Change of target price

RUSSIAN FEDERATION Telecommunications
MBT US
Price, USD TP 12-mo, USD Upside, %

25 July 2011
Buy
18.41 29.10 58%

Capitalisation & stock data (current)
MCAP, USD mn Net Debt, USD mn EV, USD mn Shares outstanding, mn Free-float, % Local/ADR ratio 18,308 5,782 23,871 2,066 47 2.0x

MTS: Lower Competition To Help
Having updated our forecasts for MTS, we are decreasing our 12month Target Price 1.4% to USD 29.1. It now implies 58% upside potential from current levels and so we are reiterating our Buy recommendation. The stock is trading at 4.6x 2011 EV/OIBDA, with a 22% discount to EM peers, which we think is excessive. We think that the recent weakness in the name (it is down 14% since early May) on the back of the weak 4Q10-1Q11 results (which are mostly of a one-off nature, in our view) provides a good opportunity to enter the stock. We have included all the recent results into our model and slightly upgraded our revenue forecasts while downgrading our OIBDA margin profitability (Figure 4). We expect that the current trend of decreasing competition in Russia (with subsequent lower sales and marketing costs) is likely to continue for the next few years. We forecast MTS and MegaFon to have lower net additions, while VimpelCom is to continue increasing its subscriber market share (Figure 3). We see VimpelCom’s potential M&A activity in Russia as a threat to the currently benign competitive landscape as we think that MegaFon and MTS might react to it with increased sales levels. Tele2 Russia’s 2Q11 results (with flattish prices and an increasing EBITDA margin) confirm our view on Russia’s improving competitive environment (our forecast of MTS’s 2Q11 results is in Figure 1). We have also increased our capex guidance on the back of MTS’s plans to match MegaFon’s 2010 infrastructure spending by the year’s end. We think this is an ambitious goal, and due to this capex we expect slightly higher revenues in 2012-13. Our calculations show that the market is currently pricing in low single-digit revenue growth for MTS over the next several years, while we expect to see 5-7% growth for the next four years on the back of voice and data revenue growth (Figure 5).

Share price dynamic, USD
25 20 15 10 5 0 Jul Aug Sep Oct NovDec Jan FebMar AprMay Jun ADS, USD/share, lhs Relative to RTS Index (Russia), %, rhs 10% 0% -10% -20% -30% -40% -50%

Source: Bloomberg

Ratios
EV/EBITDA P/E EPS, USD DPS, USD

2010
5.59 14.65 0.4 1.04

2011F
4.55 10.44 0.4 1.23

2012F
4.14 9.39 0.5 1.17

Victor Klimovich +7 495 663 46 84 victor.klimovich@vtbcapital.com

VTB Capital
All prices are as of 22.07.11 Important disclosures and equity rating histories regarding the company (companies) that is (are) the subject of this report can be found here VTB Group does and seeks to do business with companies covered in their research reports. Thus, investors should be aware that the VTB Group may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

