per share from discontinued operations

          

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

     1.55       0.15       (0.39     (0.37     (0.19

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

     1.55       0.15       (0.39     (0.37     (0.19

Weighted average number of common shares (millions)

     1,749       1,748       1,748       1,711       1,618  

Dividends declared per share

     0.23       0.035       0.035       1.24       0.80  

 

(1) Certain comparative amounts have been reclassified to conform to the current period’s presentation. For more information, please refer to Note 8 of our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

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     As of December 31,  
     2016     2015     2014     2013(2)     2012
Unaudited(2)
 
     (in millions of U.S. dollars)  

Consolidated balance sheet data:

          

Cash and cash equivalents

     2,942       3,614       6,342       4,454       4,949  

Working capital (deficit)(1)

     (2,007     (156     (938     (2,815     (2,421

Property and equipment, net

     6,719       6,239       11,849       15,493       15,666  

Intangible assets and goodwill

     6,953       6,447       18,002       24,546       27,565  

Total assets

     21,193       33,854       41,042       49,747       54,737  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     15,150       29,960       37,066       40,796       39,988  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     6,043       3,894       3,976       9,078       14,749  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Working capital (deficit) is calculated as current assets less current liabilities and is equivalent to net current assets.
(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. The figures for the year December 31, 2012 have not been adjusted.

SELECTED OPERATING DATA

The following selected operating data as of and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 has been derived from internal company sources. The number of mobile data customers and fixed-line broadband customers have not been included as of December 31, 2012 because we did not have an operational protocol to collect that data in 2012. 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 and for December 31,  
     2016      2015      2014      2013      2012  

Selected company operating data(1):

              

Mobile customers in millions

              

Russia

     58.3        59.8        57.2        56.5        56.1  

Pakistan

     51.6        36.2        38.5        37.6        36.1  

Algeria(2)

     16.3        17.0        17.7        17.6        16.7  

Bangladesh

     30.4        32.3        30.8        28.8        25.9  

Ukraine(2)

     26.1        25.4        26.2        25.8        25.1  

Uzbekistan

     9.5        9.9        10.6        10.5        10.2  

Others(3)

     15.3        15.7        16.1        15.3        14.3  

Total mobile customers(4)

     207.5        196.3        197.1        192.1        184.4  

Mobile MOU in minutes(2)(5)

              

Russia

     326        310        304        291        276  

Pakistan(6)

     628        623        433        226        214  

Algeria(2)(6)

     332        369        371        216        274  

Bangladesh(6)

     312        306        197        184        216  

Ukraine(2)

     559        543        508        501        513  

Uzbekistan

     615        528        522        471        474  

Mobile ARPU(2)(5)

              

Russia

   US$ 4.6      US$ 5.1      US$ 8.6      US$ 10.6      US$ 10.8  

Pakistan

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

Algeria(2)

   US$ 5.1      US$ 6.0      US$ 7.9      US$ 8.4      US$ 9.0  

Bangladesh

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

 

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     As of and for December 31,  
     2016      2015      2014      2013      2012  

Ukraine(2)

   US$ 1.7      US$ 1.8      US$ 3.1      US$ 4.7      US$ 5.2  

Uzbekistan

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

Mobile data customers in millions

              

Russia

     36.6        34.3        31.9        29.4        —    

Pakistan

     25.1        16.8        14.4        10.9        —    

Algeria(2)

     7.0        4.1        1.3        0.5        —    

Bangladesh

     14.9        14.0        12.2        9.8        —    

Ukraine(2)

     11.2        12.0        11.1        11.3        —    

Uzbekistan(7)

     4.6        4.7        5.4        5.4        —    

Others(3)

     7.9        7.8        8.4        8.1        —    

Total mobile data customers(4)

     107.3        93.7        84.7        75.4        —    

Fixed-line broadband customers in millions

              

Russia

     2.2        2.2        2.3        2.3        —    

Ukraine

     0.8        0.8        0.8        —          —    

Others(3)

     0.3        0.4        0.2        0.3        —    

Total broadband customers(4)

     3.3        3.4        3.3        2.6        —    

 

(1) For information on how we calculate mobile customers, mobile MOU, mobile ARPU, mobile data customers and fixed-line broadband customers, 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 have been adjusted to reflect revised customer numbers in Algeria and Ukraine where the definition of customers has been aligned to the group definition. Mobile MOU and Mobile ARPU have been adjusted accordingly. For a definition of Mobile MOU and ARPU, see “Item 5—Operating and Financial Review and Prospects—Certain Performance Indicators—MOU” and “Item 5—Operating and Financial Review and Prospects—Certain Performance Indicators—ARPU,” respectively.
(3) Customer numbers for Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos for all periods. For a discussion of the treatment of our “Others” category and our operations in Kazakhstan for each of the periods discussed in this Annual Report on Form 20-F, please see “Item 5—Operating and Financial Review and Prospects—Reportable Segments.”
(4) The customer numbers for 2016, 2015, 2014, 2013 and 2012 have been adjusted to remove customers in operations that have been sold and exclude (i) the customers in our historical WIND business as of December 31, 2012-2015 and (ii) the customers in the new Italy Joint Venture as of December 31, 2016.
(5) Data for our “Others” category is not presented because we do not collect data on Mobile MOU and Mobile ARPU in “Others.” For a discussion of the treatment of our “Others” category and our operations in Kazakhstan for each of the periods discussed in this Annual Report on Form 20-F, please see “Item 5—Operating and Financial Review and Prospects—Reportable Segments.”
(6) The Algeria, Pakistan and Bangladesh segments for the years ended December 31, 2013 and 2012 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). This definition differs from the group’s definition of MOU. Mobile MOU in the Algeria, Pakistan and Bangladesh segments has been restated to use the group definition for the years ended December 31, 2016, 2015 and 2014. For an explanation of our group’s definition of MOU, please refer to “Item 5—Certain Performance Indicators—MOU.”
(7) Mobile broadband customers in Uzbekistan (as well as in Kazakhstan, 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 Wi-Fi technologies.

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 (“ADSs”). Before purchasing our ADSs, you should carefully consider all of the information set forth in this Annual Report on Form 20-F including but not limited to, these risks.

 

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In addition to those risk factors, there may be additional risks and uncertainties of which management is not aware or focused on or that management deems immaterial. Our business, financial condition or results of operations or prospects could be materially adversely affected by any of these risks. The trading price of our securities could decline due to any of these risks, and you may lose all or part of your investment.

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, 2016, the outstanding principal amount of our external debt for bonds, bank loans, equipment financing, and loans from others amounted to approximately US$10.5 billion. For more information regarding our outstanding indebtedness, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financing Activities.”

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, where they are secured, 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 or cross-acceleration) could have a material adverse effect on our business, financial condition, results of operations or 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 Note 18 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 largest shareholders of their respective stakes in VEON Ltd. or a change in control of VEON Ltd. 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 paying 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 successfully implement our strategic priorities.

We are rapidly transforming with the aim to reinvent the business across all geographies and operations. This transformation involves re-engineering fundamentals, working to revitalize the business and implementing a new digital model. However, there can be no assurance that our strategy will be successfully implemented and will not cause changes in our operational efficiencies or structure. In addition, although we are working to improve revenue trends in our Algeria segment, there can be no assurance that the current trend of decreasing revenue in Algeria will be reversed.

A failure to obtain the anticipated benefits of our performance transformation program including revenue targets; cost optimization or a delay in the implementation of our transformation programs could significantly affect our business, financial condition, results of operations, cash flows or prospects.

 

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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 or prospects.

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 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 Russia and Ukraine, 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. For a discussion of the sanctions imposed against Ukraine and Russia, see “Exhibit 99.2—Regulation of Telecommunications.” 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, including 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 or prospects.

We are exposed to foreign currency exchange loss and currency fluctuation and translation risks.

A significant amount of our costs, expenditures and liabilities are denominated in U.S. dollars and euros, including capital expenditures and borrowings, while a significant amount of our revenue is denominated in currencies other than the U.S. dollar and the 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 denominated debt and/or euro denominated purchase equipment and services. The values of the Russian, Algerian, 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. 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 2016, total operating revenues in functional currency terms were relatively stable compared to 2015, but in U.S. dollar terms, total operating revenues decreased by 8%. 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,” “Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting Our Financial Position and Results of Operations—Foreign Currency Translation,” “Item 11—Quantitative and Qualitative Disclosures About Market Risk” and Notes 5 and 18 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

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 or prospects. “Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting Our Financial Position and Results of Operations—Inflation.”

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 or prospects. We cannot ensure that our existing or future hedging strategies will sufficiently hedge against these risks.

 

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As a holding company, VEON Ltd. depends on the ability of its subsidiaries to pay dividends and therefore on the performance of its subsidiaries, and is affected by changes in exchange controls and currency restrictions in the countries in which its subsidiaries operate.

VEON Ltd. 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 VEON Ltd.’s subsidiaries to pay dividends and make payments or loans to VEON Ltd. depends on the success of their businesses and is not guaranteed. Although VEON Ltd. 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.

VEON Ltd.’s subsidiaries are separate and distinct legal entities. Any right that VEON Ltd. 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 VEON Ltd.’s subsidiaries to pay dividends and make payments or loans to VEON Ltd., and to guarantee VEON Ltd.’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 VEON Ltd.’s subsidiaries operate. For further details on the restrictions on dividend payments, see “Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting Our Financial Position and Results of Operations—Foreign Currency Controls and Currency Restrictions” 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.” 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.”

We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA, the SEC Judgment and the Dutch Settlement Agreement, which may be significant.

VEON Ltd. is subject to a DPA with the DOJ, the SEC Judgment and the Dutch Settlement Agreement with the OM. See “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes 25 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. In conjunction with the DPA and pursuant to the SEC Judgment, VEON Ltd. is required to retain, at our own expense, an independent compliance monitor. The independent compliance monitor has been appointed. Pursuant to the DPA and the SEC Judgment, the monitorship will continue for a period of three years from 2016, 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 the SEC. The monitor will assess and monitor our compliance with the terms of the DPA and the SEC Judgment by evaluating factors such as our 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. In addition, VEON Ltd. incurred fines and disgorgement payable to the U.S. and Dutch authorities in connection with the entry into the DPA, the SEC Judgment and the Dutch Settlement Agreement. VEON Ltd. has incurred significant costs in

 

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connection with the disposition of these investigations and agreements, including retention of legal counsel and other vendors/advisors and other costs related to the investigations undertaken in connection with these matters. VEON Ltd. currently cannot estimate the additional costs that it is likely to incur in connection with compliance with the DPA, the SEC Judgment and the Dutch Settlement Agreement, including the ongoing obligations relating to the monitorship, its 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 internal controls, policies and procedures required by the monitor. However, such costs could be significant.

Under the DPA and pursuant to the SEC Judgment, VEON Ltd. has obligations to implement, and continue to implement, a compliance and ethics program designed to prevent and detect violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other applicable anti-corruption laws throughout its operations. Further, VEON Ltd. must 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. The implementation of these programs and the review of our internal accounting controls, policies, and procedures regarding compliance with the FCPA and other applicable anti-corruption laws is ongoing and may take significant management time and resources.

We could be subject to criminal prosecution or civil sanction if we breach the DPA with the DOJ, the SEC Judgment or the Dutch Settlement Agreement, 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.

Failure to comply with the terms of the DPA, whether such failure relates to alleged improper payments, internal controls failures, or other non-compliance, 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 SEC Judgment, VEON Ltd. 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 SEC Judgment 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 or prospects.

We may also face other potentially negative consequences relating to the investigations by, and agreements with, the DOJ, SEC and OM. None of the DPA, the SEC Judgment 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 or otherwise in relation to, these or other matters. Furthermore, the Norwegian Government has held parliamentary hearings concerning the investigations in the past and may schedule further hearings. Similarly, the agreements do not foreclose potential third party or additional shareholder litigation related to these matters. For example, a consolidated class action lawsuit has been filed in a U.S. district court against VEON in relation to our prior disclosure regarding our operations in Uzbekistan, and relies upon the investigations by the DOJ, SEC and OM. We may incur significant costs in connection with this or future lawsuits. Any collateral investigations, litigation or other government or third party actions resulting from these, or other, matters could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects.

 

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In addition, any ongoing media and governmental interest in the prior investigations, the agreements 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 November 5, 2016, we completed a transaction to form a joint venture holding company with Hutchison, through which we jointly own and operate our historical WIND and Hutchison’s historical 3 Italia telecommunications businesses in Italy (see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Italy Joint Venture”); and on July 1, 2016 we completed a transaction with WTPL and Bank Alfalah, which resulted in the merger of our telecommunications businesses in Pakistan (see “Item 5—Operating and Financial Review and Prospects—Key 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.

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

 

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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 or 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 potential towers sales (which could cause costs to be materially higher than anticipated), and the divestitures we carry out could negatively impact our business.

Integration of the Warid and Mobilink (now Jazz) brands is subject to significant uncertainties and risks.

Although the Pakistan Merger is now complete, there can be no assurance that we will not experience difficulties in integrating the operations of Warid and Mobilink brands (now jointly operating under the Jazz brand), that we will realize expected synergies, that the integration process will not negatively affect our customer base, revenue or market share or that we will not incur higher than expected costs. In addition, the integration of the businesses in Pakistan will require substantial time and focus from management, which could adversely affect their ability to operate the businesses.

The Italy Joint Venture is subject to integration and performance risks.

A portion of our operations is conducted through the Italy Joint Venture. Although the transaction closed on November 5, 2016, the Italy Joint Venture may be subject to integration risks, which may affect its business or results of operations. In addition, a failure by the Italy Joint Venture to perform as anticipated or realize its business plans, could, in turn, have a material adverse effect on our financial condition and results of operations.

On March 22, 2017, the Italian telecommunications regulator AGCOM issued a notice to the Italy Joint Venture in relation to compliance with the EU Regulation 2015/2120 (the “open internet access regulation”), which regulates, among other things, traffic management practices in the EU, including Italy. The Italy Joint Venture has until April 15, 2017 to inform AGCOM of the measures it has taken, if any, to ensure compliance. The Italy Joint Venture believes that this notice will not have a material impact on its digital offering.

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 and TNS-Plus LLP), Algeria (OTA), Uzbekistan (Buzton JV), Kyrgyzstan (Sky Mobile LLC, Terra LLC), Georgia (Mobitel LLC), Tajikistan (Tacom LLC) and Laos (VimpelCom Lao Co., Ltd). We also own 50% of the Italy Joint Venture. 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.”

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 or 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, VEON 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.

 

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

We derive benefits and resources from the participation of L1T VIP Holdings S.à r.l. (“LetterOne”) and Telenor East Holding II AS (“Telenor East”), in our company such as industry expertise, management oversight and business acumen. In September 2016, Telenor East partially divested its stake in VEON Ltd. pursuant to an underwritten offering and simultaneously issued a bond, which is exchangeable under certain conditions for VEON Ltd.’s ADSs. Further, it announced its intention to divest the remainder of its stake in VEON Ltd. The completion of the divestiture of Telenor East’s remaining stake is subject to uncertainties with respect to timing and demand for an offering. If LetterOne or Telenor East were to dispose of their stake in VEON Ltd., we would be deprived of those benefits, which could harm our business, financial condition, results of operations, cash flows or prospects. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Telenor Share Sale and Exchangeable Bond Issuance.”

Some of our financing agreements (representing approximately US$1.4 billion in outstanding indebtedness as of December 31, 2016) 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-default or 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 or prospects.

Our strategic shareholders may pursue diverse development strategies, and this may hinder our ability to expand and/or compete in such regions.

As of March 15, 2017, VEON Ltd.’s largest shareholders, LetterOne and Telenor East, and their respective affiliates, beneficially owned, in the aggregate, approximately 71.6% of our issued and outstanding shares, with LetterOne beneficially owning approximately 47.9% of our issued and outstanding shares and Telenor East beneficially owning approximately 23.7% of our issued and outstanding 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 VEON Ltd. with respect to capital structure, financings, dispositions, 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.”

At various times from 2005-2012, 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”). See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Pakistan Merger.” 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 or prospects.

 

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

In the past, our two largest shareholders, LetterOne and Telenor East, have been involved in disputes and litigation regarding our group companies, against one another and VEON Ltd. Further disputes among our two largest shareholders and us could harm our business, financial condition, results of operations, cash flows or prospects. For more information on our two largest shareholders, see “Item 7—Major Shareholders and Related Party Transactions—A. Major Shareholders” below.

We may not be able to detect and prevent fraud, other misconduct or unethical actions 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. For a description of the key trends with respect to our business, see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends.”

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.

Further, our brand may be adversely impacted from any association, action or inaction which is perceived by stakeholders or customers to be inappropriate or unethical and not in keeping with the group’s stated purpose and values. This reputation risk may arise in many different ways, including:

 

   

failure to act in good faith and in accordance with the group’s values and code of conduct;

 

   

failure (real or perceived) to comply with the law or regulation, or association (real or implied) with illegal activity;

 

   

failures in corporate governance, management or technical systems;

 

   

failure to comply with internal standards and policies;

 

   

association with controversial sectors or clients;

 

   

association with controversial transactions, projects, countries or governments;

 

   

association with controversial business decisions, including but not restricted to, decisions relating to: products (in particular new products), delivery channels, promotions/advertising, acquisitions, branch representation, sourcing/supply chain relationships, staff locations, treatment of financial transactions; and

 

   

association with poor employment practices.

 

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Our MFS and digital financial services (“DFS”) offerings are complex and increase our exposure to fraud, money laundering and reputational risk.

The provision of MFS and DFS, included as part of our new VEON personal internet platform, is complex and involves regulatory and compliance requirements. It may involve cash handling, exposing us to risk of fraud and money laundering and potential reputational damage if these were to occur. Any violation of anti-money laundering laws or regulations on our MFS or DFS networks could have a material adverse effect on our financial condition and results of operation.

In addition, MFS and DFS each requires us to process sensitive personal consumer data (including, in certain instances, consumer names, addresses, credit and debit card numbers and bank account details) as part of our business, and therefore we must comply with strict data protection and privacy laws. For risks associated with possible unauthorized disclosure of such personal data, please see “—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, or the perception of such attacks or failures, leading to the loss of integrity and availability of our telecommunications, digital and financial services and/or leaks of confidential information, including customer information.”

Our MFS and DFS business requires us to maintain a certain level of systems availability, and failure to maintain agreed levels of service availability or to reliably process our customers’ transactions due to performance issues, system interruptions or other failures could result in a loss of revenues, payment of contractual or consequential damages, reputational harm, additional operating expenses in order to remediate any failures, and exposure to other losses and liabilities.

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 program could result in employee dissatisfaction. For example, in February 2016, Banglalink Digital Communications Limited (“BDCL”) experienced labor disruptions in connection with the implementation of our announced performance transformation program. We may also experience strikes or other labor disputes or disruptions in connection with social unrest or political events. For a discussion of our employees represented by unions or collective bargaining agreements, please see “Item 6—D. Employees.” 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 or prospects.

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

Our subsidiary in Egypt, Global Telecom Holding (“GTH”), is a public company listed on the Egyptian Stock Exchange and is therefore subject to corresponding laws and regulations, including laws and regulations for the protection of minority shareholder rights. In February 2017, GTH completed a share buy-back for 10% of the total issued share capital of GTH, and on March 20, 2017, cancelled its global depositary receipt listing on the Main Market for Listed Securities of the London Stock Exchange. Upon ratification by the Egyptian Financial Supervisory Authority of the board minutes for the cancellation of the GDR program, our shareholding in GTH will increase to 57.7% from 51.9%. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—GTH Share Buy-Back and Cancellation of GDR Program.” 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

 

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

Adoption of new accounting standards could affect reported results and financial position.

Accounting standardization bodies and other authorities may change accounting regulations that govern the preparation and presentation of our financial statements. Those changes could have a significant impact on the way we account for certain operations and present our financial position and operating income. In some instances, a modified standard or a new requirement with retroactive nature may have to be implemented, which requires us to restate previous financial statements.

For details of the implementation of new standards and interpretations issued, see Notes 3 and 4 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. In particular, VEON Ltd. is required to adopt the new accounting standards IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, each effective from January 1, 2018, and IFRS 16 Leases, effective for the financial years from January 1, 2019. These changes could have a material impact on our financial statements. Such impact is under analysis as of the date of 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 or 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, 2016, over 87% of our customers in each of the jurisdictions in which we operate, which excludes the Italy Joint Venture, 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 or prospects.

 

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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. For example, the French operator Iliad is expected to launch in the Italian market in 2017 as a new mobile operator and as a beneficiary of the remedy package we agreed with the European Commission for the completion of the Italy Joint Venture. Each of the items discussed immediately below regarding increased competition could materially harm our business, financial condition, results of operations, cash flows or 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 (see “Item 4—Information on the Company—Description of Our Business—Mobile Business in Russia” and “Item 4—Information on the Company—Description of Our Business—Fixed-Line Business in Russia”) 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 markets where we are limited in the growth of our customer base, the continued growth in our business and results of operations will depend, in part, on our ability to extract greater revenue from our existing customers, including through the expansion of data services and the introduction of next generation technologies, which may prove difficult to accomplish;

 

   

as we expand the scope of our services, such as new networks and 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 OTT players) could significantly impact our future profitability;

 

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

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

We may be unable to develop additional sources of revenue in markets where the potential for additional growth of our customer base is limited.

The mobile markets in Russia, Algeria, Ukraine, Kazakhstan, Kyrgyzstan, Armenia, Georgia, Tajikistan and Italy have each reached mobile penetration rates exceeding 100.0%, according to Analysys Mason. Increasing competition, market saturation and technological development lead to the increased importance of data services in the Russian market and, to a lesser extent, the markets of other Commonwealth of Independent States (“CIS”) countries. 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 data and improve customer loyalty. If we fail to develop these additional sources of revenue, it could harm our business, financial condition, results of operations, cash flows or prospects.

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

The telecommunications industry is characterized by rapidly evolving technology, industry standards and service demands, which may vary by country or geographic region. Accordingly, our future success will depend on our ability to adapt to the changing technological landscape and the regulation of standards utilizing these technologies. It is possible that the technologies 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 developing 3G networks, 4G/LTE networks and networks beyond 4G/LTE in some 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, 4G/LTE or other 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, mobile penetration rates for 4G/LTE compatible devices may not currently support the cost of 4G/LTE development in certain markets, 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, or the perception of such attacks or failures, leading to the loss of integrity and availability of our telecommunications, digital and financial 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

 

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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, unauthorized dissemination and loss of confidentiality. 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.

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.

If our services are affected by such attacks and this degrades our services, our products and services may be perceived as being vulnerable to cyber risk and the integrity of our data protection systems may be questioned. As a result, users and customers may curtail or stop using our products and services, and we may incur legal and financial exposure.

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. See “Exhibit 99.2—Regulation of Telecommunications—Regulation of Telecommunications in Russia—Data Protection.” In general, mobile 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,

 

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individually or in the aggregate, could harm our brand, business, financial condition, results of operations or prospects.

We may have to expend significant resources to protect against security breaches.

Regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection, including measures to ensure that our encryption of users’ data does not hinder law enforcement agencies’ access to that data. In addition, the interpretation and application of consumer and data protection laws in the United States, the European Union and elsewhere are often uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on our business and results of operations. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

Our ability to profitably provide telecommunications services depends in part on the commercial terms of our interconnection agreements.

Our ability to secure and maintain interconnection 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 or prospects. See “Item 4—Information on the Company—Interconnection Agreements.”

Our existing equipment and systems may be subject to disruption and failure for various reasons, including the threat of terrorism, 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. Our technological infrastructure is vulnerable to damage or disruptions from other events, including natural disasters, military conflicts, power outages, terrorist acts, government shutdown orders, changes in government regulation, equipment or system failures, human error or intentional wrongdoings, such as breaches of our network or information technology security. We operate in countries which may have an increased threat of terrorism and a possible attack on, or near our premises, equipment or points of sale could result in causalities, property damage, business interruption, legal liability and/or damage to our brand or reputation.

In addition, our business 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 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 addition, the potential liabilities associated with these events could exceed the business interruption insurance we maintain.

 

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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 core number of suppliers, principally Ericsson, Huawei, Nokia Solutions and Networks, Cisco Systems and ZTE Corporation (“ZTE”) 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. For example, in March 2016, the U.S. Department of Commerce’s Bureau of Industry and Security imposed restrictions on exports and re-exports of U.S. products, software and technology to ZTE and three of its affiliates. These restrictions were lifted in March 2017, however, there can be no assurance that third parties suppliers will not be subject to similar programs in the future. Our business could be materially harmed if export and re-export restrictions impact our suppliers’ ability to procure products, technology, or software from the United States that is necessary for the production and timely and satisfactory delivery of the supplies and equipment that we source from these suppliers.

Also, we may outsource all or a portion of our networks in certain markets in which we operate such as Russia and Kazakhstan. The Italy Joint Venture also outsources a portion of its networks. See “Item 4—Information on the Company—Property, Plant and Equipment—Mobile Telecommunications Equipment and Operations—Site Procurement and Maintenance” and “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Disposal of Non-Core Assets and Network and Tower Sharing Agreements.” Furthermore, in June 2016, we entered into a US$1 billion long-term global software agreement with Ericsson to develop, implement and service over a seven year period, new software and cloud technologies across our customer-facing IT infrastructure. See “Item 4—Information on the Company—Property, Plant and Equipment—Information Technology.” 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 on a timely basis or at all or otherwise fulfill their obligations under our agreements with them.

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 or 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.

 

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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), “Mobilink” (now “Jazz” in Pakistan), “Djezzy” (Algeria), “banglalink” (Bangladesh), our historical business in Italy’s logo, (“WIND”) 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. See “—Legal and Regulatory Risks—New intellectual property laws or regulations may require us to invest substantial resources in compliance or may be unclear.”

We are in the process of registering the VEON name as a trademark in the jurisdictions in which we operate. As of the date of this Annual Report on Form 20-F, we have achieved registration of the VEON name in several jurisdictions and have applied for registration in several jurisdictions for which our application is still outstanding. The timeline and process required to obtain trademark registration can vary widely between jurisdictions. We have received third party objections to some of our applications and we are currently working to resolve these, but there can be no assurance that we will resolve them in a timely or satisfactory manner, or at all, which could affect our ability to roll out our VEON personal internet platform as anticipated.

As we continue our digital transformation, we will need to ensure that we have adequate legal rights to the ownership or use of necessary source code and other intellectual property rights associated with our systems, products and services. For example, our VEON personal internet platform is being developed using source code created in conjunction with third parties. We rely on a combination of contractual provisions and intellectual property law to protect our proprietary technology and software, access to and use of source code and other necessary intellectually property. There can be no assurance that our efforts to protect our intellectual property rights will be successful. Our failure to protect our ownership and use rights to our source code and other intellectual property, including as the result of disputes with our contractual counterparties, could have a material adverse effect on our results of operations and financial condition.

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 or prospects.

We depend on our senior management and highly skilled personnel, and, if we are unable to retain or motivate key personnel, hire qualified personnel, or implement our strategic goals or corporate culture through our personnel, we may not be able to maintain our competitive position or to implement our business strategy.

Our performance and ability to maintain our competitive position and to implement our business strategy is dependent to a large degree on our senior management team and on the talents and efforts of highly skilled personnel, including the local management teams of our subsidiaries. In the markets in which we operate, competition for qualified 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.

 

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In addition, our compensation schemes may not always be successful in attracting new qualified employees and retaining and motivating our existing employees. The loss of any key personnel or an inability to attract, train, retain and motivate qualified members of senior management or highly skilled personnel could have an adverse impact on our ability to compete and to implement new business models and could harm our business, financial condition, results of operations, cash flows or prospects. In addition, we might not succeed in instilling our corporate culture and values in new or existing employees, which could delay or hamper the implementation our strategic priorities.

Our continued success is also dependent on our personnel’s ability to adapt to rapidly changing environments and to perform in pace with our continuous innovations and industry developments. Although we devote significant attention to recruiting and training, there can be no assurance that our existing personnel will successfully be able to adapt to and support our strategic priorities.

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 market position (Ukraine, Kazakhstan, Tajikistan and Uzbekistan), a dominant market position (Russia and Armenia) or are considered a dominant company (Kyrgyzstan). Our operations in Pakistan and Algeria previously held significant market positions. In Pakistan, this designation has been suspended while the courts consider an appeal by PMCL. In Algeria, the regulator withdrew this designation in September 2016. For further information on our market designations, see “Exhibit 99.2—Regulation of Telecommunications.” As we expand certain areas of our business and provide new services, such as MFS, we may be subject to additional laws and regulations. Regulatory compliance may be costly and involve a significant expenditure of resources, thus negatively affecting our financial condition and results of operations.

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, Kyrgyzstan and Armenia) are considering the regulation of roaming prices, which could negatively impact our roaming margins.

Data privacy laws and regulations apply broadly to the collection, use, storage, disclosure and security of personal information that identifies or may be used to identify an individual, such as names and contact information. Many countries have additional laws that regulate the processing, retention and use of communications data (both content and meta-data). These laws and regulations are subject to frequent revisions and differing interpretations, and have generally become more stringent over time. Most of the jurisdictions where we operate have laws that restrict data transfers overseas unless criteria are met and/or are developing or implementing laws on data localization requiring data to be stored locally. These laws may restrict our flexibility to leverage our data and build new or consolidate existing technologies and may conflict with other laws we are subject to, exposing us to regulatory risk. For more information, see “Exhibit 99.2—Regulation of Telecommunications.” As a data controller headquartered in the Netherlands and offering services to customers worldwide, including within the European Union, we are subject to the European data protection regime. The Italy Joint Venture is also subject to this regime.

 

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In recent years, U.S. and European lawmakers and regulators have expressed concern over the retention and interception of telecommunications data. The European Commission proposed a draft of the new ePrivacy Regulation on January 10, 2017, which is targeted to apply from May 25, 2018. It will regulate the processing of electronic communications data carried out in connection with the provision and the use of publicly available electronic communications services to users in the European Union, regardless of whether the processing itself takes place in the European Union. The draft proposal regulates the retention and interception of communications data as well as the use of location and traffic data for value added services, imposes stricter requirements on electronic marketing, and changes to the requirements for use of tracking technologies like cookies. Unlike the current ePrivacy Directive, restrictions on the use of traffic and location data for value added services and the requirements on data retention and interception will likely apply to over-the-top service providers as well as traditional telecommunications service providers, which could broaden our exposure to data protection liability, restrict our ability to leverage our data and increase the costs of running our local companies. The draft also extends the strict opt-in marketing rules with limited exceptions to business to business communications, and significantly increases penalties.

The EU Data Protection Directive, as implemented into national laws by the EU member states, imposes strict obligations and restrictions on the processing of personal data. The new EU-wide General Data Protection Regulation (GDPR) will become effective on May 25, 2018 (alongside the ePrivacy Regulation), replacing the current EU data protection laws, and will implement more stringent operational requirements for processors and controllers of personal data. These rules affect services offered by our EU entities and may conflict with the laws and guidance in other markets in which we operate. We are also subject to evolving EU laws on data export, as we may transfer personal data from the European Union to other jurisdictions. This could limit our ability to use and share personal data or could cause us to incur costs or require us to change our business practices in a manner adverse to our business.

Any failure or perceived failure by us to comply with privacy or security laws, policies, legal obligations or industry standards may result in governmental enforcement actions and investigations, blockage of our services in the relevant market, fines and penalties (for example, of up to 20,000,000 Euros or up to 4% of the total worldwide annual turnover of the preceding financial year (whichever is higher) under the GDPR and draft ePrivacy Regulation), litigation and/or adverse publicity, which could have an adverse effect on our reputation and business. If the third parties we work with violate applicable laws, contractual obligations or suffer a security breach, such violations may also put us in breach of our obligations under privacy laws and regulations and/or could in turn have a material adverse effect on our business.

In some countries, we are required to obtain approval for offers and advertising campaigns, which can delay our marketing campaigns and require restructuring of 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. For further information, see “Exhibit 99.2—Regulation of Telecommunications.”

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 or prospects. For more information on the regulatory environment in which we operate, see “Exhibit 99.2—Regulation of Telecommunications.”

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

 

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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 and currently are one of the largest operators in Bangladesh, but hold a small amount of the frequency spectrum. 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 or 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 expect that the fees we pay for radio-frequency spectrum could substantially increase in some or all of the countries in which we operate, and any such increase could harm our business, financial condition, results of operations, cash flows or prospects.

We are subject to anti-corruption laws.

We are subject to a number of anti-corruption laws, including the FCPA in the United States and the anti-corruption provisions of the Dutch Criminal Code in the Netherlands. 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 or prospects. The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. The FCPA also requires public companies to maintain accurate books and records and devise a system of sufficient internal accounting controls. We regularly review and update our policies and procedures and internal controls designed to provide reasonable assurance that we, our employees, distributors and other intermediaries comply with the anti-corruption laws to which we are subject. However, there are inherent limitations to the effectiveness of any policies, procedures and internal controls, including the possibility of human error and the circumvention or overriding of the policies, procedures and internal controls. There can be no assurance that such policies or procedures or internal controls will work effectively at all times or protect us against liability under these or other laws for actions taken by our employees, distributors and other intermediaries with respect to our business or any businesses that we may acquire.

We operate in countries which pose elevated risks of corruption violations. If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities and/or officials (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could harm our business, financial condition, results of operations, cash flows or 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 or prospects.

Please see also “Risks Related to Our Business—We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA, the SEC Judgment and the Dutch Settlement Agreement, which may be significant,” “—We could be subject to criminal prosecution or civil sanction if we breach the DPA with the DOJ, the SEC Judgment or the Dutch Settlement Agreement, and we may face other potentially negative consequences relating to the investigations by, and agreements with,

 

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the DOJ, SEC and OM, including additional investigations and litigation” and “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes 25 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

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 subsidiary in Pakistan, to seek approval from the Pakistan Telecommunication Authority (“PTA”) 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 customer base through biometric verification, with the exception of SIM cards issued in the names of companies for use by employees. For our subsidiary in Pakistan, 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, the Mobilink brand (now Jazz) lost customers, retaining 87% of its subscriber base. In Bangladesh, the regulator initiated similar SIM re-verification requirements from December 16, 2015, which resulted in 3.8 million SIM cards being blocked by Banglalink and for which we may incur additional fees or which may require additional time and/or resources from management at VEON Ltd. and/or BDCL. Similar actions were recently introduced in Algeria, and we anticipate that they will be introduced in Ukraine in 2017. See “Exhibit 99.2—Regulation of Telecommunications.” 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. For more information about the effect of re-verification on our results of operations, see “Item 5—Operating and Financial Review and Prospects—Results of Operations.”

In addition, many jurisdictions in which we operate, including Federal Law No 374-FZ in Russia, 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, or the perception of such attacks or failures, leading to the loss of integrity and availability of our telecommunications, digital and financial services and/or leaks of confidential information, including customer information.”

In certain jurisdictions in which we operate, the relevant regulators set MTRs. If any such regulator set MTRs that are lower for us than the MTRs of our competitors, our interconnection costs may be higher and our interconnection revenues may be lower, relative to our competitors. In Algeria, for example, the MTRs set by the regulator are significantly lower for Optimum Telecom Algeria S.p.A. (“Optimum”) 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.”

 

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In addition, we are subject to certain sanctions and embargo laws and regulations of the United States, the United Nations, the 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 or 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.”

New intellectual property laws or regulations may require us to invest substantial resources in compliance or may be unclear.

Current and new intellectual property laws may affect the ability of companies, including us, to protect their innovations and defend against claims of patent infringement. The costs of compliance with these laws and regulations are high and are likely to increase in the future. Claims have been, or may be threatened and/or filed against us for intellectual property infringement based on the nature and content in our products and services, or content generated by our users.

We may be subject to legal liability associated with providing new online services or content as part of our strategic priorities.

We currently, and as part of our strategic priorities will continue to, host and provide a wide variety of services and products that enable users to conduct business, and engage in various online activities.

The law relating to the liability of providers of these online services and products for the activities of their users is still unsettled in some jurisdictions. Claims may be threatened or brought against us for defamation, negligence, breaches of contract, copyright or trademark infringement, unfair competition, tort, including personal injury, fraud, or other theories based on the nature and content of information that we use and store. In addition, we may be subject to domestic or international actions alleging that certain content we have generated or third-party content that we have made available within our services violates applicable law.

We also offer third-party products, services and content. We may be subject to claims concerning these products, services or content by virtue of our involvement in marketing, branding, broadcasting, or providing access to them, even if we do not ourselves host, operate, provide, or provide access to these products, services or content. Defense of any such actions could be costly and involve significant time and attention of our management and other resources, may result in monetary liabilities or penalties, and may require us to change our business in an adverse manner.

Recent anti-terror legislation passed in Russia could result in additional operating costs and may harm our business.

Federal Law No 374-FZ dated July 6, 2016 (“Federal Law No 374-FZ”) amending anti-terrorism legislation imposed certain obligations on communication providers, including, among others, the obligation to store information confirming the fact of receipt, transmission, delivery and/or processing of voice data, text messages, pictures, sounds, video or other communications (i.e., meta-data reflecting these communications) for a period of three years, as well as to store the contents of communications, including voice data, text messages, pictures, sounds, video or other communications for a period of up to six months (the latter requirement will come into force starting from July 1, 2018). In addition, in accordance with Federal Law No 374-FZ, communication

 

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providers are obliged to supply to the investigation and prosecution authorities the information about the users and any other information “which is necessary for these authorities to achieve their statutory goals,” and to provide to the investigation and prosecution authorities any information and codes necessary to decode the information. In addition, under local law, operators will be required to block services for users whose personal data does not correspond to the data registered and stored by operator. This may lead to administrative fines and could impact the effectiveness of our licenses.

Most of the provisions of Federal Law No 374-FZ entered into force on July 20, 2016. However, the practical effects of Federal Law No 374-FZ are still unclear, since subordinate legislation is yet to be adopted. The implementation and support of the legislation could result in substantial costs for the design and production of specialized equipment and tools, as no currently commercially available products satisfy the requirements imposed by the new law. These costs are currently expected to be borne by telecommunications companies, and, together with diversion of management’s attention and resources, could materially adversely affect our business and operations. We expect operators to compensate for losses through increased retail tariffs, which may, in turn, have a negative effect on demand for telecommunications services.

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 or prospects. For more information on our licenses and their related requirements, please see the sections of this Annual Report on Form 20-F entitled “Item 4—Information on the Company—Licenses.”

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. Some of our licenses will expire in the near term, including a license in Algeria that expired in 2016 and for which we are waiting for an official confirmation of renewal. See also, “Item 4—Information on the Company—Licenses.” 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 the 4G/LTE spectrum or more advanced spectrums) 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. 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.”

 

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It may not be possible for us to procure in a timely manner, or at all, the permissions and registrations required for our base stations.

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, or at all, 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 or prospects.

We are, and may in the future be, involved in disputes and litigation with regulators, competitors and third parties.

We are party to lawsuits and other legal, regulatory antitrust proceedings and commercial disputes, the final outcome of which is uncertain and there can be no assurance that we will not be a party to additional proceedings in the future. Litigation and regulatory proceedings are inherently unpredictable. For more information on these disputes, see “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes 25 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. An adverse outcome in, or any disposition 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 or 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, Algeria, Egypt, Pakistan, Bangladesh, Ukraine, Kazakhstan, Armenia, Georgia, Uzbekistan, Kyrgyzstan, Tajikistan and Italy. These claims have resulted, and future claims may result, in additional payments, including interest, fines and other 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 authorities. 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 and/or prosecution in connection with claims by tax inspectorates for prior tax years.

 

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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 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes 25 and 27 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.

On January 1, 2016, a new tax law became effective in Uzbekistan, 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%) and the tax per subscriber was increased by 100%, resulting in an increase in the statutory tax rate from 7.5% for the year ended December 31, 2015 to 50.0% for the year ended December 31, 2016 and an effective tax rate of 53.3% for the year ended December 31, 2016, which negatively impacted our results in Uzbekistan. In Bangladesh, supplementary duty has been increased due to additional subnational tax from 3% to 5% with effect from June 2016 and a 1% surcharge was implemented on mobile services from March 9, 2016. The minimum tax rate has also been increased in Bangladesh from 0.5% to 0.75% with effect from January 2015. In Algeria, a new finance law in 2017 increased VAT from 7% to 19% on data services and from 17% to 19% on voice services, and also increased taxes on recharges from 5% to 7%. 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.

Moreover, as a result of the 2016 U.S. election and ongoing activity in the U.S. Congress relating to tax reform proposals, there is in particular a heightened possibility of significant changes to U.S. federal tax laws, which could affect our limited operations in the United States.

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

 

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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 or 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 or 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. We have also been the subject of repeat complex and thematic tax audits in Kazakhstan, Tajikistan and Kyrgyzstan. For further information on tax audits, see “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings” and Notes 25 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Adverse decisions of tax authorities or changes in tax treaties, laws, rules or interpretations could have a material adverse effect on our business, results of operations, financial conditions or cash flows.

The tax laws and regulations in the Netherlands, our current resident state for tax purposes, may be subject to change and there may be changes in enforcement of tax law. Additionally, European and other tax laws and regulations are complex and subject to varying interpretations. We cannot be sure that our interpretations are accurate or that the responsible tax authority agrees with our views. If our tax positions are challenged by the tax authorities, we could incur additional tax liabilities, which could increase our costs of operations and have a material adverse effect on our business, financial condition or results of operations.

Within the Organisation for Economic Co-operation and Development (“OECD”) there is an initiative aimed at avoiding base erosion and profit shifting (“BEPS”) for tax purposes. This OECD BEPS project has resulted in further developments in other countries and in particular in the European Union. One of the developments is the agreement on the EU Anti-Tax Avoidance Directive (“ATAD”). All EU Member States must implement the minimum standards as set out in the ATAD. The implementation of these measures against tax avoidance in the legislation of the jurisdictions in which we do business could have a material adverse effect on us. For example, the implementation of the general interest limitation rule (Article 4 ATAD) could result in an increase of our tax liabilities as certain interest costs could no longer be deductible. Another development is the recently published proposal for a Council Directive on a Common Corporate Tax Base (“CCTB”) and the re-launch of the Common Consolidated Corporate Tax Base, first tabled in 2011. If enacted, these directives could also impact our tax position, either positively or negatively. For instance, under the proposed CCTB, our taxable result realized in each of the EU Member States will be calculated on the same basis in each of these EU Member States, irrespective of whether the national corporate income tax system differs from the CCTB (noting that Member States can opt to continue to have their own corporate income tax rate). Based on the draft wording of the CCTB, the CCTB participation exemption regime would be less favorable in comparison to the Dutch regime because a minimum of a 10% shareholding would be required, as compared to the current 5% under the Dutch regime. On the other hand, the CCTB potentially introduces a notional interest deduction on equity, which the current Dutch rules do not make available. As a result, it is difficult to assess the impact of the enactment of these directives on our business.

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

For taxpayers like the Italy Joint Venture, 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

 

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amount of unused interest expense deduction may be carried forward to future years. Based on these rules, the Italy Joint Venture currently 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 may have an adverse impact on the deductibility of interest expenses for the Italy Joint Venture which, in turn, could harm our business, financial condition, results of operations or 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.