235 1Q11 252.000 7.234 -0.012 2016F 15.1% 6. USD mn New revenues.414 2017F 15.000 2.000 2.8% 6.691 5.6% 4.6% -0.7% -3.862 5.9 39.6% 5.8% 6.000.500.2% 6.212 1.926 6. USD mn New OIBDA.8% 5.607 2019F 15.000 1.1% 1.8% 31.837 15.000.5 3.0% 45.439 15. USD Source: Company data.1% 15.716 -0.500.1% 2 .000 4.371 5.1% 2016F 1.934 1.000. USD mn 44.1% 2.3% -2.9% 467 Net margin % EPS.5 2.000 1.695 1.7% 6.32 15% 0. USD mn 253. % Chng YoY.8% -1.6% 12.000. % Old OIBDA.000.RUSSIAN FEDERATION 25 July 2011 Change of target price Telecommunications Figure 1: MTS 2Q11 US GAAP results preview 2Q10 ARPU in Russia.7% Figure 5: Comparison of MTS’s market implied revenue growth rate with our actual forecasts of VimpelCom Ltd and MTS.501 2015F 15.772 1.4% 5.000.4 38.5% 5.9% 2015F 2.718 13.1 2.000.000 -500.9% OIBDA margin % Net income.0% 6. USD mn OIBDA. 1Q10-4Q11F 3. 2011-20F 2011F Old revenues.000 1.4% 5.596 Diff.279 12.525 2018F 15.000 -1. January 2009 – May 2011 9. VTB Capital Research Source: AC&M Figure 4: Difference between an old and new forecast for MTS.475 2012F 13.7% 2014F 2.000 8.154 0.2% -0.6% 5. 2011-20F 2011F Implied MTS's growth VTBC MTS's growth Source: VTB Capital Research 2012F 4.47 Figure 2: Net additions by Big Three operators in Russia.283 6.812 5.000 2.9% 4.000.950 5.723 15. VTB Capital Research 13% 0.000.000 3.3% 3.500.1% 2013F 3.5% -2. RUB ARPU in Ukraine.1% 45% 6. USD mn 12.000 500.7% 5.7% 2017F 0.000 MTS VimpelCom MegaFon 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F Figure 3: 12-mo net additions by Big Three operators in Russia.000.813 -0. UAH Net revenues.4% -2.488 14.9% 5.000 0 Jul09-Jun10 Dec09-Nov10 Feb09-Jan10 Nov09-Oct10 Jan09-Dec09 Sep09-Aug10 Jun09-May10 Jan10-Dec10 Feb10-Jan11 Aug09-Jul10 May09-Apr10 May10-Apr11 Mar10-Feb11 Mar09-Feb10 Jun10-May11 Apr09-Mar10 Oct09-Sep10 Apr10-Mar11 MTS MegaFon VimpelCom Source: AC&M.165 6.083 13.000.000.000 5.7% 5.7% 322 41.308 2013F 13.2% 2018F 0.4% 4.785 5.306 Chng QoQ.9% 31.135 2Q11F 269.621 15.018 0.000 6.6% 5.031 -0.017 15.118 6.0% 2019F 0.1 36.0% 5.000.797 Diff. % 6.629 -1.7% 2020F 0.1% -2.031 15.35 11% 0.712 2020F 16.0% 0.6% 4.5% 7. USD mn 1. % Source: VTB Capital Research -3.5% 354 38.114 1.905 2014F 14.000 -1.