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;

 

   

adverse rulings by courts or government authorities resulting from a change in interpretation or inconsistent application of existing law;

 

   

significant additional costs and delays in implementing our global strategies and 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 or 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, Kazakhstan or other markets in which we operate. See “Exhibit 99.2—Regulation of Telecommunications.”

For example, in Russia, the Federal Law “On the Procedure for Foreign Investments in Business Entities of Strategic Importance for National Defense and State Security” (the “Russian Foreign Investment Law”), limits foreign investment in companies that are deemed to be strategic. Our subsidiary PJSC “Vimpel-Communications” (“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 Government Commission on Control of Foreign Investment in the Russian Federation pursuant to the Russian Foreign Investment Law. Additionally, under Russian law, companies controlled by foreign governments are prohibited absolutely from acquiring control over strategic enterprises, and the Government Commission on Control of Foreign Investment in the Russian Federation, or the Federal Antimonopoly Service of the Russian Federation, the “FAS”, which administers application of the Russian Foreign Investment Law, has challenged acquisitions of our shares in the past. In Kazakhstan, according to the national security law, a foreign company cannot directly or indirectly own more than a 49% stake in a fixed-line

 

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business operator without the consent of the Kazakhstani government. 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, which could materially harm our business, financial condition, results of operations, cash flows or prospects.

Furthermore the Federal Assembly, as the national legislature of the Russian Federation, is currently considering a draft bill which would introduce restrictions on the ability of foreign investors to control audiovisual service providers operating in Russia. In particular, foreign ownership would be restricted to 20%, subject to certain exemptions, including that the restrictions would not apply to audiovisual service providers that qualify as a strategic enterprise under the Russian Foreign Investment Law. It is not yet certain if this draft bill will be adopted and, if adopted, which specific restrictions on foreign investments could apply to the audiovisual industry and the company itself. If adopted, and depending on the final terms, the bill may affect our Pay-TV and VEON messenger projects by imposing additional costs and/or jeopardizing revenue projections.

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 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.

Low oil prices, together with the impact of economic sanctions—including those promulgated by the United States, which restrict certain financial transactions and dealings, even by non-U.S. persons, involving certain industries and parties in Russia—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 or 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 recorded for tangible and intangible assets lowering their book values could impact certain covenants under our debt agreements, which could result in a deterioration of our financial condition, results of

 

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operations or cash flows. For further information on the impairment of tangible and intangible assets and recoverable amounts (particularly key assumptions and sensitivities), 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 or 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 including the financial services, energy, and defense sectors, and (iii) territorial sanctions restricting investment in and trade with Crimea. The U.S. and EU sanctions target entities owned and/or controlled by designated entities and individuals. Further, under the U.S. sanctions regime, even non-U.S. persons who engage in certain prohibited transactions may be exposed to secondary sanctions, such as the denial of certain privileges, including financing and contracting with U.S. persons or within the United States. 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 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. Such 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 or 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. Our Ukrainian subsidiary, “Kyivstar” JSC, 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” JSC is obliged to provide services throughout Ukraine. “Kyivstar” JSC has notified the regulatory authorities that “Kyivstar” JSC 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 or 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.

 

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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 or 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.

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 or 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. Turnover of political leaders or parties in emerging markets as a result of a scheduled election upon the end of a term of service or in other circumstances may also affect the legal and regulatory regime in those markets to a great extent than turnover in established countries. 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 2016, 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. 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 or prospects.

Investors should fully appreciate the significance of the risks involved in investing in an emerging markets company and 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

 

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restrictions on foreign ownership of companies in the telecommunications industry or nationalization, expropriation or other seizure of certain assets or businesses. In most of the countries in which we operate, there is relatively little experience in enforcing legislation enacted to protect private property against nationalization or expropriation. As a result, we may not be able to obtain proper redress in the courts, and we may not receive adequate compensation if in the future the governments decide to nationalize or expropriate some or all of our assets. If this occurs, our business could be harmed.

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

The physical infrastructure in many countries in which we operate is in poor condition and further deterioration in the physical infrastructure could harm our business.

In many countries in which we operate, the physical infrastructure, including transportation networks, power generation and transmission and communications systems, is in poor condition. In some of the countries in which we operate, including Ukraine, the physical infrastructure has been damaged by military conflict. In some of the countries in which we operate, including Russia, the public switched telephone networks have reached capacity limits and need modernization, which may inconvenience our customers and will require us to make additional capital expenditures. In addition, continued growth in local, long distance and international traffic, including that generated by our customers, and development in the types of services provided may require substantial investment in public switched telephone networks. Any efforts to modernize infrastructure may result in increased charges and tariffs, potentially adding costs to our business. The deterioration of the physical infrastructure harms the economies of these countries, disrupts the transportation of goods and supplies, adds costs to doing business and can interrupt business operations. Further deterioration in the physical infrastructure in many of the countries in which we operate could harm our business, financial condition, results of operations, cash flows or 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. Uncertain banking laws may also limit our ability to attract future investment. 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, particularly in Uzbekistan, Ukraine, Bangladesh and Pakistan. For more information on currency restrictions, see “Item 5—Operating and Financial Review and Prospects—Certain Ongoing Factors Affecting Our Financial Position and Results of Operations—Foreign Currency Controls and Currency Restrictions.” Furthermore, local banks have limitations on the amounts of loans that they can provide to single borrowers, which could limit the availability of functional 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.

 

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Risks Related to the Ownership of our ADSs

Our ADS price may be volatile, and purchasers of ADSs could incur substantial losses.

Our ADS price may be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, holders of our ADSs may not be able to sell their ADSs at or above the price at which they purchase our ADSs. The market price for our ADSs may be influenced by many factors, including:

 

   

the success of competitive products or technologies;

 

   

regulatory developments in the foreign countries where we operate;

 

   

developments or disputes concerning licenses or other proprietary rights;

 

   

the recruitment or departure of key personnel;

 

   

quarterly or annual variations in our financial results or those of companies that are perceived to be similar to us;

 

   

market conditions in the industries in which we compete and issuance of new or changed securities analysts’ reports or recommendations;

 

   

the failure of securities analysts to cover our shares or changes in financial estimates by analysts;

 

   

investor perception of our company and of the industry in which we compete; and

 

   

general economic, political and market conditions.

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

Telenor East’s issuance of exchangeable bonds, and subsequent exchanges of the existing and any future exchangeable bonds for VEON Ltd.’s ADSs, as well as our filing of a registration statement registering resale of VEON Ltd.’s ADSs deliverable upon exchange of the exchangeable bonds and/or any additional divestures by Telenor may negatively affect the market for VEON Ltd.’s ADSs. The sale of any of the VEON Ltd.’s 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, VEON Ltd.’s ADSs.

Various factors may hinder the declaration and payment of dividends.

The payment of dividends is subject to the discretion of VEON Ltd.’s supervisory board and VEON Ltd.’s assets consist primarily of investments in its operating subsidiaries. For the financial year ended December 31, 2016, we intend to pay a dividend in the aggregate amount of US$23 cents per share, comprised of US$3.5 cents per share paid as an interim dividend in December 2016 and US$19.5 cents per share, with a record date of March 30, 2017 and which is intended to be paid on April 12, 2017. Various factors may cause the supervisory board to determine not to pay dividends or not to increase dividends from current levels. Such factors include VEON Ltd.’s financial condition, its earnings and equity free cash flow, its leverage, its capital requirements, contractual restrictions, legal proceedings and such other factors as VEON Ltd.’s supervisory board may consider relevant. For more information on our policy regarding dividends, see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—New dividend policy,” “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.8. Policy on Dividend Distributions,” “—Risks Related to Our Business—As a holding company, VEON Ltd. depends on the ability of its subsidiaries to pay dividends and therefore on the performance of its subsidiaries, and is affected by changes in exchange controls and currency restrictions in the countries in which its subsidiaries operate” and “—Risks Related to Our Business—Our strategic partnerships and relationships carry inherent business risks.”

 

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Holders of our ADSs may not receive distributions on our common shares or any value for them if it is illegal or impractical to make them available to them.

The depositary of our ADSs has agreed to pay holders of our ADSs the cash dividends or other distributions it or the custodian for our ADSs receives on our common shares or other deposited securities after deducting its fees and expenses. Holders of our ADSs will receive these distributions in proportion to the number of our common shares that their ADSs represent. However, the depositary is not responsible for making such payments or distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if such distribution consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs, common shares, rights or anything else to holders of our ADSs. This means that holders of our ADSs may not receive the distributions we make on our common shares or any value for them if it is illegal or impractical for us to make them available. These restrictions may materially reduce the value of the ADSs.

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

VEON Ltd. is a Bermuda exempted company. As a result, the rights of VEON Ltd.’s shareholders are governed by Bermuda law and by VEON Ltd.’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 VEON Ltd.’s bye-laws as registered holders of VEON Ltd.’s common 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 VEON 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.

As a foreign private issuer within the meaning of the Exchange Act and the rules of NASDAQ, we are subject to different U.S. securities laws and NASDAQ governance standards than domestic U.S. issuers. This may afford less protection to holders of our securities, and such holders may not receive corporate and company information and disclosure that they are accustomed to receiving or in a manner in which they are accustomed to receiving it.

As a foreign private issuer, the rules governing the information that we disclose differ from those governing U.S. corporations pursuant to the Exchange Act. Although we currently report periodic financial results and certain material events, we are not required to file quarterly reports on Form 10-Q or provide current reports on Form 8-K disclosing significant events within four business days of their occurrence. In addition, we are exempt from the SEC’s proxy rules, and proxy statements that we distribute will not be subject to review by the SEC. Our exemption from Section 16 rules regarding sales of our shares by insiders means that holders of our securities will have less data in this regard than shareholders of U.S. companies that are subject to this part of the Exchange Act. As a result, holders of our securities may not have all the data that you are accustomed to having when making investment decisions with respect to domestic U.S. public companies.

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

 

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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 with this NASDAQ requirement, and we do not have a majority of independent directors, as defined in the NASDAQ rules. Accordingly, VEON Ltd.’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 “Item 16G—Corporate Governance.”

Holders of ADSs may be restricted in their ability to exercise voting rights and the information provided with respect to shareholder meetings.

Holders of ADSs generally have the right under the deposit agreement to instruct the depositary to exercise the voting rights for the equity shares represented by such holder’s ADSs. At our request, the depositary will mail to holders any notice of shareholders’ meeting received from us together with information explaining how to instruct the depositary to exercise the voting rights of the common shares represented by ADSs. If the depositary timely receives voting instructions from a holder of ADSs, it will endeavor to vote the securities represented by the holder’s ADSs in accordance with such voting instructions. However, the ability of the depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the common shares on deposit. We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary in a timely manner.

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

We could cease to be a foreign private issuer if a majority of our outstanding voting securities are directly or indirectly held of record by U.S. residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Based on a review of our register of members maintained in Bermuda, as of March 15, 2017 100% of our issued common shares were held of record by BNY (Nominees) Limited in the United Kingdom, as agent of The Bank of New York Mellon, for the purposes of our ADS program. As of March 15, 2017, 23 record holders of VEON Ltd.’s ADRs, holding an aggregate of 353,454,732 common shares (20.12%), were listed as having addresses in the United States. The regulatory and compliance costs to us under U.S. securities laws under such event may be significantly higher than costs we incur as a foreign private issuer, which could have a material adverse effect on our business and financial results.

 

ITEM 4. Information on the Company

Overview

VimpelCom is rebranding to VEON and has changed its name to VEON, effective as of March 30, 2017. VEON is an international communications and technology company, headquartered in Amsterdam, and driven by a vision to unlock new opportunities for customers as they navigate the digital world. Present in some of the world’s most dynamic markets, VEON provides more than 200 million customers with voice, fixed broadband, data and digital services. VEON offers services to customers in 12 countries including Russia, Pakistan, Algeria, Uzbekistan, Ukraine, Bangladesh, Kazakhstan, Kyrgyzstan, Tajikistan, Armenia, Georgia and Laos. We provide services under the “Beeline,” “Kyivstar,” “banglalink,” “Jazz” and “Djezzy” brands. As of December 31, 2016, we had 207.5 million mobile customers and 41,994 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.”

The Italy Joint Venture offers services to customers in Italy. It provides services under the “WIND” and “3” brands and had 31.3 million customers and 9,356 employees as of December 31, 2016.

 

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Our rebranding to VEON seeks to reflect our aim to move from being considered solely a telecommunications company to being considered more broadly as a technology company. VEON is being used as the branding name for both the company and its new personal internet platform. Technology is continuing to revolutionize the way users communicate, travel, bank, shop, consume and are entertained. While other telecommunications companies have tried to respond to the digital challenge through acquiring technology companies, merging with media players or setting up incubators to host innovation, we have instead created our new VEON personal internet platform. It is built on the re-engineering of our legacy systems and data architecture, which will enable us to offer new, personalized and contextual services. We believe that it will ultimately eliminate or greatly reduce the comparatively inefficient bricks-and-mortar service model and replace it with a smooth, easy, fun, contextual and intuitive experience.

As part of our VEON rebranding, we aim to implement a digital vision and strategy, moving towards a technology company with an asset-light business model in comparison to the capital-intensive traditional telecommunications model. We aim to reduce our capital expenditure to revenue ratio and reduce our IT, capital expenditure and distribution costs. We have secured network sharing agreements and aim to reduce the assets on our balance sheet. In the future, we anticipate that we will own only the core assets needed to operate our business. For further information on our strategic disposal of assets see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Disposal of Non-Core Assets and Network and Tower Sharing Agreements.” We anticipate that we will invest approximately US$100 million per annum over the next five years as part of the rollout of our VEON brand, in the context of our group capital expenditure budget of over US$1.5 billion per year. For further information on our capital expenditures, please see “Item 5—Liquidity and Capital Resources—Further Liquidity and Capital Requirements.” We anticipate that we will finance the investments (or the VEON personal internet platform) with operational cash flow, cash on our balance sheet and external financing that we currently have in place.

The VEON personal internet platform integrates data analytics and artificial intelligence, with the aim of putting the user in control. With zero-rating as a fundamental component, as currently envisioned, VEON users will be able to use the VEON platform to stay connected for free, even when they are out of credit. We intend to work with music, transport, banking, e-commerce and other businesses, all of which will be integrated into a single personalized internet platform, VEON. We believe that these relationships, particularly those with local businesses in each of the countries in which we operate, will help grow those regional economies. We are also working through our technology landscape to deploy a fully digital end-to-end solution to benefit our customers. The digital stack and data management platform will be the core of our IT, while our network will become software defined, intelligent and dynamic. In addition, we have announced partnerships with STUDIO+, Deezer and MasterCard, which will integrate new services into the platform for VEON users.

VEON 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 VEON Group’s headquarters are located at Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands. Our telephone number is +31 20 797 7200. VEON Ltd. is registered with the Dutch Trade Register (registration number 34374835) as a company formally registered abroad (formeel buitenlandse kapitaalvennootschap), as this term is referred to in the Dutch Companies Formally Registered Abroad Act (Wet op de formeel buitenlandse vennootschappen), which means that we are deemed a Dutch resident company for tax purposes in accordance with applicable Dutch tax regulations.

Our legal representative in the United States is Puglisi & Associates, 850 Library Ave, Suite 204, Newark, DE 19711 (+1 (30) 738 6680). Our agent for service of process in the United States is CT Corporation, 11 Eighth Avenue, New York, NY 10011 (+1 (212) 894 8400).

History and Development

Our predecessor PJSC VimpelCom (formerly OJSC “Vimpel-Communications”) was founded in 1992. Since then, VEON has a rich history of adapting to shifts in the marketplace. Prior to 2014, VEON focused on

 

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development and expansion throughout Russia and the CIS, then into Asia, Europe and Africa through a combination of organic growth and acquisitions. More recently, VEON 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;

 

   

VEON 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, VEON 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, VEON Ltd. switched the listing of its ADSs to the NASDAQ Global Select Market from the New York Stock Exchange;

 

   

On January 30, 2015, VEON Ltd. completed the sale by its subsidiary GTH of a non-controlling 51% interest in Omnium Telecom Algérie (OTA) S.p.A. (“OTA”) to the Fonds National d’Investissement in Algeria;

 

   

In March 2015, WIND Telecomunicazioni S.p.A. (“WIND”) sold 90% of the shares of its wholly owned tower subsidiary, Galata S.p.A. (“Galata”) to Cellnex Telecom Terrestre SA, formerly named Abertis Telecom Terrestre SAU (“Cellnex”) and entered into tower services agreements with Galata; these agreements are now held by the Italy Joint Venture;

 

   

On July 1, 2016, Pakistan Mobile Communications Limited (“PMCL”) merged with Warid Telecom Pakistan LLC (“WTPL”) and Bank Alfalah Limited (“Bank Alfalah”), which resulted in the merger of our telecommunications businesses in Pakistan (a transaction we refer to as the “Pakistan Merger” in this Annual Report on Form 20-F);

 

   

In September 2016, Telenor East sold 163,875,000 of VEON Ltd.’s ADSs pursuant to an underwritten offering and also announced its intention to divest the remainder of its stake in VEON Ltd. In addition, Telenor East issued a US$1,000,000,000 0.25% bond due 2019, which is exchangeable for VEON Ltd.’s ADSs. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Telenor Share Sale and Exchangeable Bond Issuance;”

 

   

On November 5, 2016, we formed a joint venture holding company with Hutchison, through which we jointly own and operate our historical WIND and Hutchison’s historical 3 Italia telecommunications businesses in Italy. The companies were then merged in January 2017 (see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Italy Joint Venture” and Notes 6, 13 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F);

 

   

In February 2017, GTH completed a share buy-back for 10% of the total issued share capital of that company. In conjunction with the share buy-back, GTH cancelled listing of the global depositary

 

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receipts (“GDRs”) on the Official List of the Financial Conduct Authority and the trading of GDRs on the Main Market for Listed Securities of the London Stock Exchange on March 20, 2017. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—GTH Share Buy-Back and Cancellation of GDR Program;”

 

   

On February 27, 2017, we announced our new name “VEON,” which was approved by the shareholders on March 30, 2017; and

 

   

We expect to have a second listing of our common shares on Euronext Amsterdam, to broaden our European investor base, with potential inclusion in European indices and extended stock coverage. Such listing is expected to become effective in the second quarter of 2017.

Leadership

VEON has made changes in its management and board composition to focus on significant experience and expertise in compliance, transformation and digital.

During 2016 and 2017, as of the date of this Annual Report on Form 20-F, VEON made a number of strategic management appointments to lead the company in its next phase of development. New appointments included:

 

   

Kjell Morten Johnsen as Head of Major Markets and Chief Executive Officer of PJSC VimpelCom;

 

   

Mark MacGann as Group Chief External Affairs Officer; and

 

   

Joshua Drew as Acting Group Chief Compliance Officer.

The following people transitioned to new roles from existing positions within VEON:

 

   

Aamir Hafeez Ibrahim as Chief Executive Officer of Pakistan;

 

   

Jeffrey Hedberg as Group Chief People Officer;

 

   

Matthieu Galvani as Chief Executive Officer of Algeria; and

 

   

Enrique Aznar as Chief Values and Culture Transformation Officer.

In March 2017, Joshua Drew was appointed as Acting Group Chief Compliance Officer following the resignation of Daniel Chapman. He will report directly to Scott Dresser, Group General Counsel. Mr. Drew has been a key member of the legal team since July 2016, when he joined us from Hewlett-Packard Enterprise, where he spent over five years in global roles with responsibility for anti-corruption compliance and investigations. He is also a former federal prosecutor in the U.S., including time with the U.S. Department of Justice’s Fraud section, which has responsibility for FCPA enforcement. This appointment has been discussed with the Audit Committee (which oversees compliance with the DPA, the SEC Judgment and the Dutch Settlement Agreement), the independent compliance monitor, the DOJ and the SEC. We are currently in the process of appointing a permanent Group Chief Compliance Officer.

In addition, Stan Chudnovsky and Jørn P. Jensen joined the supervisory board, and Jørn Jensen replaced Trond Ø Westlie as chairman of the audit committee.

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

VEON 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 the three following business units, all of which report to our headquarters in Amsterdam:

 

   

Major Markets (Russia and the Italy Joint Venture);

 

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

 

   

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

Notwithstanding our new regional structure described above, we currently operate and manage VEON Ltd. on a geographical basis. In accordance with IFRS rules, this results in seven reportable segments. These segments are based on the different economic environments and varied stages of development across the geographical markets we serve, each of which requires different investment and marketing strategies.

Our reportable segments currently consist of the seven following segments:

 

   

Russia;

 

   

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

 

   

Algeria;

 

   

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

 

   

Ukraine;

 

   

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

 

   

HQ (transactions related to management activities within the group).

Italy is no longer a reportable segment following the completion of the Italy Joint Venture. For more information, please see Notes 6, 13 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F, “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Italy Joint Venture” and “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.”

We also provide customer numbers for “Others,” which includes all results of our operations in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos.

From January 1, 2015 through June 30, 2016, management organized our business in eight reportable segments consisting of our seven current reporting segments and Kazakhstan. In the second quarter of 2016, management decided to no longer include Kazakhstan as a separate reportable segment due to the decreasing impact of operations in Kazakhstan on the overall business. As a result, the activities in Kazakhstan have been integrated into our Others category in this Annual Report on Form 20-F. Our annual consolidated financial statements for the years ended December 31, 2015 and December 31, 2014 included in this Annual Report on Form 20-F have been restated for this organizational change.

 

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The table below sets forth our operating companies and significant subsidiaries, including those subsidiaries that hold our principal telecommunications licenses, and our percentage ownership interest, direct and indirect, in each subsidiary as of December 31, 2016. Unless otherwise indicated, our percentage ownership interest is identical to our voting power in each of the subsidiaries.

 

 

   Country
of Incorporation
   Percentage
Ownership
Interest
(Direct and
Indirect)
 

VimpelCom Amsterdam B.V.

   Netherlands      100.0

VimpelCom Holdings B.V.

   Netherlands      100.0 %(1) 

Wind Telecom S.p.A.

   Italy      100 %(2) 

PJSC “Vimpel-Communications” (“PJSC VimpelCom”)

   Russia      100.0 %(3) 

Golden Telecom Inc.

   Delaware      100 %(4) 

“Kyivstar” PJSC

   Ukraine      100.0 %(5) 

B.V. VimpelCom Finance S.à r.l.

   Netherlands/Luxembourg      100.0 %(6) 

VIP Kazakhstan Holding AG

   Switzerland      75.0 %(7) 

LLP “KaR-Tel”

   Kazakhstan      75.0 %(8) 

LLC “Tacom”

   Tajikistan      98.0 %(9) 

LLC “Unitel”

   Uzbekistan      100.0 %(10) 

LLC “Mobitel”

   Georgia      80.0 %(11) 

CJSC “Armenia Telephone Company”

   Armenia      100.0 %(12) 

Menacrest AG

   Switzerland      99.9 %(13) 

LLC “Sky Mobile”

   Kyrgyzstan      50.1 %(14) 

VimpelCom Lao Co. Ltd.

   Lao PDR      78.0 %(15) 

Weather Capital S.à r.l.

   Luxembourg      100.0 %(16) 

Weather Capital Special Purpose 1 S.A.

   Luxembourg      100.0 %(17) 

Global Telecom Holding S.A.E.

   Egypt      51.9 %(18) 

Oratel International Inc. Limited

   Malta      100.0 %(19) 

Moga Holding Limited

   Malta      100.0 %(20) 

Omnium Telecom Algérie (OTA) S.p.A.

   Algeria      23.7 %(21) 

Optimum Telecom Algeria S.p.A.

   Algeria      23.7 %(22) 

Pakistan Mobile Communications Limited

   Pakistan      44.0 %(23) 

Banglalink Digital Communications Limited

   Bangladesh      51.9 %(24) 

Wind Tre S.p.A.

   Italy      50.0 %(25) 

 

(1) VimpelCom Amsterdam B.V. holds 100% directly.
(2) VimpelCom Holdings B.V. holds 92.24% directly. Wind Telecom S.p.A. holds 7.76% of its own shares.
(3) VimpelCom Holdings B.V. holds 100% minus one share directly. VEON Ltd. holds one share directly.
(4) PJSC VimpelCom holds 100% directly and indirectly through a wholly owned Cypriot holding company and two Delaware holding companies.
(5) VEON Ltd. holds 0.01% directly and VimpelCom Holdings B.V. holds 73.80% directly. “Kyivstar” JSC holds 26.19% of its own shares.
(6) PJSC VimpelCom holds 100% directly.
(7) B.V. VimpelCom Finance S.à r.l. holds 75.0% directly.
(8) VIP Kazakhstan Holding AG holds 75.0% directly.
(9) VimpelCom Holdings B.V. holds 98.0% indirectly through a wholly owned Swiss holding company.
(10) PJSC VimpelCom holds 100% indirectly through wholly owned Dutch and BVI holding companies.
(11) VimpelCom Holdings B.V. holds 80.0% indirectly through a number of wholly owned companies.
(12) PJSC VimpelCom owns 100% directly.
(13) B.V. VimpelCom Finance S.à r.l. holds 50.1% indirectly through a Swiss holding company and a Cypriot holding company.
(14) Menacrest AG holds 100% directly.
(15) B.V. VimpelCom Finance S.à r.l. holds 78.0% indirectly through a wholly owned Dutch holding company. The local shareholder of VimpelCom Lao Co. Ltd. is the government of the Lao People’s Democratic Republic.
(16) VimpelCom Holdings B.V. holds 100% indirectly through a wholly owned Luxembourg holding company.
(17) Weather Capital S.à r.l. owns 100% directly.
(18) Weather Capital S.à r.l. holds 1.9% directly and Weather Capital Special Purpose 1 S.A. holds 50.00% directly.
(19) Global Telecom Holding S.A.E. owns 100% directly and indirectly through a Maltese holding company.
(20) Global Telecom Holding S.A.E. owns 100% directly and indirectly through a Maltese holding company.

 

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(21) Global Telecom Holding S.A.E. holds a controlling interest of 45.6% directly and indirectly through Oratel International Inc. Limited and Moga Holding Limited. The Algerian National Investment Fund, Fonds National d’Investissement, holds 51% directly in Omnium Telecom Algérie (OTA) S.p.A. and a local minority shareholder named Cevital S.p.A. holds directly the remaining 3.4%.
(22) Omnium Telecom Algeria S.p.A. holds 99.99% directly.
(23) As of July 1, 2016, Global Telecom Holding S.A.E. holds 84.7% of PMCL indirectly through two wholly owned Maltese subsidiaries and a nominee shareholder. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Pakistan Merger.”
(24) Global Telecom Holding S.A.E. holds 99.99% indirectly through a wholly owned Maltese subsidiary.
(25) VimpelCom Holdings B.V. owns 50.0% indirectly through two Luxembourg holding companies and one Italian holding company.

Description of Our Business

VEON, through its operating companies, provides customers with mobile and fixed-line telecommunications services in certain markets, which are described more fully below.

Our Mobile Telecommunications Businesses

The table below presents the primary mobile telecommunications services we offer to our customers and a breakdown of prepaid and postpaid subscriptions as of December 31, 2016.

 

Mobile Service Description

   Russia     Pakistan     Algeria     Bangladesh     Ukraine     Uzbekistan     Others  

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

              

—of which prepaid

     89.1     98.3     92.2     93.0     90.0     97.6     (4) 

—of which postpaid

     10.9     1.7 %(3)      7.8 %(3)      7.0     10.0     2.4     (4) 

Value added and call completion services(1)

     Yes       Yes       Yes       Yes       Yes       Yes       Yes (4) 

National and international roaming services(2)

     Yes       Yes       Yes       Yes       Yes       Yes       Yes  (4) 

Wireless Internet access

     Yes       Yes       Yes       Yes       Yes       Yes       Yes (4) 

Mobile financial services

     Yes       Yes       Yes       Yes       Yes       Yes       No  

Mobile bundles

     Yes       Yes       No       Yes       Yes       Yes       Yes (4) 

 

(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.
(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 Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Laos and Georgia, see “—Mobile Business in Others—Description of Mobile Services in Others.”

Mobile Business in Russia

Description—Mobile Business in Russia

In Russia, through our operating company PJSC VimpelCom and our “Beeline” brand, we primarily offer mobile telecommunications services to our customers under two types of payment plans: postpaid plans and prepaid plans. As of December 31, 2016, approximately 89.1% of our customers in Russia were on prepaid plans, representing 19% of our revenue in Russia, and approximately 10.9% of our customers in Russia were on postpaid plans, representing 81% of our revenue in Russia.

 

 

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The table below presents the primary mobile telecommunications services we offer in Russia.

 

Service

  

Description

Voice Services

   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.

Roaming

   As of December 31, 2016, we had active roaming agreements with 601 GSM networks in 214 countries in Europe, Asia, North America, South America, Australia and Africa. Additionally, we provided GPRS roaming with 486 networks, in 180 countries, and 4G/LTE roaming with 170 networks in 94 countries.
   Roaming agreements generally state that the host operator bills PJSC VimpelCom, which PJSC VimpelCom pays, and then PJSC VimpelCom subsequently bills customers for the roaming services on the customer’s monthly bill.

Basic VAS Package

   Caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting

Messaging Services

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

Content/infotainment services

   Voice services (including referral services); content downloadable to telephone (including music, pictures, games and video); RBT and SMS services (including information services such as news, weather, entertainment chats and friend finder)

Mobile financial services

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

Wireless Internet access

   Access is offered through GPRS/EDGE, 3G/HSPA and 4G/LTE
   Special wireless “Plug&Play” USB modems, which provide our customers with a convenient tool for internet access
   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)
   Windows Phone Store Billing (offering Windows Phone Store products and payment through a customer’s mobile account)
   Unstructured supplementary services data menu (a self-help and entertainment portal)
   DSTK portal (a self-help and entertainment portal)
   IVR portal (information and content services portal)

 

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Service

  

Description

   SMS services, Bee Number requests (information and content services provider)
   Mobile portal (browsing, entertainment and information services provider)
   SMS, voice and Unstructured Supplementary Service Data technology through which third party content is provided

M2M/IoT

   M2M refers to direct communication between devices using any communications channel, including wired and wireless. M2M communication can range from industrial instrumentation, enabling a sensor or meter to communicate the data it records (such as temperature, inventory level, etc.) to application software. Such communication was originally accomplished by having a remote network of machines relay information back to a central hub for analysis, which would then be rerouted into a system like a personal computer. More recent M2M communication has changed into a system of networks that transmits data to personal appliances. The expansion of IP networks around the world has made M2M communication quicker and easier while using less power. These networks also allow new business opportunities for consumers and suppliers.
   IoT is the internetworking of physical devices, vehicles (also referred to as “connected devices” and “smart devices”), buildings, and other items—embedded with electronics, software, sensors, actuators, and network connectivity that enable these objects to collect and exchange data.
   We offer a M2M Control Center solution for all M2M/IoT verticals based on the global Cisco Jasper cloud solution. The product consists of special M2M SIM-cards, API, and a multi-functional web-interface.

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 2016 and made significant progress, as the average number of spam SMS per month is below one, as of December 31, 2016.

Fixed Mobile Convergence

   Beeline Business offers FMC services to corporate clients providing use of their mobile phone as an extension of their 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.

 

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Service

  

Description

MVNO services

   MVNO is a wireless communications services provider that does not own the wireless network infrastructure over which the MVNO provides services to its customers. An MVNO enters into a business agreement with a mobile network operator to obtain bulk access to network services at wholesale rates, and then sets retail prices independently. An MVNO may use its own customer service, billing support systems, marketing, and sales personnel, or it could employ the services of a mobile virtual network enabler (MVNE).
   Since 2014, SIM TELECOM has sold our tariff plans for non-residents and expatriates in Russia under the SIM SIM brand. As part of the agreement, we acquired a 50.3% controlling interest in SIM TELECOM. SIM SIM is the first national MVNO within our network in Russia and it has launched new tariff plans and services (including translation, transportation and legal assistance services) for expatriates in Russia. In March 2016, we announced an agreement with SIM TELECOM to launch Russia’s first expatriate MVNO customer solution.

Mobile Bundles. Tiered data-plans provide smartphone customers with data, voice and SMS packages. In 2016, we focused on a new simplified tariff portfolio with competitive prices in combination with transparent services. In addition to Shared Data Services and Shared Everything Bundle Service, offering the option of multiple SIM cards for one account, in 2016 we launched the FMC proposal “All in one” for B2C prepaid subscribers combining FTTB internet and IPTV mobile services into one bundle.

Distribution.

Our primary sales channels in Russia consist of monobrand, multibrand and national partners. Monobrand channels constituted 18% of the channel mix as of December 31, 2016. The number of owned retail monobrand stores was 1,499 as of December 31, 2016, as compared to 1,455 owned retail monobrand stores as of December 31, 2015.

In the second quarter of 2016, we stopped the closure of certain franchise stores, which were due to close as a result of the difficult economic situation in Russia. In addition, a new franchise model was developed and launched. The “Plug&Play” franchise model represents a fully packaged solution, with a store opening process managed by PJSC VimpelCom.

As of December 31, 2016, the number of franchise stores was 2,069, compared to 2,044 as of December 31, 2015. As of December 31, 2016, we had 144 “Know How” stores, and 56 “Know How” stores in a new format of multibrand stores with regional dealers, compared to 117 “Know How” stores and 34 stores in a new format of multibrand stores as of December 31, 2015.

Additionally, in 2016, we reached an agreement with Svyaznoy, a national mobile retailer, focused on the distribution of complex products, such as tariff packages and fixed and mobile convergence. B2B agents were shifted to the B2C segment, creating a separate multibrand channel along with regional dealers and alternative retail. We also increased the number of regional dealers to manage this channel. Sales of tariff packages increased for all channels by 4%, reaching 11% in the sales mix.

We also reevaluated trade conditions in all channels in order to stimulate high quality sales in the B2C segment. Fixed salaries were shifted to trade commission arrangements, to motivate partners and salespeople through increased revenue-sharing. Additionally, we launched the “Need for sales 2.0” program, aimed at stimulating upsell (based on the value-based index).

 

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Specialized customer care.

The Beeline brand continued to enhance customer service to improve its NPS and reduce the number of calls to call centers in 2016. The NPS is an indicator that correlates loyalty and growth levels. We implemented “clever customer segmentation” for B2C mobile clients in call centers, which allowed us to focus on the main customer segments from a business and service perspective. In addition, we carried out a root cause analysis of the reasons for calls to our call centers, which helped us to implement more than 100 initiatives in all our businesses (B2C, B2B and FTTB and IPTV) with the aim of providing our clients with better service. Several incentives were taken to transfer requests of our customers from traditional voice channels to digitalized text channels. The successful mobile self-service application for iOS, Android and WindowsPhone, which allows customers to manage all charged Beeline services, has been downloaded over 10 million times and the monthly active base doubled during 2016, reaching over 3 million active customers per month, as of December 31, 2016. The launch of a chat function with a customer service agent in our mobile application tripled our requests received through chat, to 450, 000 requests per month as of December 2016. Further steps towards digitalization include pilots of Visual IVR, a platform that guides inbound smartphone callers to a web-based support experience, thus personalizing the support journey for customers already on their way to an operator at a call center, and Bots, a software robot that converses in natural language, provides necessary information and answers clients’ questions like a call center operator. Apart from these pilots, all products go through usability and user acceptance tests (“UAT”) during the “analysis-design” stage before launch, to address any design or IT changes, which ensures their quality, transparency and functionality.

The customer experience team is involved in designing customer journeys and product notifications within the Business Support System scope, which is expected to be launched in 2017. Customer care tools (such as “Voice of Customer,” which is currently gathering feedback from clients in various channels) are being used in order to develop the Beeline network by highlighting “white spots” (areas with considerable amount of complaints on network quality and where tower construction is in demand). All these measures helped to raise NPS in 2015 and 2016 and increase the gap between us and our nearest competitor in Russia.

Competition—Mobile Business in Russia

According to Analysys Mason, there were approximately 257 million mobile customers in Russia as of December 31, 2016, compared to 251.4 million mobile customers as of December 31, 2015, representing a mobile penetration rate of approximately 177.2%, an increase from 172.4% as of December 31, 2015.

The following table shows our and our primary mobile competitors’ respective customer numbers in Russia as of December 31, 2016:

 

Operator

   Customers
(in millions)
 

MTS

     79.6  

MegaFon

     75.6  

PJSC VimpelCom

     58.3  

Tele2

     41.4  

 

Source: Analysys Mason.

Mobile Business in Pakistan

Description—Mobile Services in Pakistan

Pakistan is mainly a 2G market; however, 3G is growing following its launch in 2014. We operate in Pakistan through our operating company, Pakistan Mobile Communications Limited (“PMCL”) and our brand, “Jazz,” which is the historic Mobilink brand together with the newly merged Warid brand. See “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Pakistan Merger.” In 2016, PMCL had launched 3G services in over 350 towns and cities and 4G/LTE services in 30 cities.

 

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In Pakistan, we offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2016, approximately 98.3% of our customers in Pakistan were on prepaid plans and approximately 1.7% of our customers in Pakistan were on postpaid plans.

The table below presents the primary mobile telecommunications services we offer in Pakistan.

 

Service

  

Description

Voice Services

   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

Basic VAS Package

   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 Chat

Data access services

   On GPRS, EDGE and 3G

RBT

   Customized ring back tones

Mobile Financial Services)

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

Roaming

   In Pakistan, as of December 31, 2016, we had active roaming agreements with 287 GSM networks in 150 countries, covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. Additionally, we provided GPRS roaming with 194 networks in 105 countries and CAMEL roaming through 61 networks in 42 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 Bundles. We offer bundled offers on 4G/LTE, 3G and 2G networks. In 2016, we focused on a technology agnostic mobile internet portfolio. Apart from pure internet bundles, we also provide hybrid bundles, which include voice and SMS and can be individually created according to customer needs.

Distribution. 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, 2016, our sales channels in Pakistan include eight company stores, 21 business centers, a direct sales force of 208 employees, 350 exclusive franchise stores, 230 contractual direct-selling representatives, and over 212,000

 

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non-exclusive third party retailers. For top-up, we offer prepaid scratch cards and electronic recharge options, which are distributed through the same channels. Jazz brand SIMs are sold through more than 30,000 retailers, supported by biometric verification devices.

Biometric verification. Following various terrorist attacks, the Government of Pakistan introduced Standard Operating Procedures (“SOP”) in 2015 requiring all mobile operators to re-verify their entire customer base through biometric verification, with the exception of SIM cards issued in the names of companies for use by employees. For our subsidiary in Pakistan, 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, the Mobilink brand (now Jazz) lost customers, retaining 87% of its subscriber base.

Competition—Mobile Business in Pakistan

The following table shows our and our competitors’ respective customer numbers in Pakistan as of December 31, 2016:

 

Operator

   Customers in
Pakistan

(in millions)
 

PMCL (“Jazz”) (Mobilink and Warid)

     51.6  

Telenor Pakistan

     39.5  

Zong

     26.9  

Ufone

     18.6  

 

Source: The Pakistan Telecommunication Authority for all companies except PMCL.

According to the PTA, there were approximately 136.5 million mobile customers in Pakistan as of December 31, 2016, compared to 125.9 million mobile customers as of December 31, 2015, representing a mobile teledensity of approximately 69.8%, an increase from 65.3% as of December 31, 2015.

Mobile Business in Algeria

Description—Mobile Business in Algeria

The mobile industry in Algeria has grown rapidly over the past ten years as a result of increased demand by individuals and newly-created private businesses and 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.

We operate in Algeria through our operating company, Optimum, and our brand, “Djezzy.” In October 2016, Optimum launched 4G/LTE services in Algeria and, by the end of 2016, had expanded these services to 20 provinces (out of 48 wilayas (provinces)) across the country, including Algiers, and the largest provinces in terms of population. In Algeria, we generally offer our customers mobile telecommunications services under prepaid and postpaid plans. As of December 31, 2016, prepaid, postpaid and hybrid (a monthly fee with recharge possibility) customers represented approximately 92.2%, 3.0% and 4.8%, respectively, of our customers in Algeria.

OTA is owned 45.6% by our subsidiary, GTH, and 51% in a non-controlling interest by the Algerian National Investment Fund. The establishment of this partnership in January 2015 strengthened OTA’s position and prospects, with greater opportunities for our operations in Algeria. VEON Ltd. will continue to exercise operational control over OTA and, as a result, will continue to fully consolidate OTA, which holds 99.99% of Optimum. During the course of 2016, the operating company in Algeria changed from OTA to Optimum. Historical references to our operating company in Algeria have therefore been retained as OTA throughout this Annual Report on Form 20-F.

 

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The table below presents the primary mobile telecommunications services we offer in Algeria.

 

Service

  

Description

Voice Services

   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

Roaming

   Total extranet retail roaming revenues generated abroad by outgoing voice calls and extranet roaming retail subscription fees for all services

Wireless internet

   Provided through GPRS, EDGE, 3G and 4G/LTE technology. Customers can use data services both as pay-per-use and through a bundle

Mobile financial services

   P2P credit transfer and credit loan

Basic VAS Package

   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, 3G and 4G/LTE

RBT

   Customized ring back tones

Distribution. We sell our mobile telecommunications services through indirect channels (distributors) and through our “Djezzy” branded shops, with a total own “Djezzy” shops and indirect points of sales of 2,098 as of December 31, 2016, of which 95 are monobrand own shops rented, equipped, staffed and managed by Optimum, including 1,102 shops equipped with IT material and sales applications. Our nine exclusive national distributors cover all 48 wilayas (provinces) of Algeria and are distributing our products through over 70,000 points of sale, of which 57,000 are authorized to sell airtime and 13,000 of which are authorized to sell SIMs. As of December 31, 2016, we also had a pool of more than 100 agents in call centers, who 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 Optimum 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 2016, Optimum 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.

Competition—Mobile Business in Algeria

The following table shows our and our competitors’ respective customer numbers in Algeria as of December 31, 2016:

 

Operator

   Customers in
Algeria
(in millions)
 

Optimum (“Djezzy”)

     16.3  

Mobilis

     15.5  

Ooredoo

     13.8  

 

Source: Analysys Mason.

 

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According to Analysys Mason, there were approximately 45.5 million mobile customers in Algeria as of December 31, 2016, compared to 44.4 million mobile customers as of December 31, 2015, representing a mobile penetration rate of approximately 110.8%, an increase from 110.1% as of December 31, 2015.

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 and 4G/LTE networks.

Mobile Business in Bangladesh

Description—Mobile Business in Bangladesh

Bangladesh is still primarily a 2G market; however, 3G is growing rapidly following the launch of 3G services in Bangladesh 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.

We operate through our operating company, Banglalink Digital Communications Limited and our brand “banglalink” in Bangladesh. Recent revenue growth is mainly driven by data, while voice revenue has started to decline in Bangladesh.

The telecommunications market in Bangladesh is largely comprised of prepaid customers. As of December 31, 2016, approximately 93.0% of our customers in Bangladesh were on prepaid plans and approximately 7.0% were on postpaid plans.

The table below presents the primary mobile telecommunications services we offer in Bangladesh.