356 6.0 8.8 10.8 23.2 5.6 6.4 26.8 5.3 10.5 5.75 USD USD ZAR TRY CNY SEK ZAR USD EGP MXN INR KWd AED Mcap USD mn 2009 18.2 4.4 7.2 2010 13.7 12.3 7.7 15.8 26.1 9. VTB Capital Research *Note: for VimpelCom Ltd 2011-13F CAGR 3 .8 8.6 11.832 7.4 8.93 15.3 10.2 4.205 10.1 5.9 5.1 Telecommunications Change of target price 14.7 5.1 4.3 — EV/EBITDA — 2010 2011F 2012F 2013F 2010-13F CAGR 2012-13F CAGR 3.9 22.075 10.3 7.3 4.3 9.7 5.9 8749 118.8 13.2 11.6 7.15 1000 10.8 13.75 3.7 7.1 4.7 14.6 4.3 9.5 23.1 10.3 18.3 8.225 8.0 11.7 5.0 5.1 4.1 11.1 9.9 5.995 6.400 8.0 7. 2009-13F Company Price.41 10.7 19.5 5.3 5.6 5.9 14.1 12% 8%* 28% 13% 12% 1% 16% 21% 17% 9% 28% 5% 42% 18% 2% 2% 2% -2% 14% 6% -1% -2% 2% 2% 6% 9% 9% 7% 4% 4% 3% 6% -4% 3% 9% 5% 1% 5% 0% 0% 0% 0% 5% 2% 1% 1% 2% 1% 2009 18.308 20.9 20.6 5.8 4.804 5.8 6.0 5.3 5.6 6.3 4.554 5.1 12.8 7.5 13.2 7.1 27.9 11.4 5.6 132.4 13.4 5.4 8.4 9.34 14.3 12.5 5.7 7.05 164.2 7.0 10.8 4.7 5.5 12.8 6.5 10.1 9.7 12.8 5.4 4.4 4.7 5.8 14.1 10.8 11.6 31.6 4.5 10.0 5.4 10.4 5.092 40.9 5.2 17.8 9.16 411.7 10.5 10.5 13.2 12.4 5.4 3.7 5.7 5.0 9.1 5.8 5.5 15.7 9.239 5.0 17.1 12.2 21.2 4.581 16.1 14.458 n/a 101.8 7.9 27.8 12.1 11.9 10.3 11.8 4.6 9.2 9.2 10.7 9.7 7.3 12.5 4.6 131.8 5.4 10.4 3.46 77.7 12.4 8.2 11.4 15.4 32.6 4.3 8.0 8.1 21.976 5.55 8.3 Source: Bloomberg.71 14.3 12.950 9.0 8.3 — P/E — 2011F 2012F 2013F 2010-13F CAGR 2012-13F CAGR 7.2 3.5 4.1 11.3 5.8 4.572 5.2 13.8 19.3 40.744 7.3 4.6 5.0 10.4 11.7 3.4 5.218 4.2 4.5 9.7 8.0 6.6 15.0 4.0 29.9 5.7 8.41 12.9 6.0 5.7 3.3 10.25 July 2011 RUSSIAN FEDERATION Figure 6: MTS’s international peers.41 9.7 20% 15%* 36% 7% 4% -7% 70% -26% 66% 12% 18% -38% 4% 16% -6% 41% -6% 0% 8% 4% 31% -8% 2% 11% 10% 17% 5% 5% 2% 5% 2% 5% -15% 3% 10% 4% 2% 3% 0% 4% 0% 0% 8% 3% 7% 2% 2% 3% 6.1 10.572 5.8 8.7 3.2 6.7 5.6 11.9 51.3 5.3 9.4 7.649 3.7 19.383 4.3 8.3 11.0 5.4 4.8 5.1 4.8 27.76 89.1 4.6 137.7 6.8 9.0 5.2 5.8 8.5 7. LC Currency MTS VimpelCom Ltd Emerging markets MTN Group Turkcell China Mobile Tele2 Vodacom Millicom Orascom Telecom Holding America Movil Bharti Airtel Limited Zain Emirates Telecom Average Developed markets France Telecom Deutsche Telekom France Telecom KPN Telenor ASA Vodafone Group Plc Telekom Austria Telefonica TeliaSonera Average 18.6 6.06 EUR EUR EUR EUR NOK GBP EUR EUR SEK 32.2 4.2 10.2 15.9 9.4 8.4 35.0 4.139 7.8 8.2 10.0 241.6 5.7 4.6 6.8 17.8 19.7 8.2 4.5 13.5 8.8 9.4 10.305 48.057 n/a 2.3 11.8 6.