 

Service

  

Description

Voice Services

   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

Basic VAS Package

   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

Content/chat/infotainment services

   News alert service, sports related content, job alerts, music streaming, mobile TV, content download, religious content and agricultural helpline

RBT

   Customized ring back tones

Wireless internet access

   Provided through GPRS, EDGE and 3G technology. Customers can use data services both as pay-per-use and through a bundle

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, 2016, BDCL had active roaming agreements with 445 GSM networks in 165 countries and provided GPRS roaming with 328 networks in 121 countries, in addition to maritime roaming and in-flight roaming

 

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Service

  

Description

   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.

Mobile financial services

   Provides convenient financial services like mobile-based utility bill payments, train ticketing, international remittance disbursements. Also, we partner with leading mobile financial service operators through providing Unstructured Supplementary Service Data and distribution network and Bangladesh Post Office to provide a mobile money order service

Distribution. As of December 31, 2016, our sales and distribution channels in Bangladesh included 10 company stores, a direct sales force of 76 enterprise sales managers and 88 zonal sales managers for mass market retail sales channels, 43 monobrand stores, 33,465 retail SIM outlets, 209,553 top-up selling outlets, online sales channels, and 600 banglalink brand service points. BDCL provides an i-top up service through mobile financial services. The banglalink brand provides customer support through its call center, which is open 24 hours a day and seven days a week. The banglalink brand also provides digital customer care support through the banglalink app and the “banglalink mela” Facebook page. 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. BDCL has established credit control and collection teams to improve invoice recovery rates.

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, in the case of purchase-sale models, and we offer banglalink branded internet through reverse-bundle model in device partners’ channels.

Competition—Mobile Business in Bangladesh

The following table shows our and our competitors’ respective customer numbers in Bangladesh as of December 31, 2016.

 

Operator

   Customers in
Bangladesh
(in millions)
 

Grameenphone

     58.0  

Robi

     33.8  

BDCL (“banglalink”)

     30.4  

Teletalk

     2.6  

 

Source: Analysys Mason.

The mobile telecommunications market in Bangladesh is highly competitive. The top three mobile operators, Grameenphone, BDCL (“banglalink”) and Robi, collectively held approximately 91.2% of the mobile market in Bangladesh as of October 31, 2016, according to the Bangladesh Telecommunications Regulatory Commission. According to Analysys Mason, as of December 31, 2016, there were approximately 124.8 million customers in Bangladesh, representing a mobile penetration rate of approximately 75.7% compared to 133.2 million customers and a mobile penetration rate of 82.0% in 2015.

 

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Mobile Business in Ukraine

Description—Mobile Business in Ukraine

We operate in Ukraine with our operating company “Kyivstar” JSC and our brand, “Kyivstar.” The Ukrainian mobile market operates on a 2G and 3G basis.

As of December 31, 2016, approximately 90.0% of our customers in Ukraine were on prepaid plans and approximately 10.0% of our customers in Ukraine were on postpaid plans.

The table below presents the primary mobile telecommunications services we offer in Ukraine.

 

Service

  

Description

Voice Services

   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

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 RBT

Mobile financial services

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

Internet access

   Access is offered through GPRS/EDGE and 3G

Roaming

   As of December 31, 2016, the “Kyivstar” brand provided voice roaming on 465 networks in 197 countries, GPRS roaming on 398 networks in 165 countries and 3G roaming on 173 networks in 89 countries.

Distribution. “Kyivstar” JSC’s strategy is to maintain a leadership position by using the following distribution channels: distributors (43% of all connections), local chains (17%), national chains (16%), monobrand stores (11%), direct sales (7%) and active sales (6%). In order to avoid possible price pressure from core distributors, one of our strategic priorities is to invest in our own monobrand stores. As of December 31, 2016, the number of owned retail monobrand stores was 393 as compared to 366 stores as of December 31, 2015.

Mobile Bundles. “Kyivstar” JSC offers bundles including combinations of voice, SMS and MMS, mobile data and OTT services.

Competition—Mobile Business in Ukraine

The following table shows our and our primary mobile competitors’ respective customer numbers in Ukraine as of December 31, 2016:

 

Operator

   Customers
(in millions)
 

“Kyivstar” JSC

     26.1  

MTS Ukraine

     20.9  

Lifecell

     9.2  

 

Source: Analysys Mason.

 

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“Kyivstar” JSC 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” JSC also competes with Lifecell, as well as with Trimob, a 100% affiliate company of Ukrtelecom to provide services under a 3G license, and with other small CDMA operators.

According to Analysys Mason, as of December 31, 2016, there were approximately 59.2 million customers in Ukraine, representing a mobile penetration rate of approximately 136.5% compared to 59.2 million customers and a mobile penetration rate of 138.3% in 2015.

Mobile Business in Uzbekistan

Description of Mobile Business in Uzbekistan

In Uzbekistan, we operate through our operating company, LLC “Unitel,” and our brand, “Beeline.” We offer our customers mobile telecommunications services under postpaid and prepaid plans. As of December 31, 2016, approximately 97.6% of our customers in Uzbekistan were on prepaid plans and approximately 2.4% of our customers in Uzbekistan were on postpaid plans.

The table below presents the primary mobile telecommunications services we offer in Uzbekistan.

 

Service

  

Description

Voice Services

   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

Basic VAS Package

   Caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting

Call Completion

   GSM service that is provided by Unitel in 2G and 3G networks throughout Uzbekistan. Call duration for one session is limited for 40 minutes.

Messaging Services

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

Content/chat/infotainment services

   Voice services (including referral services), content downloadable to telephone (including music, pictures, games and video), and RBT

Mobile financial services

   Mobile payment, banking card, trusted payment, our own payment system “Beepul,” mobile transfer

Internet access

   Access is offered through 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. Our 4G/LTE services were commercially launched in 2014. Unitel was the first Mobile Operator who has provided 4G/LTE services.

Roaming

   We have active roaming agreements covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. As of December 31, 2016, we had active roaming agreements with 489 GSM networks in 185 countries and provided GPRS roaming with 380 networks in 162 countries and CAMEL roaming through 237 networks in 108 countries. Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our customer while on the host’s network. We pay the host operator for the roaming services and bill the amount due for the provision of roaming services on our customer’s monthly bill.

 

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Mobile Bundles. We offer bundled tariff plans, which may differ by types or volume of traffic, duration (daily, weekly, and monthly), region or charge type. Currently, we provide data bundles consisting of different types of traffic volume, charge and duration and integrated bundles consisting of traditional voice with SMS and data traffic.

Distribution. In Uzbekistan, we offer a portfolio of tariffs and products for the prepaid system designed to cater to the needs of specific market segments, including mass-market customers, youth customers and high value contract customers. Further, we have the following four segments in our postpaid system: Large Accounts, Business to Government, SME and SOHO. We have own offices and monobrand own stores in an amount of 28 points of sale, exclusive stores in amount of 707 points of sale and multibrand stores in an amount of 1,348 points of sales.

Competition—Mobile Business in Uzbekistan

The following table shows our and our primary mobile competitors’ respective customers in Uzbekistan as of December 31, 2016:

 

Operator

   Customers
(in millions)
 

LLC “Unitel”

     9.5  

Ucell

     9.1  

UMS

     1.6  

UzMobile

     0.7  

Perfectum

     0.3  

 

Source: Analysys Mason.

According to Analysys Mason, as of December 31, 2016, there were approximately 21.2 million mobile customers in Uzbekistan, representing a mobile penetration rate of approximately 66.5% compared to 20.6 million customers and a mobile penetration rate of 65.4% in 2015. The relatively low mobile penetration rate is primarily caused by the single-SIM profile of most Uzbek mobile subscribers.

Mobile Business in Others

Description of Mobile Services in Others

In the countries in Others, we generally offer our customers mobile telecommunications services under prepaid and postpaid plans. As of December 31, 2016, we had the following percentages of prepaid and postpaid customers:

 

Payment Plan

   Kazakhstan     Kyrgyzstan     Armenia     Tajikistan     Georgia     Laos  

Prepaid

     95.9     96.5     87.9     99.9     99.7     97.0

Postpaid

     4.1     3.5     12.1     0.03     0.3     3.0

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

 

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Roaming. In the countries in Others, we have roaming arrangements with a number of other networks, which vary by country of our operation. The table below presents the material roaming agreements in each of the countries included in the Others category.

 

Country

  

Roaming Agreements (as of December 31, 2016)

Kazakhstan

   Voice roaming on 595 networks in 191 countries
   GPRS roaming on 470 networks in 162 countries
   CAMEL roaming on 282 networks in 108 countries

Kyrgyzstan

   Voice roaming on 423 networks in 128 countries
   GPRS roaming on 236 networks in 90 countries
   CAMEL roaming on 170 networks in 74 countries

Armenia

   Voice roaming on 421 networks in 174 countries
   GPRS roaming on 327 networks in 134 countries
   CAMEL roaming on 222 networks in 103 countries
   3G roaming on 278 networks in 122 countries
   4G/LTE roaming on 15 networks in 13 countries

Tajikistan

   3G roaming on 160 networks in 77 countries
   Voice roaming on 212 networks in 88 countries
   GPRS roaming on 192 networks in 83 countries
   CAMEL roaming on 119 networks in 64 countries

Georgia

   Voice roaming on 212 networks in 88 countries
   GPRS roaming on 170 networks in 79 countries
   CAMEL roaming on 120 networks in 60 countries

Laos

   Voice roaming on 410 networks in 138 countries
   GPRS roaming on 225 networks in 72 countries
   CAMEL roaming on 50 networks in 25 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.

Wireless Internet Services

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.

Distribution—Mobile Business in Others

We distribute our products in Others through owned monobranded stores, franchises and other distribution channels. As of December 31, 2016, we had 227 total stores (monobranded, franchised and other distribution channels such as modules, multibrand, direct-delivery and electronic stores) in Kazakhstan, 67 stores in Kyrgyzstan, 76 stores in Armenia, 57 stores in Tajikistan, 36 stores in Georgia and 5 stores in Laos.

 

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Competition—Mobile Business in Others

Kazakhstan

According to Analysys Mason, as of December 31, 2016, there were approximately 25.6 million customers in Kazakhstan, representing a mobile penetration rate of approximately 143.0%, compared to 25.9 million customers and a mobile penetration rate of approximately 147.1% in 2015. We held the second position in the market in 2016, according to Analysys Mason.

Kyrgyzstan

According to Analysys Mason, as of December 31, 2016, there were approximately 7.8 million customers in Kyrgyzstan, representing a mobile penetration rate of approximately 134.5%, compared to 7.6 million customers and a mobile penetration rate of approximately 132.7% in 2015. We held the second position in the market in 2016, according to Analysys Mason.

Armenia

According to Analysys Mason, as of December 31, 2016, there were approximately 3.6 million customers in Armenia, representing a mobile penetration rate of approximately 119.4%, compared to 3.6 million customers and a mobile penetration rate of approximately 120.0% in 2015. We held the second position in the market in 2016, according to Analysys Mason.

Tajikistan

According to Analysys Mason, as of December 31, 2016, there were approximately 9.8 million customers in Tajikistan, representing a mobile penetration rate of approximately 110.1%, compared to 10.5 million customers and a mobile penetration rate of approximately 120.5% in 2015. We held the fourth position in the market in 2016, according to Analysys Mason.

Georgia

According to Analysys Mason, as of December 31, 2016, there were approximately 5.4 million customers in Georgia, representing a mobile penetration rate of approximately 134.8%, compared to 5.4 million customers and a mobile penetration rate of approximately 136.1% in 2015. We held the third position in the market in 2016, according to Analysys Mason.

Laos

The Lao telecommunication market is strictly regulated by fixed price floors and limited promotion periods. The impact of these regulations has primarily been on VimpelCom Lao’s ability to offer customer-friendly priced services, such as promotions and discounts, in comparison to local competitors.

According to Analysys Mason, as of December 31, 2016, there were approximately 4.6 million customers in Laos, representing a mobile penetration rate of approximately 64.4%, compared to 4.7 million customers and a mobile penetration rate of approximately 66.4% in 2015. We held the fourth position in the market in 2016, according to Analysys Mason.

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

 

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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 Kazakhstan, the fixed-line business offers range of services for B2O, B2B and B2C segments.

In Pakistan, we offer internet and value added services (“VAS”) over a wide range of access media, covering major cities of Pakistan but we do not report customer numbers and other data on our fixed-line business in Pakistan, as we do with Russia, Ukraine and Uzbekistan, because the fixed-line business in Pakistan is not material to our overall business.

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

The table below presents the primary fixed-line telecommunications services we offer to our customers as of December 31, 2016.

 

Fixed-Line Service Description

   Russia      Pakistan      Ukraine      Uzbekistan      Other
Countries
 

Business and Corporate Services, providing a wide range of telecommunications and information technology and data center services to companies and high-end residential buildings

     Yes        Yes        Yes        Yes        Yes (1) 

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: (i) generating revenue by providing a specific range of telecommunications services to other mobile and fixed-line operators and ISPs in Russia and worldwide and (ii) 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

     Yes        Yes        Yes        No        No  

Consumer Internet Services, which provide fixed-line telephony, internet access and home phone services (on a VoIP and copper wire basis)

     Yes        Yes        No        Yes        Yes (1) 

Consumer Voice Offerings

     Yes        No        No        Yes        Yes (1) 

Corporate Voice Offerings, which provide fixed-line voice services, data services, VAS and connectivity services to corporate customers, including large corporate customers, SMEs and SOHOs

     Yes        Yes        Yes        Yes        Yes (1) 

Internet and Data Services, which provide internet and data transmission services to both consumer and corporate customers

     Yes        Yes        Yes        Yes        Yes (1) 

 

(1) For a description of the fixed-line services we offer in Armenia and Kazakhstan, see “Item 4—Information on the Company—Description of Our Business—Fixed-line Business in Others.”

 

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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, 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.

The table below presents the primary fixed-line telecommunications services we offer to our customers in Russia as of December 31, 2016.

 

Fixed-Line Services

  

Description

Local Access Services

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

International and Domestic Long Distance Services

   These services are offered via our Fixed Technological Network (FTN), which covers the entire territory of Russia and also includes eight international communications transit nodes across Russia.
   We provide International and Domestic Long Distance Services primarily through our FTN, proprietary and leased capacity between major Russian cities and through interconnection with zonal networks and incumbent networks. We also offer very small aperture terminal satellite services to customers located in remote areas.

Dedicated Internet and

Data Services

   We provide our business customers with dedicated access to the internet through our access and backbone networks. We also offer traditional and high-speed data communications services to business customers who require wide area networks (“WANs”) to link geographically dispersed computer networks.
   We also provide private line channels that can be used for both voice and data applications.

Leased Channels

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

Intellectual and Value Added

Services

   Our company offers an increasing range of value added services, including toll free (800) numbers, virtual PSTN number, SIP connection, data center services, such as co-location, web hosting, audio conference, domain registration and corporate mail services. We also offer access to a variety of financial information services, including access to the Society for Worldwide Interbank Financial Telecommunication (“S.W.I.F.T.”) and all Russian stock exchanges.

 

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Fixed-Line Services

  

Description

Fixed Corporate and Cloud Services

   We offer to our corporate customers IPTV services, certain Microsoft Office packages (including SaaS), web-videoconferencing services (based on Cisco WebEx and TelePresence technologies) and sale, rental and technical support for telecommunications equipment. Our company is the first 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. The portal will be extended with other cloud services of third parties and with 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. This product allows customers to access their systems from various locations.
   We offer and deploy managed Wi-Fi networks (indoor and outdoor) on a client’s site (office, restaurant, shops etc.) based on IEEE 802.11b/g/n/ac wireless technology. We can offer VAS services such as SSID customization, first page customization, filtering, forwarding to the predefined page, advertisement allocation, statistic offering, and 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, 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.

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.

 

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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.

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.

In 2016, we launched FMC product services in all branches in Russia. As of December 31, 2016 we had more than 500,000 FMC customers. FMC greatly increased MNP portations and decreased churn.

FTTB Operations

Currently the Beeline FTTB IPTV product is run in seven out of eight super-regions of Russia. We provide IPTV services in 135 cities in 35 regions of Russia, and as of December 31, 2016, we had more than 1.0 million IPTV customers.

Fixed-Line Residential Operations

xDSL Services. For xDSL services, we offer an unlimited tariff plan, and tariff plans that depend on connection speed.

Pay TV (cable TV) Services. We offer two tariff plans: “Social” for customers who need basic TV channels, which includes 10-15 TV channels, and “Commercial,” which includes 45-55 TV channels. As of December 31, 2016, we had more than 44,000 customers including both “Social” and “Commercial” customers.

Distribution—Fixed-Line Business in Russia

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.

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;

 

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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 voice services, our main competitors are the long distance carriers Rostelecom, TransTelecom and OJSC “Multiregional TransitTelecom.”

Residential and Fiber–To–The–Building (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, Avado, Err-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.

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.

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.

 

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

Fixed-line Business in Ukraine

Description of Fixed-line Services in Ukraine

Business Operations

We have constructed and own, as of December 31, 2016, a 43,822 kilometer fiber optic network, including 20,068 kilometers between cities, 14,848 kilometers inside cities, and 8,906 kilometers local FOL for FTTB, which is interconnected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine and to our gateway. We provide data and internet access services in almost all metropolitan cities in Ukraine.

Our fixed-line services include corporate internet access, VPN services, data center, contact center, fixed-line telephony and a number of VAS. Internet access services include connection to the internet via ADSL, symmetrical and Ethernet interfaces at speeds ranging from 256 kilobytes per second to 10 gigabytes per second. Fixed-line voice services are available in 30 major cities of Ukraine.

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.

Consumer 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, 2016, 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 40,070 residential buildings in 116 cities, providing over 55,066 access points.

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.

Wholesale Operations

For voice and data services, our main competitors are Datagroup, Ukrtelecom, and Farlep-Invest (Ucomline LLC).

Consumer Operations

Our residential marketing strategy is focused on attracting new customers. We offer several tariff plans, each one targeted at a different type of customer. During 2016, 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.

In November 2016, we launched FMC (Fixed Mobile Convergence—charging subscribers who use both mobile and fixed fiber connect from a single account) for an increasing range of mobile users in our fixed-line broadband internet base.

We also offer a wide range of FTTB services tariffs for fixed-line broadband internet access 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.

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, 2016, according to management’s estimates. 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 Operations

Our main competitors for provision of consumer internet services in Ukraine are Volia and Ukrtelecom. From December 31, 2015 to December 31, 2016, we increased the number of our broadband customers in Ukraine (excluding customers in the ATO zone) by 0.4% from 808,477 to 811,910.

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 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.

 

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

Residential and FTTB Operations

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

Distribution—Fixed-line Business in Uzbekistan

One of our priorities in Uzbekistan is the development of ICT, which supports economic development in Uzbekistan. Our strategy includes maintaining our current market position by retaining our large corporate client customer base.

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, TPS 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.

Fixed-line Business in Others

Description of Fixed-line Services in Others

We offer certain fixed-line services in Kazakhstan and Armenia.

Business Operations

Kazakhstan. We focus on customer experience for large enterprises through offering high-quality services. Our main business clients are concentrated in the financial and oil and 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 use the following technologies: fiber optic lines (more than 25,000 buildings are covered by our FTTB network), wireless technologies, satellite technologies, and the TV-Everywhere platform (which is provided through the vendor, Computer Telephony Integration).

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

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.

Residential and FTTB Operations

Kazakhstan. We offer the same fixed-line broadband and wireless internet services as in Russia. For more information, see “—Fixed-line Business in Russia.”

 

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We have launched new products for Beeline subscribers, including OTT TV, which is 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.

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 fourth quarter of 2015, we launched FMC services and currently offer FMC bundles to subscribers (for example, fixed internet plus mobile voice plus mobile data).

Distribution—Fixed-line Business in Others

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.

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.

Competition—Fixed-line Business in Others

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

Armenia. We offer a broad spectrum of fixed-line services to government, corporate and private customers. There are more than 10 active operators in Armenia. We believe that the largest operators are U!Com and Rostelecom.

Interconnection Agreements

Our mobile and fixed-line businesses are dependent on interconnection services, which are 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. In order to provide a local, domestic and international network, we have interconnection agreements in the markets in which we operate.

Russia. We have several interconnection agreements with mobile and fixed-line operators in Russia under which we provide traffic termination services. During 2016, we had the following MTRs in Russia: average cost per minute of national traffic 0.9413 RUB (approximately US$0.0155) and average price per minute of national traffic 0.9571 RUB (approximately US$0.0158), which was broadly stable as compared to the 2014 and 2015 historical periods.

Pakistan. 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. Our MTR in 2016 was PKR 0.90/min (US$0.00865), which was broadly stable as compared to the 2014 and 2015 historical periods.

 

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Algeria. We have several interconnection agreements with mobile, VoIP and fixed-line operators in Algeria under which we provide traffic termination services. In 2016, we had MTRs of 1 DZD ex-VAT/min (US$0.01) for voice termination and 2 DZD ex-VAT/SMS (US$0.02) for SMS termination. The national incoming interconnect rate increased for the year ended December 31, 2016 as compared to the year ended December 31, 2015, while the outgoing interconnect rate decreased over the same period. The movements in the historical MTRs for 2015 and 2014 have been favorable to our business, however, asymmetry continued to exist between OTA and other operators.

Bangladesh. We have several interconnection agreements with ICX, IGW, mobile operators, IPTSP and fixed-line operators in Bangladesh under which we provide traffic termination services. Our MTR in 2016 was BDT 0.22/min (US$0.003), which was broadly stable as compared to the 2014 and 2015 historical periods.

Ukraine. We have several interconnection agreements with mobile and fixed-line operators in Ukraine under which we provide traffic termination services. The following rates were effective in 2016 for termination of national traffic to a (regulated), which were broadly stable as compared to the 2014 and 2015 historical periods:

 

   

mobile network: 0.23 UAH/min (US$0.0085)

 

   

fixed network on intercity level: 0.23 UAH/min (US$0.0085)

 

   

fixed network on local level: 0.11 UAH/min (US$0.0040)

 

   

fixed network on city level: 0.02 UAH/min (US$0.0007)

Uzbekistan. We have several interconnection agreements with mobile and fixed-line operators in Uzbekistan under which we provide traffic termination services. The MTR for the 90% state owned mobile operator Uzbektelecom JSC Perfectum Mobile was 0.05 sums (local Uzbek currency, US$0.0000154) in 2016, which was broadly stable as compared to the 2014 and 2015 historical periods.

Others. We have several agreements with mobile and fixed-line operators in each of the countries in our Others category under which we provide traffic termination services.

Licenses

We hold the following licenses in each of the countries in which we operate for mobile and fixed-line services. For a description of the risks associated with our licenses, please see “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 “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—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.”

Mobile Telecommunications Licenses in Russia

GSM Licenses

PJSC VimpelCom holds super-regional GSM licenses (GSM900, GSM1800, GSM900/1800 and 4G/LTE 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.

 

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PJSC VimpelCom does not currently hold a GSM super-regional license for the Far East super-region of Russia, but it holds GSM licenses in a number of regions of the Far East super-region. These licenses expire on various dates between 2019 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, PJSC VimpelCom holds 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. PJSC VimpelCom has extended its license, which was due to expire in May 2017, until May 2022.

LTE 2600 Licenses:

PJSC VimpelCom holds 4G/LTE 2600 licenses in 32 subjects of Russia. The licenses expire on April 15, 2026 and we plan to apply for renewal of these licenses prior to their expiration.

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.

Mobile Telecommunications Licenses in Pakistan

2G License

PMCL was awarded a 15-year 2G license in 1992. In 2007, PMCL renewed its 2G license for a further term of 15 years. As of December 31, 2016, PMCL had a balance of US$43.65 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. This 2G license does not entitle PMCL to provide services in AJK and GB.

3G License

In 2014, following a competitive auction process, PMCL 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 PMCL acquired the license. This 3G license does not entitle PMCL to provide services in AJK and GB. In 2006, PMCL was awarded a 15-year license to provide mobile telecommunications services in AJK and GB.

Further, Warid acquired a 15 year technology neutral license in 2004 for US$291 million. US$145.5 million was paid upfront while the rest was to be paid in ten equal annual installments starting with a four year grace period.

 

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In addition, PMCL and its subsidiaries have other licenses, including 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, in a total amount equal to a percentage of the licensees’ annual gross revenues (less certain allowed deductions) for such services.

License fees

Under the terms of its 2G and 3G licenses, as well as its license for services in AJK and GB, PMCL 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 PMCL’s annual gross revenues (less certain allowed deductions) for such services, supplemental to spectrum administrative fees.

PMCL’s total license fees (annual license fees plus revenue sharing) in Pakistan (excluding the yearly installments noted above) were US$27.1 million, US$21.1 million and US$20.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. PMCL’s total spectrum administrative fee payments in Pakistan were US$1.0 million for each of the years ended December 31, 2016, 2015 and 2014.

Mobile Telecommunications Licenses in Algeria

2G License

In 2001, OTA was awarded a 15-year license to operate a 2G telecommunications network for an aggregate fee of approximately US$737 million. The license expired in 2016; however, renewal is automatic if the holder has satisfied all of the obligations under the license, which we have. The Autorité de Régulation de la Poste et des Télécommunications (“ARPT”) must provide the holder with a notice of non-renewal six months prior to the expiry of the license if it will not be renewed. We have not received such notice. The renewal has not been made official because the Ministry of Post, Information Technology and Communications (“MPTIC”) is currently reviewing the GSM license terms and will publish a decree renewing the license. We anticipate that the decree will not be published before the fourth quarter of 2017 and that the license will be issued on the same economic terms.

VSAT License

In 2003, OTA acquired a VSAT data-voice license for an aggregate fee of US$2.05 million and renewed the license in 2014 for an additional period of five years, at no additional cost.

3G License

In 2013, OTA was awarded a 15-year license to operate a 3G telecommunications network for an aggregate fee of approximately US$38 million, which was paid in full in 2013. Under the terms of its 3G license, OTA is required to pay an additional annual revenue sharing fee of 1% based on 3G revenues less interconnection costs.

4G/LTE License

In 2016, Optimum was awarded a 15-year license to operate a 4G/LTE telecommunications network for an aggregate fee of US$36 million (based on then-current exchange rates), which was paid in full in 2016. Under the terms of its 4G/LTE license, Optimum is required to pay an additional annual revenue sharing fee of 1% based on 4G/LTE revenues less interconnection costs.

License fees

Under the terms of its 2G, 3G, 4G/LTE and VSAT licenses, OTA is required to pay revenue sharing allocations to the Algerian government and contributions for:

 

   

The universal service fund (3% of revenues less interconnection costs);

 

   

Management of the numbering plan (0.2% of revenues less interconnection costs); and

 

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Research, training and standardization (0.3% of revenues less interconnection costs).

OTA’s total license fees (spectrum charges plus revenue sharing) in Algeria were US$62.1 million, US$64.3 million and US$85.4 million for the years ended December 31, 2016, 2015 and 2014, respectively, of which US$25.9 million, US$29.2 million and US$30.9 million was related to spectrum charges, and US$36.2 million, US$35.1 million and US$54.5 million was related to revenue sharing, respectively, over the same periods.

Mobile Telecommunications Licenses in Bangladesh

2G License

In November 1996, BDCL 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.

3G License

In September 19, 2013, following a competitive auction process, BDCL was awarded a 15-year license to use 5 MHz of 3G spectrum, 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.

License fees

Under the terms of its 2G and 3G mobile licenses, BDCL is required to pay to the Bangladesh Telecommunication Regulatory Commission (“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 BDCL’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.

BDCL’s total license fees (annual license fees plus revenue sharing) in Bangladesh were equivalent to US$41.68 million, US$40.6 million and US$37.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.

In addition to license fees, BDCL pays annual spectrum charges to the BTRC, calculated according to the size of BDCL’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. BDCL’s annual spectrum charges were equivalent to US$9.8 million, US$9.9 million and US$9.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Mobile Telecommunications Licenses in Ukraine

GSM Licenses

In Ukraine, “Kyivstar” JSC holds GSM900 and GSM1800 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.

3G Licenses

On February 25, 2015, after an auction process, “Kyivstar” JSC was awarded one of three licenses to provide nationwide 3G services in the 2100 MHz band. The license was issued on April 1, 2015 and is valid for a period of 15 years (until April 1, 2030).

 

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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” JSC is not able to use and control its network).

Mobile Telecommunications Licenses in Uzbekistan

GSM900/1800, 3G and 4G/LTE

We hold a national license for GSM900/1800, 3G and 4G/LTE covering the entire territory of Uzbekistan. The most recent license was an extension granted in May 2016 for 15 years, is effective until August 7, 2031 and requires annual license fee payments.

Unitel LLC also has international communication services license valid until 2026 and for data transfer valid until 2019.

Mobile Telecommunications Licenses in the countries in Others

 

Country

  

Licenses (as of December 31, 2016)

  

License Expiration

Kazakhstan

   License to provide mobile services (GSM900/1800, UMTS/WCDMA2100, 4G/LTE800/1800)    Unlimited

Kyrgyzstan

  

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

796-801MHz/83-842MHz

   September 28, 2025
   National license to use radio spectrum of 800 MHz for the entire territory of Kyrgyzstan (technology neutral) 791-796MHz/832-837MHz    December 27, 2026
   National license to use radio spectrum of 900 MHz, 1800 MHz and 2100 MHz for the entire territory of Kyrgyzstan (technology neutral)   

October 30, 2019

   National license for electric communication service activity   

Unlimited term

   National license for base station transmission   

December 3, 2019

   National license for services on data traffic   

Unlimited term

Armenia

   Network operation license for the entire territory of Armenia    March 3, 2028
   National licenses to use radio spectrum of 900 MHz, 1800 MHz    March 3, 2023

 

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Country

  

Licenses (as of December 31, 2016)

  

License Expiration

   and 2100 MHz for the entire territory of Armenia (technology neutral)   

Tajikistan

   GSM900/1800 license, 3G license and data services license (with permission to use of 800 MHz frequency for 4G/LTE services) for the entire territory of Tajikistan, International call services license    May 12, 2019; July 13, 2020; and December 9, 2020, August 11, 2021 respectively

Georgia

   GSM1800 10 MHz frequency licenses    February 1, 2030
   GSM900 5.49 MHz frequency licenses    February 1, 2030
   LTE 800 10 MHz frequency licenses    February 1, 2030
   10 MHz 3G frequency license    December 29, 2031

Laos

   2G, 3G, WLL, ISP licenses for the entire territory of Laos    January 23, 2022 (2G and WLL); annual renewal (3G and ISP)

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, includes FMC), Local Communications Services using multiple access facilities (includes FMC), Leased Communications Circuits Services, Voice Communications Services in Data Transmission Networks (includes FMC), Telematic Services (includes FMC), Intra-zonal Communications Services, Data Transmission Services and Communications Services for the Purposes of Cable Broadcasting (includes FMC) in the main cities of Moscow, St. Petersburg, Ekaterinburg, Nizhny Novgorod, Khabarovsk, Novosibirsk, Rostov-on-Don and Krasnodar. These licenses will expire between October 4, 2017 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 2017:

 

   

Leased Communications Circuits Services in St. Petersburg (October 4, 2017); and

 

   

Data Transmission Services licenses in St. Petersburg, Nizhny Novgorod, Novosibirsk, Rostov-on-Don and Krasnodar (August 01, 2017).

We have filed, or will file, applications for renewal for all of our licenses that expire in 2017.

 

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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

Licenses for Fixed-line Business in Uzbekistan

We have a fixed-line license valid until 2021, a data license valid until 2021 and long distance licenses which are valid until 2029. These licenses require the payment of annual fees and cover services including local, long distance and international communications, data transmission and internet.

Licenses for Fixed-line Business in Others

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.

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 a 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.

Description of Operations of the Italy Joint Venture

As of November 5, 2016, VEON Ltd. owns a 50.0% share of the Italy Joint Venture. We account for the Italy Joint Venture using the equity method. We do not control the Italy Joint Venture. All information related to the Italy Joint Venture is the sole responsibility of the Italy Joint Venture’s management, and no information contained herein, including, but not limited to, the Italy Joint Venture’s financial and industry data, market projections and strategy, has been prepared by or on behalf of, or approved by, our management. VEON Ltd. is not making, and has not made, any written or oral representation or warranty, express or implied, of any nature whatsoever, with respect to any Italy Joint Venture information included in this Annual Report on Form 20-F, other than the financial information that is derived directly from our financial statements. For further information on the Italy Joint Venture and its accounting treatment, see “Item 5—Operating and Financial Review and Prospects—Key Developments and Trends—Italy Joint Venture” “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new 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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Mobile Business in Italy

Mobile Telecommunications Services

The Italy Joint Venture primarily offers mobile telecommunications services under two types of payment plans: postpaid and prepaid, and markets its mobile, internet, fixed-line voice and data offerings by employing a multibrand strategy for the “WIND” and “3” brands in their respective markets.

 

Service

  

Description

Consumer Voice Offerings

   The Italy Joint Venture’s consumer voice offerings are tailored to specific market segments, with a variety of option plans, extra telecommunications services and smart devices solutions.
   WIND customers can choose between tied postpaid (Fiscal Code or professional with VAT) and untied prepaid portfolios, according to their needs and willingness to pay. The postpaid offer is mainly focused on the Magnum Portfolio for Fiscal Code, with bundles of unlimited minutes/SMS and gigabyte allowances based on customer needs. For professional customers with VAT, WIND offers the all-inclusive portfolio, with differentiation by minutes, SMS and gigabytes. Postpaid customers can also rely on discounts by acquiring the latest devices (smartphones, tablets, etc.) through installment payments.
   For WIND, the untied range consists of three main pillars: all-inclusive with minutes, SMS and gigabytes included within the same offer; Noi Tutti, which is only a voice solution, and mobile broadband plans for data-heavy users. Additional gigabytes for all-inclusive bundles specifically targeting young people (under 30 years old) are available. WIND provides data-friendly users with the opportunity to manage their own account via digital channels such as the web, mobile apps and social networks.
   Based on the market evolution on one hand and the increased focus on gigabytes on the other, WIND also fosters data consumption by providing customers with appealing and seasonal promotions (e.g. Giga Max limited edition, Ricarica Max). Moreover, WIND offers promotional activities throughout the year, with promotions to boost data usage as well as reward customers with unlimited on-net calls.
   “3” offers three tariff plans on a weekly basis from the all-in brand to untied prepaid and to tied prepaid (on a monthly payment basis by credit card or bank account with a discount) that include a set amount of call minutes, SMSs and gigabytes of mobile internet access for a fixed fee. Tied customers with an all-in discounted option can add a smartphone to their offer starting from 0€/month, with a wide selection of smartphone for every budget. On the high value smartphone segment, “3” brand offers, with free prepaid and postpaid tariff plans and “all-in bundles” the chance to change their smartphone with a new one every year. Based on the market evolution on one hand and the increased focus on gigabytes on the other, “3” also fosters data consumption by providing customers with appealing and seasonal promotions.

 

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Service

  

Description

Corporate Voice Offerings

   The Italy Joint Venture provides corporate voice services to large corporate customers, SMEs and SOHOs, through its corporate voice offerings. For large corporate customers, who often solicit tenders for their mobile telephone requirements on a competitive basis, the Italy Joint Venture offers customized services tailored to their specific requirements.
   For WIND SME clients, WIND offers a new mobile portfolio “Giga Smart Share,” which reinvents the value proposition with a disruptive product to address increasing needs in terms of data traffic, efficiency and flexibility. “Giga Smart Share” allows users to share the internet traffic in both multi-users and multi-device mode. Different data baskets and tariffs plans and additional options complete the portfolio.
   For WIND SOHO customers, WIND offers 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. WIND also offers a variety of add-on options to its standard corporate voice offerings. As interest in apps is growing, with the aim of bringing greater mobility to business processes, WIND 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.
   WIND and “3” offer SME and SOHO customers standardized products, such as all-inclusive tariff plans that offer customers a set amount of calling minutes, SMS and gigabytes of mobile internet access for a fixed monthly fee.
   During 2016, several commercial campaigns were carried for “3” business customers during which prepaid tariff plans Unlimited and Unlimited Plus without smartphones were promoted. Moreover, in February 2016, a new offer Ufficio 3 was launched and in April 2016, it was supported by the extended version of Ufficio 3 Plus. These two offers aim to satisfy the needs of professional and small office customers through a combined solution for voice/data mobile.

Data and Value Added Service Offerings.

   The Italy Joint Venture provides a variety of mobile data services and VAS for telephone and computer to its consumer and corporate customers. The Italy Joint Venture offers bundle options, suited for both prepaid and postpaid customers, which include minutes of voice traffic, SMS, and mobile internet browsing for a fixed fee.

Mobile Internet

   Mobile customers can connect their mobile phones to the internet using GSM, GPRS, 3G or 4G/LTE technologies. WIND renewed its data portfolio with innovative options like the “Internet 5 Giga” and “Open-Internet 12 GB,” which allows data customers to share the total amount of the data bundle with family members.

 

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Service

  

Description

   “3” offers several different tariff data plans to fulfil the needs of every mobile internet user: untied prepaid plans for occasional or tablet users and tied prepaid offers (monthly payment by credit card or bank account) that include a Wi-Fi router and set amount of gigabytes for a fixed fee. Contract data plans include a Wi-Fi router and set amount of gigabytes, plus an overall advantage called “Night Free,” a special feature that allows customers unlimited data traffic free of charge every night from 0:00 to 8:00 am. Finally, “3” developed an innovative offer called “Express,” a single-use data SIM specially tailored for tourists that allows customer to buy a fixed amount of gigabytes and use them within a very long timeframe (3 months).

PC Mobile Internet

   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, the Italy Joint Venture’s customers can directly connect their PC to the internet using a dongle with a 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 and music.

Content and Innovative Services

   WIND renewed its partnership with Google and Microsoft for carrier billing and enhanced roll out of mobile ticketing. WIND 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 its Customer Care and with its shops.
   In 2014, WIND introduced a concept called “Digital Home & Life” in the main WIND store in Rome. In the store, as well as online, WIND’s 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.
   At the beginning of November 2016, WIND released on both the Android and IOS digital stores, the new VEON app. The app is an innovative engagement platform that combines traditional communication features with the most innovative OTT services. The new app is available to everyone, but WIND’s customers have additional advantages in terms of free data traffic and other exclusive rewards such as one gigabyte as a free welcome, 100 megabytes per day, chat and calls without consuming traffic and a 10% discount on the current offer when registering a credit card.
   The Italy Joint Venture is also continually improving and updating three main apps for former 3 customers under the “3” brand to offer the best user experience to its customers: Area Clienti 3, 3Mobility and MyWebFamily.

 

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Service

  

Description

   Area Clienti 3 is a Self Care app that allows “3” customers to verify phone credit and keep thresholds for voice and data traffic under control. Customers can also use the app to configure and customize their tariff plan by activating/deactivating additional options and services. The app also has a dedicated area for the Top Up feature and a control panel to manage VAS deactivation. Area Clienti 3 is also used as a main channel for upselling new offers dedicated to customers.
   The 3Mobility App offers a simplified user interface to use the Mobile Ticketing service: through the app all “3” customers can purchase tickets for public transports (Bus, Metro, etc.), parking and ZTL using their phone credit or billing account. From the app, each customer can select the city where the service is available and get their ticket with one click. The ticket purchase is then confirmed by SMS.
   MyWebFamily is an app dedicated to 3 Mobile Broadband customers that allows them to remotely manage Wi-Fi devices such as WebCube and WebPocket. Customers can keep data traffic and thresholds under control, check the internet connection of their Wi-Fi router and manage all attached devices (Tablet, PC, smartphones, etc.).

Roaming

   The Italy Joint Venture’s mobile customers can use mobile services, including SMS, MMS and data services where available, while roaming in other countries. Roaming coverage outside Italy is provided through WIND’s roaming agreements with approximately 503 international operators in 220 countries as of December 31, 2016, as well as 3 Italia’s roaming agreements with approximately 491 international operators in 190 countries as of December 31, 2016.

Handset Offerings

   The Italy Joint Venture offers its customers a broad selection of handsets and internet devices sourced 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.

Distribution—Mobile Business in Italy

For corporate customers in Italy, the Italy Joint Venture uses different marketing strategies depending on the nature and size of a customer’s business. For large corporate customers and SMEs, the Italy Joint Venture’s 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, the Italy Joint Venture advertises in the professional and general press and use airport billboards.

The Italy Joint Venture sells consumer mobile products and services, including SIM cards, scratch cards and handsets through a significant number of points of sale. As of December 31, 2016, the Italy Joint Venture had 153 owned stores and 496 exclusive franchised outlets both operating under the WIND name as well as 486 flagship stores and 717 franchising operating under the “3” name. During 2016, the Italy Joint Venture has also utilized 3,037 non-exclusive points of sale and 804 electronic chain store outlets both coming from the WIND point of sales infrastructure, as well as 5,350 other point of sale coming from the “3” point of sales infrastructure. The Italy Joint Venture also sells a portion of its consumer services online through its websites.

 

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Customer experience is a strategic element of differentiation in the market for the Italy Joint Venture. Through the Customer Experience Development Function, the Italy Joint Venture aims to ensure the continuous improvement of customer satisfaction, developing a customer experience model with the fundamental support of all business functions. The model development is carried out using the Net Promoter System methodology. The NPS is an indicator that correlates loyalty and growth levels. NPS is now central to the Italy Joint Venture’s strategy; in addition to being measured periodically through market research, NPS is also used as a tool for continuous monitoring of customer perception when interacting with all of the Italy Joint Venture’s touch points. Using this measurement and through the mapping of all the phases of the customer journey, the Italy Joint Venture can better assess the level of customer satisfaction and implement improvement actions.

Competition—Mobile Business in Italy

The mobile telecommunication market in Italy in which the Italy Joint Venture operates is characterized by high levels of competition among service providers. The Italy Joint Venture expects this market to remain competitive in the near term, and competition may be exacerbated by further consolidation and globalization of the telecommunications industry. Additionally, in the second half of 2017, the French operator Iliad is expected to launch in the Italian market as a new mobile operator and as a beneficiary of the remedy package agreed with the European Commission for the completion of the Italy Joint Venture. In the Italian mobile telecommunications market, the Italy Joint Venture’s main competitors are Telecom Italia, operating under the “TIM” brand name, and Vodafone Italy, operating under the “Vodafone” brand name. Telecom Italia and Vodafone Italy have well established positions in the Italian mobile market. During 2016, Italian operators have continued to develop voice and data services offers with promotions, discounts, bundle upgrades and complementary services, with the intention of attracting new customers and maintaining established customers with advantages and/or discounts. The traffic cap in bundle offerings continued to increase over time, particularly in relation to internet navigation, while new value-added digital services were launched for both consumer (e.g. media) and professional users (e.g. business software and cloud services). The 4G/LTE network continued to be the core of the offerings of the major players and is frequently included in promotions. Innovative value added services continued to play an important role in operator strategies and were included in multimedia services offers, with a focus on M2M applications and IoT.

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. According to Analysys Mason, the network operators in Italy offered mobile telecommunications services to approximately 85.9 million registered customers as of December 31, 2016, representing a mobile penetration rate of approximately 143.7% of the Italian population compared to 87.1 million customers and a mobile penetration rate of approximately 145.7% in 2015.