523 7. USD mn Revenues Cost of sales SG&A and other operating expenses EBITDA Depreciation & amortization Operating profit Non-operating gains /(expenses) EBIT Net interest income/(expense) Profit before tax Income tax Minorities Net income Cash flow statement summary.505 (3.528 2.7 15.027 28. USD mn Cash flow from operations Working capital changes Capex Other investing activities Free cash flow Share issue (reacquisition) Dividends paid Net change in borrowings Other financing cash flow Movement in cash Balance sheet summary.814 10.589 11.840) 2.033 18.446 13.402 (714) (34) 2.3x 139% 1.018 (2.824 (2.835 3.359 2012F 1.018 15. USD EPS growth.76 22% 10.328) 259 1.8x 4.413 3.051 15. % ROIC. % EBITDA margin.6x 12. Uzbekistan.501 22.308 21.00 6% 99% 3.01 15% 43.17 6% 62% 4. % ROE.122 MTS Prices as of: 22.65 4% 43.781 259 5.004 3. USD Price/BV.043) (680) (186) (538) 402 8. % Net margin.295 1.464) (3. % Payout ratio (ords).799) 5.6x 4.8x 1.83 4% 42.330 2.7x 6.94 2.043 480 1.218 4.2x 14.136 2.899 10.7x 13.204 (517) (168) 1.378 2014F 1.509 (527) (31) 1.295 3.10 2. VTB Capital Research Research team: Victor Klimovich +7 495 663 46 84 victor.10% Free float in ADRs 34.789 12. % CFPS.781 8.275) 2. USD mn EV. x Income statement summary.965 8.4x 8.125 1.044 (639) (40) 2.626 5.950 480 1.com Shareholder structure AFK Sistema 50.77 1.38 21% 7.478 439 5. USD mn Cash and equivalents PP&E Goodwill Investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Total shareholder's equity Minority interest Total liabilities and shareholder's equity Net working capital Net Debt Capital 2009 996.950 (504) 14 1.268 (1.05 -49% 14.905 (3.046) 375 1.9% 14.6x 5.815 (1.6x 9.085 10.274 2013F 1.1x 5.8% 14.947 32 15.419) (4.024 15.574 3.782 104 2. USD Dividend yield (ords).53 1.8x 4.873 (2.804 104 15.7x 1.308 22.000) 2.33% Source: Company data.243) 217 529 930 8.033 18.209 8.3x 1.50 1.033 18.432) 4.com 4 .7% 34% 10% 22% 1.620 3.355 (545) (47) 1.224 5.123 (35) 3.329 9.308 24.701) 6.743 1. USD mn Ratios & analysis EPS.199 1.RUSSIAN FEDERATION 25 July 2011 Change of target price Telecommunications VTB Capital Facts & Forecasts Last model update on: 22.501 (3. Its licences cover a population of some 240mn in Russia.321) (740) (1.41 USD Rating Buy 12mo TP 29.308 24.2% 22% 4% 24% 1.305 8.224 238 2.472) (438) 905 2.818 334 936 14.470 (3. MTS reported 2010 revenues of USD more than 11bn. % P/E.161 3. USD/share.56 6% 42.242 (2.255) 2.560 3. % Net debt/EBITDA.285 2011F 1. 12-mo 25 20 15 10 5 0 Jul Aug Sep Oct Nov Dec Jan FebMar Apr May Jun Jul ADS.07.531 11. Ukraine.951 4.8mn fixed-line broadband subscribers and 2. In October 2009.989) (3.637 (1.194) 5.474 (1.555 (1.3% 33% 14% 16% 1.3x 1. Company website: http://www.9x 55% 0.009) (126) 1.308 (3.17 2.4x 4.2% 33% 7% 23% 1.154 (2.11 Emerging Europe / RUSSIAN FEDERATION Sector / Telecommunications GAAP Company data Weighted average shares.216) (1.7 21.872 (693) 2.381 3. including 3G services and wireline).458) 3.196 6.145 8.626 239 3. # mn Average market cap.1x 91% 0.5% 10.59 9% 62% 5.8mn pay-TV subscribers. MTS acquired a 51% stake in Comstar UTS (fully consolidating the company in April 2011) .4% 18.2x 4.123 (600) 2.377) 6.29% Free float in locals 11.7x 1.68 3. rhs 10% 0% -10% -20% -30% -40% -50% Company description Mobile TeleSystems (MTS) is the largest telecommunication operator in the CIS (by revenues).82% MGTS 0.668 220 5.47 11% 41.196 373 5.460) 2.647) 663 970 (976) (1. the operator had a customer base of around 103mn. By the end of 2010.668 6.560 (548) 3.948) 1. x BV/share.646) (4.706 2010 996.262) 2.klimovich@vtbcapital.mtsgsm.108 15.695 (2.634 (253) 2.478 7.596 (28) (2.32 -4% 45.902 3.972 2.572) 3.045 480 986 15.4x 4.0x 30% 0.872 20 2.2x 1.1% 12.210 12.42 8% 62% 4.7x 3.719 6.343) (3.5x 13.3x 125% 1.9x 5.909 3.10 Share price performance. USD Free CFPS.11 Tickers MBT US Current 18.033 18. x Net debt/Equity.3% 17.75 3.2x 3.7x 11.01 3.236 217 1.1x 4.101 7.601) 928 7.293 (2.634 (463) 1.04 5% 75% 3. lhs Relative to RTS Index (Russia) %.95 2.007) 4.96 11% 9.584 1. providing all major services (both wireless based on GSM standard.377 1.234 3.878 480 1.6x 5.085 16. x EV/EBITDA.2x 111% 1.914 2.23 7% 72% 4.75 1. % Capex/Depreciation.9bn and net income of USD 1.912 (46) (2.43 4.753 4.605 2.4bn.67 12% 6.4x 8. Armenia and (through a 49% JV) Belarus.782 (558) 2.617 (48) (2. x DPS (ords).one of the biggest fixed-line operators in Russia – in order to have some exposure to this fast-growing market.745 2.654 64 15.835 (478) 3.950 5. as well as 1. USD Revenues growth.365 4.0% 35% 8% 24% 1.447 2. while it reached OIBDA of USD 4.654 5.239 2.07.461 (1.967 11. x Net interest cover.319) 3.9x 3.510) (4.44 37% 14.070 (34) (2.6x 6.46% Treasury shares 3.503 (176) (2.119 14.045 1.985 137 16.0% 34% 12% 16% 0. % Capex/Revenues.