The following table shows the Italy Joint Venture’s and its principal competitors’ respective mobile customer numbers in Italy as of December 31, 2016:

 

Operator

   Customers
(in millions)
 

Italy Joint Venture (WIND plus 3 Italia)

     31.3  

Telecom Italia

     30.6  

Vodafone Italy

     24.1  

 

Source: Analysys Mason.

Mobile Telecommunications Licenses in Italy

GSM1800 and GSM900

The Italy Joint Venture has a license to provide mobile telephone services in Italy using digital GSM1800 and GSM900 technology. This license is due to expire on June 30, 2018. In the Italian Budget Law 2017, the

 

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Italian government sets out the conditions and formal procedure to be followed by operators holding GSM spectrum rights of use wishing to extend such rights until December 31, 2029 and also obtain freedom to use such spectrum under a technology neutrality regime.

3G license

Both WIND and 3 Italia (now comprising the Italy Joint Venture) acquired 3G licenses in 2001, which were initially expected to expire in 2021, but were extended to December 2029. In light of the authorization received from the Italian Ministry of Economic Development (“MISE”) regarding the transfer of spectrum rights of use from WIND and 3 Italia to the French operator, Iliad as remedy taker in the completion of the Italy Joint Venture (7 blocks of 2x5MHz each in 900, 1800, 2100 and 2600MHz bands), the Italy Joint Venture will have to submit a request for the extension to the MISE for the 2100MHz spectrum rights of use from December 2021 to December 2029.

4G/LTE

WIND and 3 Italia have licenses for 4G/LTE spectrum rights of use in 800, 1800 and 2600 MHz bands. Such spectrum rights are due to expire in December 2029. Below is a list of the mobile access spectrum blocks, on a band by band basis, that will be held by the Italy Joint Venture once the release of spectrum to Iliad has been completed, which the Italy Joint Venture anticipates will be by 2019:

 

   

800 Band—2 blocks of 2x5 MHz

 

   

900 Band—2 blocks of 2x5 MHz

 

   

1800 Band—4 blocks of 2x5 MHz

 

   

2000 TDD Band 5+5 MHz

 

   

2100 Band—4 blocks of 2x5 MHz

 

   

2600 Band—4 blocks of 2x5 MHz

 

   

2600 TDD Band 15+15 MHz

Fixed-line Business in Italy

Description of Fixed-line Services in Italy

In Italy, the Italy Joint Venture offers a wide range of fixed-line voice and internet broadband services. The Italy Joint Venture offers these services to both consumer and corporate customers under the Infostrada brand (our fixed-line voice, broadband and data services brand in Italy).

The Italy Joint Venture’s fixed-line voice customer base in Italy consisted of approximately 2.7 million customers as of December 31, 2016. Its direct customers mainly comprise LLU customers.

The Italy Joint Venture offers voice and broadband internet services to direct customers by renting from Telecom Italia the “last mile” of the access network, which is disconnected from Telecom Italia equipment and connected to the Italy Joint Venture’s equipment in telephone exchanges. In the areas where the Italy Joint Venture does not have direct access to the network via LLU, customers can request wholesale services though the Italy Joint Venture, though the Italy Joint Venture no longer actively markets such wholesale services. In April 2016, WIND signed a strategic and commercial partnership with Enel Open Fiber (“EOF”) for the nationwide development of the ultra-broadband fixed-line network in Italy. In May 2016, the first customers were connected in Perugia throughout the EOF infrastructure with the possibility to reach up to 250 municipalities in the future.

 

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Service

  

Description

Internet and Data Services

   In the broadband access market in Italy, the Italy Joint Venture mainly offers its products directly through LLU and Fiber. The Italy Joint Venture offers broadband mainly to direct customers, so long as the line is ADSL or ADSL 2+ capable.
   In 2016, the contract offer “Casa3” was launched, which is dedicated to the home internet customer, as a competitive alternative to DSL, that includes a custom designed, 3-branded Wi-Fi router (PocketCube), plus “Night Free” functionality.
   The Italy Joint Venture also offers fixed-line voice and broadband services, both DSL and Fiber in Italy, through bundled offerings such as “All Inclusive” and “Absolute” packages, which for a fixed monthly fee, provide customers with a fixed-line voice service and unlimited connectivity to broadband. In addition, the Italy Joint Venture offers a discount to fixed-line customers who also are mobile subscribers with an All Inclusive postpaid or prepaid offer.
   For LLU customers only, the Italy Joint Venture 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 charges. For Fiber customers may access a speed of up to 100 megabytes.
   For corporate customers, the Italy Joint Venture has developed several innovative and digital services such as Cloud including IaaS (Infrastructure as a Service), Data Center, and SaaS, characterized for being fast, simple and flexible.

Consumer Voice Offerings

   Throughout Italy, the Italy Joint Venture provides 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 customers in Italy subscribe to bundled fixed-line voice and internet broadband offerings.
   The Italy Joint Venture provides 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, the Italy Joint Venture typically tailors its offers to the needs of the customer and, where applicable, to competitive bidding requirements. The Italy Joint Venture offers its large corporate customers direct access to its network through microwave links, direct fiber optic connections or, where the Italy Joint Venture does not offer direct access, via LLU, dedicated lines leased from Telecom Italia. The Italy Joint Venture also offers large corporate customers national toll free and shared toll. The Italy Joint Venture typically offers SME and SOHO customers off the shelf plans rather than bespoke offerings.
   The Italy Joint Venture’s offerings are tailored for SOHO customers and include the “All Inclusive Business,” providing

 

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Service

  

Description

   unlimited calls to national fixed and mobile networks and unlimited internet access and the “WIND Impresa” offer, which provides 6 to 60 simultaneous voice calls on VoIP technology and a combined service for renting, running, and maintaining telephone switchboards. For SME customers, the Italy Joint Venture offers the “All Inclusive Aziende,” a VOIP and connectivity service with fiber up to 50 megabytes and the “Wind Smart Office,” small large and extra-large. The Virtual IP PBX offer provides 3/15 simultaneous calls to and from landline phones, fiber up to 50 megabytes and unlimited calls to all fixed and mobile national and international operators.

Distribution—Fixed-line Business in Italy

In Italy, the Italy Joint Venture markets its fixed-line voice, broadband and data services primarily through its “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. The Italy Joint Venture utilize sales agencies, call centers and a direct sales force to target sales of fixed-line voice and internet services to corporate customers. In 2016, WIND, and subsequently the Italy Joint Venture, continued to adopt almost exclusively pull sales channels, which are more effective and efficient, in order to increase the fixed business marginality.

Competition—Fixed-line Business in Italy

In the Italian fixed-line voice market, the incumbent operator, 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, with the introduction and growth of new technologies, products and services. During the 2016 year, operators have announced increasing speed in bundles, including digital services such as streaming video for consumer profiles and solutions supporting the digitalization of enterprises. Operators have continued the extension of the fiber optic network, with direct investment and with different agreements and partnerships. According to our internal estimates, four service providers, Telecom Italia, the Italy Joint Venture (with its fixed-line voice, broadband and data services brand Infostrada), Vodafone Italy and Fastweb accounted for approximately 94.5% of the total broadband fixed services actually accessed in the Italian market as of December 31, 2016.

Based on the Italy Joint Venture’s internal estimates, as of December 31, 2016, Telecom Italia had approximately 7.2 million broadband customers in Italy, representing a market share of approximately 48.6% of broadband retail connections, followed by FastWeb with approximately 2.4 million broadband customers, representing a market share of approximately 15.9% of broadband retail connections, the Italy Joint Venture with approximately 2.3 million active broadband customers, representing a market share of approximately 15.6% of broadband retail connections and by Vodafone, with approximately 2.1 million broadband customers representing a market share of approximately 14.3% 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 5.5% of broadband retail connections.

 

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Licenses—Fixed-line Business in Italy

In Italy, fixed-line services are provided pursuant to several 20-year licenses obtained from the Italian Ministry of Economic Development in 1998. Such licenses expire in 2018 and are renewable according to Code of Communication terms.

Research and Development—Italy

The Italy Joint Venture has been providing significant additional investment to drive development of Italy’s digital infrastructure, increasing reliability, coverage and speed. During 2016, WIND, and following the Italy Joint Venture transaction, the Italy Joint Venture continued 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. We do not separate our research and development spending in our accounts.

Mobile Telecommunications Equipment and Operations—Italy

The Italy Joint Venture 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. As of December 31, 2016, the Italy Joint Venture owned 287 radio centers (for all of which it owns the towers and equipment rooms, and for approximately 120 out of 287, it also owns 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 towers 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—Key Developments and Trends—Disposal of Non-Core Assets and Network and Tower Sharing Agreements.”

Fixed-line Telecommunications Equipment and Operations—Italy

The Italy Joint Venture has an integrated network infrastructure providing high capacity transmission capabilities and extensive coverage throughout Italy. The Italy Joint Venture mobile and fixed-line networks are supported by over 34,997 kilometers of fiber optic cable backbone in Italy and 6,656 kilometers of fiber optic cable MANs, as of December 31, 2016. This 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, 2016, the Italy Joint Venture had 1,938 LLU sites for direct customer connections (approximately 70% 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.

The Italy Joint Venture 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 61 BRAS for consumer services and 84 Edge Routers for Business application, located in POPs to ensure optimal coverage of the national territory.

 

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WIND has a commercial agreement with Metroweb and Enel Open Fiber to enable WIND to provide customers 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 a contract with Metroweb, 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. During 2016, our “fiber to the home” service has been extended to Torino, Bologna and Perugia with the intent, in the next future, to cover other cities through leveraging on the agreement signed with Enel Open Fiber. In 2015, WIND also developed a commercial offer based on Fiber to the Cabinet technologies.

Regulatory

For a description of the material effects of government regulations on 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 more during these months. Guest roaming revenue on our networks also tends to increase in the summer period. Our fixed-line telecommunications business is also subject to certain seasonal effects. Among the influencing factors is 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 during the December holiday season and in the summer months.

Research and Development

We are working to develop our digital interaction, and in 2016, opened software development centers in Amsterdam and London. These centers are focused primarily on developing the VEON internet platform. In addition, we are experimenting with a number of approaches to big data/analytics in order to facilitate data monetization across our operating companies.

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 through NFV. We continue to implemented technologies to improve voice quality, such as TFO, TrFO, 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 4G/LTE network with higher voice quality and lower call setup times. These technologies are being implemented in commercial networks in VEON Ltd.’s operational companies after testing to ensure the quality of the network. In addition, we are testing new technologies for Voice Over Wi-Fi, which will enable better indoor coverage for voice (and data) communication in our customer’s home and offices.

In the area of data services, we have successfully migrated all mobile data traffic in five countries to a virtualized technology, ZTE’s vEPC, which has proven to be a very stable technology that will bring substantial cost savings in operations and investments compared to legacy solutions for mobile data. For information on export and re-export controls on ZTE, see “Item 3—Key Information—D. Risk Factors—Risks Related to the Industry—We depend on third parties for certain services and products important to our business.” The introduction of network virtualization will continue in all countries of operation during 2017 based on procurement tender results achieved in 2016. It will then also include areas other than data services.

 

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We are investing in radio access technologies that will ensure a high level of quality of our mobile 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, e.g. the 4G/LTE spectrum in 1800 MHz band in Russia, Algeria and other countries. We have also migrated old solutions for fixed wireless replacement to 4G/LTE solutions in the 450 MHz band in Armenia, which will give data services comparable to ADSL to customers that did not have the possibility to get internet connectivity before, in addition to provide superior 4G/LTE coverage at very low cost.

We have now launched 4G/LTE in all countries, except in Ukraine and Bangladesh where the regulators have not yet released any 4G/LTE spectrum. The 4G/LTE spectrum in those countries is expected to be released in 2017.

In Pakistan, we achieved 4G/LTE service to Jazz (previously Mobilink) customers through the acquisition of Warid and the subsequent merger of the networks. The merger also enabled 3G services to all Warid customers, who previously only had 2G and 4G/LTE service. The two networks, including all technologies (2G/3G/4G/LTE), were fully merged during 2016. With the merged network, we are now able to dismantle overlapping base stations and merge the core network nodes into a common network, achieving major savings in operational costs.

In Russia, we have signed a letter of intent with Huawei for the joint research and testing of technologies underlying 5G networks. Our cooperation with Huawei is intended to define the steps for the development of 5G “Beeline” networks as part of VEON’s strategy of digital transformation. In addition, it will assist Huawei in creating solutions which fully meet market requirements. Under the agreement, we expect that in the first quarter of 2017, we will test innovative LTE-U technology (LTE-Unlicensed) and LTE-Advanced Pro features, designed to improve the user experience with respect to data transmission. These studies will help develop new technologies and standards, and assist PJSC VimpelCom in creating a next generation of network, improve service quality and launch new digital services to its customers.

We have also signed a management services agreement with Huawei for full network maintenance outsourcing in Russia for five years. In addition, we are in the advanced stages of negotiating an agreement concerning network management with Nokia in Russia, which we expect to execute in the near term.

We are also developing the IoT in Russia. Throughout 2017, several companies in Russia expect to develop and test IoT technology, computer interaction (M2M), virtual radio and solutions for public safety. In addition, the parties have agreed to test a number of features to increase network speed and reduce network latency during data transmission.

For a discussion of research and development for the Italy Joint Venture, please see “—Description of Operations of the Italy Joint Venture—Research and Development—Italy.”

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.”

Property, Plant and Equipment

Information Technology

In June 2016, we entered into a US$1 billion long-term global software agreement with Ericsson. Under the agreement, Ericsson has agreed to develop, implement, and service over a seven year period, new software and cloud technologies across VEON’s customer-facing IT infrastructure. We continue to work closely with Ericsson on the timing and rollout of the development and implementation across the group. For a discussion of the risks associated with our dependence on third parties for certain services and products important to our business,

 

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

Mobile Telecommunications Equipment and Operations

Mobile Telecommunications Network Infrastructure

GSM, 3G and 4G/LTE Advanced technologies are based on “open 3GPP 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 Advanced networks, which use mainly Ericsson, Huawei, Nokia Solutions and Networks, Cisco Systems and ZTE Corporation 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.

During 2016, we entered into several agreements with other operators for radio network sharing, where we either share the passive equipment, physical site and towers, or active sharing, where we also combine the operation of the radio equipment and/or share spectrum with other operators. Network sharing brings not only substantial savings on site rentals and maintenance costs but also on investments in equipment for rollout of new base stations. In Russia, we have agreements with MTS and MegaFon in different regions and for different technology combinations, respectively. In August 2016, we have entered into a network sharing agreement with Kcell Joint Stock Company (“Kcell”) for the joint deployment of 4G/LTE services in Kazakhstan. The agreement aims to benefit customers without restricting competition between the two companies. The two mobile network operators will undertake joint planning of the combined network in order to generate greater cost efficiencies and a significantly accelerated roll-out of 4G/LTE across the country. The shared network will be managed by combined teams from Beeline Kazakhstan and Kcell.

For a discussion of the mobile telecommunications equipment and operations for the Italy Joint Venture, please see “—Description of Operations of the Italy Joint Venture—Mobile Telecommunications Equipment and Operations—Italy.”

Fixed-line Telecommunications Equipment and Operations

Russia

Our fixed infrastructure consists of two primary parts – our transport network and fixed core network.

 

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Our transport network is designed and is continually developed to carry voice, data and internet traffic of mobile network, FTTB and our fixed-line customers. The main technologies in a transport network are fiber optics and microwave links. In some cases, satellites are used to provide connection with remote and hard-to-reach areas. Following and acquisition of fixed regional operators, we now have copper line connection, which we use in limited amounts for B2C services. Our fiber optics network consists of four parts designed for specific goals: international lines, domestic main lines, zonal and local.

International lines are located outside Russia and are designed to ensure connection with international operators and channels for our clients.

Main lines are the backbone of our fiber optics for Mobile, Fix and FTTB. 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 TransTelecom 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 63,195 kilometers. 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. The active infrastructure of main lines is based on DWDM technology, with IP on top, and is organized into a single architecture called IP backbone. Zonal or intraregional transport networks connect our sites and sites in small towns and the countryside within each federal territory. We also have local fiber networks constructed in more than 220 cities, which are designed for multiservice traffic within city borders built on MEN technology. All of the networks are connected and share resources where required. The total length of our zonal and local fiber cables is 108,469 kilometers. Our primary vendors of active optical equipment are Cisco, Juniper, Huawei, Ciena and ECI. Microwave technology is mainly used to provide access to the final destination (base station or client). We use modern, high capacity (150+ Mbps) microwaves from leading telecommunication vendors such as Ericsson, Huawei, Nec, Aviat.

We use a three tiered architecture for our fixed core network (voice) to ensure correct and efficient traffic management and answer business demands: local, zonal and federal. The local voice networks are mainly used to provide telephony services for B2B customers and are in 189 cities. In an effort to minimize payments to incumbent local operators for voice transit and reduce traffic loop by direct connection with external mobile and fixed operators, we introduced zonal switches in 57 Russian regions (regional level).

Our federal transit network consists of six international transit exchanges, eight intercity communications transit exchanges installed in each of the federal districts of Russia, and connection points (access nodes) located in each region of Russia. We use this network to optimize our investments for serving of interregional and international traffic and to simplify architecture management, as well as realize our fixed operator federal license.

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. The information provided below does not include the Donetsk and Lugansk regions of Eastern Ukraine.

Our transport network is based on our optical cable network utilizing DWDM, SDH and IP/MPLS equipment. The DWDM and SDH networks connect all the main regional and mid-sized cities of Ukraine. All our DWDM and SDH optical networks are fully ring-protected (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 20,068 kilometers.

 

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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 cities is 23,754 kilometers.

As of December 31, 2016, we had constructed and owned a 43,822 kilometer fiber optic network, including 20,068 kilometers between cities, 14,848 kilometers inside cities, and 8,906 kilometers of local FOL for FTTB, which is connected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine, and to our gateway.

Uzbekistan

In Uzbekistan, we provide a wide range of fixed-line services, such as network access and hardware and software solutions, including configuration and maintenance. Our joint venture’s (Buzton) network provides international telephony and internet access through JSC Uzbektelecom. Buzton’s network consists of 95 nodes situated throughout Uzbekistan. We have our own basic fiber optic digital network in the cities of Tashkent, Zarafshan, and Uchkuduk, covering more than 485 kilometers with connection to 30,456 FTTB ports, and copper cables, providing services through 14,848 ADSL ports, that allow users to connect and to access services in nearly all regions of Uzbekistan. Our main line in Tashkent is based on fiber optic equipment.

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, 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 221,008 ADSL ports, 2,015 buildings provided with FTTB fiber access and 167 Central Offices (telephone exchanges, MSANs, remote nodes), of which 130 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 but it will be replaced by a 4G/LTE solution on a 450 MHz spectrum. After successful trials, the replacement launched during 2016.

Kazakhstan

Our subsidiaries TNS-Plus LLP and KaR-Tell LLP provide a wide range of fixed-line telecommunications services, including internet access, ADSL, FTTB, Wi-Fi, WiMax, VoIP, VPN and VSAT. TNS-Plus owns more than 13,000 kilometers of fiber optic main lines across Kazakhstan, which are based on Huawei SDH/DWDM equipment. As of December 31, 2016, we had approximately 260,000 customers connected via FTTB technology in Kazakhstan.

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, 2016, we had more than 2.1 million customers connected to our FTTB network in Russia. The network operates in 147 cities across Russia, 32 across Kazakhstan and three across Uzbekistan.

Italy Joint Venture

For a discussion of the fixed-line telecommunications equipment and operations for the Italy Joint Venture, please see “—Description of Operations of the Italy Joint Venture—Fixed-line Telecommunications Equipment and Operations—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.

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 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” and “Item 3—Key Information—D. Risk Factors—Legal and Regulatory Risks—New intellectual property laws or regulations may require us to invest substantial resources in compliance or may be unclear.”

Buildings

The primary elements of our material tangible fixed assets are our networks, as discussed above at “Mobile Telecommunications Equipment and Operations” and “—Fixed-line Telecommunications Equipment and Operations.”

In Russia, we own 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 five buildings on Lesnoryadsky Pereulok in Moscow, constituting approximately 15,360 square meters, which 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 30,000 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 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 data centers, office buildings and switching stations. PMCL also leases properties across Pakistan, AJK and GB, including its headquarters and BTS sites. In addition, Warid owns a number of properties totaling 21,686 square meters that are mostly used for MSCs, technical installations and data centers.

In Algeria, our subsidiary Optimum 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 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” JSC, owns a series of buildings consisting of 34,067 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 62,258 square meters that we use as office space, switching centers, call centers, sales centers, date centers and storage units.

 

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In Uzbekistan, we own 11 buildings consisting of approximately 25,951 square meters, which are used as administrative offices, technical centers and switching centers. In addition, we lease properties across Uzbekistan that we use for offices, sales centers, warehouses, archive centers, switching centers and parking.

Corporate Social Responsibility

We have a long-term corporate responsibility strategy, consisting of two main elements: maintaining the trust of our stakeholders by behaving in a responsible way, which is key to securing our “license to operate;” and adding tangible value to society through products, services and social investments, by recognizing the opportunities to leverage our technology, our commercial expertise, and the commitment of our employees. To further our goals, we launched our, “Make Your Mark” corporate responsibility program in 2014.

Our approach to the identification, management and evaluation of corporate responsibility is guided by three main factors:

 

   

Stakeholders: A range of stakeholders have legitimate concerns and expectations about how our company operates. By engaging with them, we understand and evaluate these issues and plan how best to improve our business. We follow a number of multi-stakeholder defined standards and guidelines. Our reporting meets Global Reporting Initiative (“GRI”) version 4 guidelines at the “core” level, follows the guidance in the AA1000 Accountability Principles Standard and is influenced by the guidance issued by the International Integrated Reporting Council (“IIRC”). Several of our markets have adopted International Organization for Standardization standards, and the social accountability standard;

 

   

Materiality: We prioritize these issues logically, by assessing the materiality of individual issues to our strategy and their importance to our stakeholders. Each material issue is scored against pre-defined criteria; and

 

   

Responsiveness: Having identified the priorities, we form our strategy and governance approach, take appropriate action and report on our progress through our corporate strategy framework overview. This overview includes analysis of the strategy elements and business principles, relevance to the business strategy, relevance to stakeholders and finally, a status summary. Within the corporate responsibility (“CR”) report, CR performance is disclosed periodically, which is used by the corporate responsibility team to determine the effectiveness of policy and design novel policy and management approaches.

Our corporate responsibility program is overseen by our corporate responsibility team, which reports to our Group Chief External Affairs Officer who, in turn, reports to the Chief Executive Officer. The team has access to the top operational committee for issue-by-issue decisions.

We are accountable to our stakeholders and customers through the publication of our annual Corporate Responsibility report, which is published each year.

We share periodic updates with internal stakeholders, including members of management, to inform them about key corporate responsibility related developments.

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 2016, ArmenTel received traffic from TCI under the 2003 contract for voice services. The gross revenue received from these activities involving TCI was approximately US$370,407 and net profits were approximately US$275,537. During 2016, ArmenTel provided telecommunications services to the Embassy of Iran in Yerevan. The gross revenue for these services in 2016 was approximately US$28,000 and net profits were approximately US$24,000. 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 2016 was approximately US$8,684 and net profits were approximately US$6,252. 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 2016 was approximately US$9,318 and net profits were approximately US$8,477. 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 2016 was approximately US$1,140 and net profits were approximately US$524. Sky Mobile LLC intends to continue the services to the Embassy of Iran.

 

   

During 2016, 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 2016 was approximately US$956 with net profits of approximately US$1,119. 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 2016, our gross revenue received from roaming arrangements with TCI, MTN Irancell and RighTel was approximately US$642,076, US$12,728 and US$1,340 respectively; net profits from roaming arrangements with TCI were US$567,445, and net losses from MTN Irancell and RighTel were approximately US$61,513 and US$4,289 respectively. During 2016, 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.

 

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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 2016:

(1) Telenor Norge AS, a Norwegian subsidiary, has roaming agreements with Mobile Telecommunication Company of Iran (“MCI”) and MTN Irancell. During 2016, Telenor Norge AS recorded net revenue related to these roaming agreements of US$8,319.45 to MCI and net expenses of US$249,335.76 to MTN Irancell.

(2) Telenor Sverige AB, a Swedish subsidiary, has roaming agreements with MCI, MTN Irancell and Taliya Mobile. During 2016, Telenor Sverige AB recorded net revenues related to its roaming agreement with MCI of US$27,552.27, net expenses related to its roaming agreement with MTN Irancell of US$41,558.97 and net expenses related to its roaming agreement with Taliya Mobile of US$19,379.55.

(3) Telenor A/S, a Danish subsidiary, has roaming agreements with MCI and MTN Irancell. During 2016, Telenor A/S recorded net expenses related to its roaming agreement with MCI of US$35,434 and net expenses related to its roaming agreement with MTN Irancell of US$100,279.

(4) Telenor d.o.o. Beograd Omladinskih brigada 90, a Serbian subsidiary, has a roaming agreement with MCI. During 2016, Telenor d.o.o. Beograd Omladinskih brigada 90 recorded net revenues of US$1,584.27 related to this roaming agreement.

(5) Telenor Hungary Plc, a Hungarian subsidiary, has a roaming agreement with MCI. During 2016, Telenor Hungary Plc, recorded net revenues of US$23,066.44 related to this roaming agreement.

(6) Telenor Bulgaria EAD, a Bulgarian subsidiary, has a roaming agreement with MCI. During 2016, Telenor Bulgaria EAD recorded net revenues of US$12,541.30 related to this roaming agreement.

(7) DiGi.Com Bhd, a Malaysian subsidiary, has a roaming agreement with MCI. During 2016, DiGi.Com Bhd recorded net revenues of US$23,055.68 related to this roaming agreement.

(8) Telenor Pakistan (Private) Ltd., a Pakistani subsidiary, has roaming agreements with MCI, MTN Irancell and Taliya. During 2016, Telenor Pakistan (Private) Ltd. recorded net expenses of US$892.69 related to the roaming agreement with MCI and net revenue of US$21,225.52 related to the roaming agreement with MTN Irancell.

(9) Total Access Communications Plc. (“dtac”), a Thai subsidiary, has roaming agreements with MCI and MTN Irancell. During 2016, dtac recorded net expenses related to these roaming agreements of US$39.63 to MCI and US$11.17 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 2016, Telenor Global Services recorded net revenue of US$355,951.23 related to this interconnection agreement.

Telenor and its subsidiaries intend to continue these agreements.

 

ITEM 4A. Unresolved Staff Comments

None.

 

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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 VEON 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, such as the Italy Joint Venture. Generally, this represents voting rights of at least 20.0% and not more than 50.0%.

From January 1, 2016 to November 5, 2016, we classified our Italian business unit as an asset held for sale and discontinued operation in our consolidated financial statements. In connection with this classification, VEON Ltd. no longer accounted for depreciation and amortization expenses of the Italian operation. The financial data for 2015 and 2014 reflects the classification of Italy as an asset held for sale and a discontinued operation. The intercompany positions were disclosed as related party transactions and balances. On November 5, 2016, the balance sheet of Italy was deconsolidated and an investment in a joint venture, in which VEON Ltd. has joint control, was recorded. Please refer to Notes 6, 13 and 26 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 December 31, 2016, our reportable segments consist of the seven following segments:

 

   

Russia;

 

   

Pakistan;

 

   

Algeria;

 

   

Bangladesh;

 

   

Ukraine;

 

   

Uzbekistan; and

 

   

HQ (transactions related to management activities within the group).

 

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Italy is no longer a reportable segment following the completion of the Italy Joint Venture. For more information, please see Notes 6, 13 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F, “—Key Developments and Trends—Italy Joint Venture” and “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.”

For historical periods prior to the year ended December 31, 2016, we reported an “HQ and Others” segment, comprised of our current “HQ” segment and our current “Others” category (which includes customer numbers in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos). As of December 31, 2016, “Others” is no longer a reportable segment but only a reconciling column in our financial statements and therefore, we report revenue and Adjusted EBITDA for “Others” only as a reconciling line item between our seven reportable segments and our total revenue and Adjusted EBITDA. For comparability purposes, the financial data for the years ended December 31, 2015 and 2014 has been represented to show our revenue and Adjusted EBITDA in each of HQ and Others on a stand-alone basis, with Others including Kazakhstan, as discussed further below. We also include herein customer numbers for the “Others” category, which includes our customers in Kazakhstan, Kyrgyzstan, Armenia, Tajikistan, Georgia and Laos.

From January 1, 2015 through June 30, 2016, management organized our business in eight reportable segments consisting of our seven current reporting segments, taking into account the change described above from “HQ and Others” to solely “HQ,” and Kazakhstan. In the second quarter of 2016, management decided to no longer include Kazakhstan as a separate reportable segment due to the decreasing impact of operations in Kazakhstan on the overall business and therefore we included Kazakhstan in the “Others” category for the year ended December 31, 2016, which is now reported separately from “HQ”. Our annual consolidated financial statements for the years ended December 31, 2015 and December 31, 2014 included in this Annual Report on Form 20-F have been restated for this organizational change such that Kazakhstan is included in the “Others” reconciling column for those years. Customer numbers for Kazakhstan are included in our “Others” category presented herein.

Key Developments and Trends

Customer and revenue growth

The mobile markets in Russia, Algeria, Ukraine, Kazakhstan, Kyrgyzstan, Armenia, Georgia, Tajikistan and Italy have each reached mobile penetration rates exceeding 100.0%. 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 data, improve customer loyalty and retain our customers.

The remaining mobile markets in which we operate, including Pakistan and Bangladesh, are still in a phase of customer growth with mobile 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 an increase in data revenue and the ability to upsell our customers, and in our fixed-line business from broadband, as well as business and corporate services.

New dividend policy

Our supervisory board approved a new dividend policy following the completion of the Italy Joint Venture, improved cash flows and stabilization of the macroeconomic environment. For the financial year ended December 31, 2016, we intend to pay a dividend in the aggregate amount of US$23 cents per share, comprised of US$3.5 cents per share paid as an interim dividend in December 2016 and US$19.5 cents per share, with a record date of March 30, 2017 and which is intended to be paid on April 12, 2017. Thereafter, we aim to pay a sustainable and progressive dividend based on the evolution of our equity free cash flow, which is defined as net cash flow from operating activities less net cash used in investing activities, as reported in our consolidated financial statements.

 

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Strong competition in Russia

In Russia, we see continued signs of strong competition in the market, with pricing pressure on devices and increased data allowances, while the macro environment remains challenging. We are aiming to improve the customer proposition in Russia by focusing on customer service, offering integrated bundles including voice, text, and data, and introducing innovative products and services.

Italy Joint Venture

On August 6, 2015, VEON Ltd., which indirectly owned 100% of Wind Telecomunicazioni S.p.A. (“WIND”), together with its subsidiary VimpelCom Amsterdam B.V., and Hutchison, together with certain of its subsidiaries, entered into a contribution and framework agreement to form an equal joint venture holding company, the “Italy Joint Venture,” that would own and operate their telecommunications businesses in Italy. On September 1, 2016, the European Commission approved the 50/50 Italy Joint Venture of WIND and 3 Italia, and the French operator Iliad as an appropriate remedy taker. On October 24, 2016, VEON and Hutchison also received final approval from the Ministry of Economic Development (Ministero dello Sviluppo Economico) (“MISE”) in Italy for their 50/50 Italy Joint Venture to merge their mobile businesses. The transaction was completed on November 5, 2016.

Each of Hutchison and VEON Ltd. indirectly holds 50% of the shares in the Italy Joint Venture, and therefore, as a consequence of the completion, VEON no longer owns a majority interest or has control over the operations of WIND. Pursuant to the terms of a shareholders’ deed, no party may reduce its aggregate indirect holding in the Italy Joint Venture below 50% for the first year following completion. After the first year, either party may sell its shares in the Italy Joint Venture to third parties after offering a right of first offer to the other party. Once three years following the completion of the Italy Joint Venture have elapsed, each shareholder can invoke a buy/sell mechanism at any time.

The scale and financial strength of the combined business, characterized by strong spectrum assets, will enable the Italy Joint Venture to improve coverage, accelerate 4G/LTE mobile broadband rollout and provide greater reliability and enhanced download speeds to its customers. The Italy Joint Venture benefits from scale and synergies which are expected to unlock investment in Italy’s digital infrastructure. Further, its delivery of mobile broadband is expected to play an important part in supporting the Italian government’s goal in its Digital Italy Plan, which aims to achieve 85% take-up of 100 megabytes broadband coverage by 2020. The investment will also complement the Enel Open Fibre project, which is already supported by WIND. As of December 31, 2016, the Italy Joint Venture had 31.3 million mobile customers.

We account for the Italy Joint Venture using the equity method. We do not control the Italy Joint Venture. For further information on the basis of finance treatment of the Italy operations see Notes 6, 13 and 26 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F and “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.”

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 Pakistan Mobile Communications Ltd (an indirect subsidiary of VEON, “PMCL”) entered into an agreement to merge their telecommunications businesses in Pakistan (the “Pakistan Merger”). WTPL and Bank Alfalah (together the “Dhabi Group Shareholders”) agreed to acquire approximately 15% of the shares of PMCL in exchange for the acquisition of 100% of the shares of Warid by PMCL.

On July 1, 2016, the transaction to merge PMCL and Warid was completed. Accordingly, PMCL holds 100% of Warid’s shares, and the Dhabi Group Shareholders have acquired 15% of the shares of PMCL, subject to potential post-completion adjustments against a pre-agreed formula.

 

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Historically, Warid was in competition in Pakistan with subsidiaries of our shareholder, Telenor. Due to the structural and economic links between Telenor and VEON, the Competition Commission of Pakistan issued an order in 2011 and strengthened the order in 2016 following the merger, placing certain restrictions on the trading and sharing agreements between Telenor and the newly merged entity.

The historical Mobilink and Warid brands now operate on a joint basis under the “Jazz” brand. The combined entity now has a single board and management structure.

Over 50 million customers in Pakistan now benefit from high-speed mobile telecommunications and a best-in-class digital mobile network from the combined PMCL and Warid entity. It is expected that the combined entity will be the leading telecommunications provider of 2G, 3G and 4G/LTE services in Pakistan, providing higher quality national voice and data coverage, faster downloads, and a wider portfolio of products and services.

Disposal of Non-Core Assets and Network and Tower Sharing Agreements

As part of our strategy under our new VEON brand, we aim to move towards an asset-light network model through the disposal of non-core assets, potential sales of tower businesses and the sharing of networks.

On November 30, 2016, we exited the telecommunications market in Zimbabwe through the sale by GTH of Telecel International Limited to ZARNet (Private) Limited (“ZARNet”).

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. Through the historical WIND agreement, the Italy Joint Venture now 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.

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 with an agreed extension of up to 41 regions. In December 2015, PJSC VimpelCom and MTS signed an amendment to the December 2014 agreement that provides for the sharing of 2600 MHz 4G/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.

Similarly, 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.

In August 2016, we have entered into a network sharing agreement with Kcell for the joint deployment of 4G/LTE services in Kazakhstan. For further information, see “Item 4—Information on the Company—Property, Plant and Equipment—Mobile Telecommunications Equipment and Operations—Site Procurement and Maintenance.”

Multi-Currency Term Loan and Revolving Facilities Agreement

On February 16, 2017, VEON Ltd. entered into a new multi-currency term loan and revolving facilities agreement (the “TL/RCF”) of up to US$2.25 billion for VimpelCom Holdings B.V. (“VIP Holdings”). The TL/RCF replaced the now cancelled US$1.8 billion revolving credit facility signed in 2014. The term loan facility has a five-year tenor and the revolving credit facility has an initial tenor of three years, with VIP Holdings having the right to request two one-year extensions to the tenor of the revolving credit facility, subject

 

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to lender consent. Several international banks have committed to the TL/RCF in an aggregate amount of US$2.108 billion. The TL/RCF includes an option to increase the amount of the facility up to the full amount of US$2.25 billion, which would consist of a term loan facility of US$562,500,000 and a revolving credit facility of US$1,687,500,000. VIP Holdings will have the option to make each drawdown under the facilities in either U.S. dollars or euros.

Telenor Share Sale and Exchangeable Bond Issuance

In September 2016, Telenor East sold 163,875,000 of VEON Ltd.’s ADSs pursuant to an underwritten offering. We did not receive any proceeds from the offering, and Telenor East’s sale of the ADSs did not result in dilution of our issued and outstanding shares. The ADSs were offered only by means of a prospectus and an accompanying prospectus supplement forming a part of the effective Registration Statement.

In addition, in a transaction outside the United States to non-US persons pursuant to Regulation S under the Securities Act, Telenor East issued a US$1,000,000,000 0.25% bond due 2019 that is exchangeable under certain conditions for up to a total at issuance of 204,081,633 of VEON Ltd.’s ADSs (subject to adjustment) at an exchange price representing a premium of 40% to the public offering price of the ADSs at the issue date.

Telenor East has announced its intention to divest the remainder of its stake in VEON Ltd.

Management Changes in Operating Companies

In 2016, we had management changes in key roles at several operating companies. On September 5, 2016 VEON accepted the resignation of Mikhail Slobodin as CEO of PJSC VimpelCom and appointed Kjell Johnsen, who leads VEON’s Major Markets, as Head of Russia. We also appointed a new CEO in Algeria and Aamir Ibrahim succeeded Jeffrey Hedberg as CEO in Pakistan following the Pakistan Merger and Mr. Hedberg’s new appointment as Group Chief People Officer. While we anticipate an integration period for these management changes, we believe that the new appointments will continue to drive the company’s transformation.

Biometric SIM verification in Bangladesh

In December 2015, the government of Bangladesh introduced biometric SIM verification, which is a mandated initiative that requires mobile phone operators to verify each customer using fingerprints in order to ensure authentic registration, proper accountability and increased security. This verification initiative has impacted revenue dynamics and customer growth across the market, resulted in 3.8 million SIM cards being blocked by Banglalink and may require additional funds and/or focus and resources on the part of BDCL’s or VEON Ltd.’s management.

GTH Share Buy-Back and Cancellation of GDR Program

In February 2017, our owned Egyptian subsidiary, GTH, completed a fixed price buy-back program to acquire up to 10% of the total issued share capital of GTH at a price per share of Egyptian pounds 7.90 and for a total consideration of up to Egyptian pounds 4.1 billion (the “Share Buy-Back”). GTH launched the Share Buy-Back primarily to maximize shareholder value, to reduce GTH’s share capital and as a supportive action to the cancellation of the listing of its GDRs on the Official List of the Financial Conduct Authority and the trading of GDRs on the Main Market for Listed Securities of the London Stock Exchange (the “GDR Listing”), in order to provide the holders of GDRs in GTH an opportunity to dispose of all or some of their GDRs prior to the cancellation of the GDR Listing, which was approved during the extraordinary general assembly meeting of the shareholders on February 6, 2017. As a result, the GDR Listing ceased on March 20, 2017. GTH will keep its single listing on the Egyptian Stock Exchange in Cairo. Upon ratification by the Egyptian Financial Supervisory Authority of the board minutes for the cancellation of the GDR program, our shareholding in GTH will increase to 57.7% from 51.9%.

 

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Factors Affecting Comparability of Our 2016, 2015 and 2014 Financial Position and Results of Operations

Our comparability between the periods presented below was affected by the classification of Italy as an asset held for sale and a discontinued operation from January 1, 2016 to November 5, 2016 and its subsequent deconsolidation and the acquisition of an investment in a joint venture. For more information, please see Note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F, “—Key Developments and Trends—Italy Joint Venture” and “Explanatory Note—Accounting Treatment of our Historical WIND Business and the new Italy Joint Venture.”

On July 1, 2016, VEON Ltd., together with its subsidiary GTH, acquired 100% of the voting shares in Warid, a mobile telecommunications provider. VEON Ltd. consolidated Warid financials in the Pakistan segment starting from July 1, 2016, which affects comparability with previous periods. For more information regarding our acquisitions and dispositions, see “—Key Developments and Trends—Pakistan Merger” and Note 6 to our audited consolidated financial statements incorporated herein.

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 disposal unless required by IFRS applied by VEON Ltd.

In general, 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 and therefore such acquisitions affect the comparability of data between periods.

In 2016, we reached resolutions with the SEC, the DOJ and the OM relating to previously disclosed investigations under the FCPA and relevant Dutch laws and paid fines and disgorgements to the SEC, the DOJ and the OM. All fines are paid and accounted for in 2016, though we anticipate some ongoing compliance costs going forward. For further details related to these agreements, please see “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—A.7. Legal Proceedings,” Notes 25 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F, “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We have incurred and are continuing to incur costs and related management oversight obligations in connection with our obligations under the DPA, the SEC Judgment and the Dutch Settlement Agreement, which may be significant” and “Item 3—Key Information—D. Risk Factors—Risks Related to Our Business—We could be subject to criminal prosecution or civil sanction if we breach the DPA with the DOJ, the SEC Judgment or the Dutch Settlement Agreement, 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” in this Annual Report on Form 20-F.

Certain Ongoing Factors Affecting Our Financial Position and Results of Operations

Our financial position and results of operations for the three years ended December 31, 2016 as reflected in our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F have been influenced by the factors listed below. For a discussion of the key developments trends, commitments or events that are likely to have a material effect on our results of operation for the current financial year, see “—Key Developments and Trends.”

Economic trends

Our financial position and results of operations are affected by the economic conditions in the countries in which we operate, including a macroeconomic slowdown in Russia, Ukraine and other countries in 2014 and 2015. Low oil prices, together with the impact of economic sanctions – including those promulgated by the United States, which restrict certain financial transactions and dealings, even by non-U.S. persons, involving certain industries and parties in Russia and resulting from the current situation in Ukraine – and the significant

 

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devaluation of the ruble, negatively impacted the Russian economy and 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 Algerian dinar in 2015, and the Kazakh tenge in 2015 (in the absence of a currency stabilization policy in Kazakhstan) negatively impacted revenues in our Ukraine and Algeria segments, and our historical Kazakhstan segment, respectively, and our results of operations in 2015. However, we have seen stabilization of most of the currencies and macroeconomic conditions in the countries in which we operate during 2016.

Inflation

Inflation affects the purchasing power of our mass market customers, as well as corporate clients. The values of the Russian, Ukrainian, Kazakh and Algerian currencies, for example, have declined significantly in response to political and economic issues since December 31, 2013, and, although the rates appeared to stabilize in some countries in 2016, they may continue to decline.

The table below shows the inflation rates for the years ended December 31, 2016, 2015 and 2014, and the source of the inflation rates.

 

     December 31,       

Country

   2016     2015     2014     

Source

Russia

     5.4     12.9     11.4    The Russian Federal State Statistics Service

Pakistan

     3.7     3.2     4.3    The Pakistan Bureau of Statistics

Algeria

     5.2 %(1)      4.4     5.3    The Central Bank of Algeria

Bangladesh

     5.0     6.1     6.1    The Central Bank of Bangladesh

Ukraine

     12.4     43.3     24.9    The State Statistics Committee of Ukraine

Uzbekistan

     8.0     9.1     9.8    The International Monetary Fund

Kyrgyzstan

     (0.5 )%(2)      4.9