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aslanova@vtbcapital.podguzov@vtbcapital.com 7 .amelin@vtbcapital.com Mikhail Shlemov +7 495 663 46 49 mikhail.frolova@vtbcapital.com Mikhail Galkin +7 495 663 64 72 mikhail.com Maxim Korovin +7 495 663 46 96 maxim.rasstrigin@vtbcapital.pukhaev@vtbcapital.lebedinets@vtbcapital.jacouris@vtbcapital.com Evgeny Pivovarov +7 495 663 64 81 evgeny.com Svetlana Aslanova +7 495 663 47 88 svetlana.loukashov@vtbcapital.kushch@vtbcapital.com Yuri Rodionov +7 495 660 42 53 yury.doronina@vtbcapital.ru Elena Kopylova +7 495 660 67 89 elena.pivovarov@vtbcapital.rodionov@vtbcapital.kolbina@vtbcapital.kirevnin@vtbcapital.com Oil Services and Pipes Olga Danilenko +7 495 589 21 32 olga.raskosnov@vtbcapital.com Sergey Galkin +7 495 660 42 18 sergey.com Olga Doronina +7 495 663 46 30 olga.sakhnova@vtbcapital.korovin@vtbcapital.RUSSIAN FEDERATION 25 July 2011 Change of target price Telecommunications VTB Capital Research team Head of Research Alexey Yakovitsky +7 495 663 46 44 alexey.bielski@vtbcapital.com Nikolay Podguzov +7 495 660 42 70 nikolay. CFA +7 495 663 46 82 elena.com Andrey Amelin +7 495 663 64 89 andrey.com Nikolay Sosnovskiy +7 495 660 77 71 nikolay.com Dmitri Fedotkin +7 495 663 47 96 dmitri.yakovitsky@vtbcapital. Real Estate Maria Kolbina +7 495 663 46 48 maria.tyagovtseva@vtbcapital. Technology Anastasia Obukhova +7 495 663 46 32 anastasia.com Metals and mining Alexander Pukhaev +7 495 663 46 71 alexander.com Telecommunications Victor Klimovich +7 495 663 46 84 victor. CFA +7 495 660 42 72 petr.shlemov@vtbcapital.com Kevin Whyte +7 495 663 64 91 kevin.mackinnon@vtbcapital.evtifyeva@vtbcapital.moiseev@vtbcapital.kopylova@vtbcapital.com Vladimir Bespalov +7 495 663 46 51 vladimir.galkin@vtbcapital.bespalov@vtbcapital.com Alexander Kirevnin +7 495 660 67 88 alexander.astapovich@vtbcapital.grigorieva@vtbcapital.smith@vtbcapital.podguzov@vtbcapital.danilenko@vtbcapital.pantskhava@vtbcapital.com Industrials.com Fixed Income Alexey Moiseev +7 495 660 42 69 alexey.fedotkin@vtbcapital.com Maxim Raskosnov +7 495 660 42 71 maxim.seleznev@vtbcapital.moiseev@vtbcapital.grishin@vtbcapital.klimovich@vtbcapital.com Oil and gas Dmitry Loukashov.prokina@vtbcapital.com Nikolay Podguzov +7 495 660 42 70 nikolay.com Marc Jacouris +44 (0) 20 3334 8572 marc.com Petr Dorozhkin +7 495 660 42 05 petr.com Igor Lebedinets +7 495 663 46 37 igor.obukhova@vtbcapital.com Petr Grishin.com Anastasia Grigorieva +7 495 660 67 69 anastasia.dmitriev@vtbcapital.com Colin Smith +44 (0) 20 3334 8976 colin.com Utilities Mikhail Rasstrigin +7 495 663 46 58 mikhail.zabotkin@vtbcapital.com Strategy Alexey Zabotkin +7 495 663 47 23 alexey.com Consumer Goods.com Mikhail Putyatin +7 495 660 67 90 mikhail.com Kiti Pantskhava.com Aleksandra Evtifyeva +7 495 663 46 38 aleksandra.com Roman Luchkovsky +7 495 589 21 62 roman.com Vadim Astapovich +7 495 589 21 46 vadim.com Alexander Seleznev +7 495 660 67 99 alexander.com Tatiana Prokina +7 495 663 47 33 tatiana. Materials Elena Sakhnova.sosnovskiy@vtbcapital.com Economy Alexey Moiseev +7 495 660 42 69 alexey.putyatin@vtbcapital.com Daria Frolova +7 495 660 42 45 daria. CFA +7 495 589 21 31 kiti.galkin@vtbcapital.com Elena Tyagovtseva +44 (0) 20 3334 8845 elena.com Financials Dmitry Dmitriev +7 495 663 46 73 dmitry.com Neil MacKinnon +44 (0) 20 3334 8865 neil. CFA +7 495 660 42 04 dmitry.dorozhkin@vtbcapital.com Media.whyte@vtbcapital.com Commodities Wiktor Bielski +44 (0) 20 3334 8781 wiktor. Retail.com Ivan Kushch +7 495 663 46 47 ivan.luchkovsky@vtbcapital. Transportation.

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