OREANDA-NEWS. On 23 June 2009 OJSC VolgaTelecom (RTS: NNSI, NNSIP; MICEX: VTEL, VTELP; ADR OTC USA: VLGAY; ADR FSE: NZH GR) reported 2008 results in accordance with International Financial Reporting Standards (IFRS). The financial statements were audited by independent auditor ZAO KPMG. Consolidated financial statements comprise assets, liabilities and the results of operations of OJSC VolgaTelecom and its subsidiaries.

The Company got unqualified audit report in regard to consolidated financial statements drawn up in accordance with IFRS requirements.

Despite the effect of recessionary phenomena in economics and also of factors related to the change of effective legislation as related to the abolishment of compensation markup and fee for connection points, in 2008 VolgaTelecom demonstrated strong performances of economic development. Positive factors having effect on economic performances in the reporting year were intensive development of data transmission network services and telematic services, and also the actions designed for enhancing the operating efficiency. VolgaTelecom’s activities of liquidity control resulted in the improvement of all parameters characterizing the Company’s ability to discharge its liabilities to creditors.

VolgaTelecom’s basic financial performances for 2008 are as follows:

- Sales revenue - RUR 32 063 million (6.7% growth vs. 2007);

- Operating profit - RUR 5 461 million (-4.6 %);

- Pretax earnings – RUR 3 658 million (-18.5%);

- Net profit – RUR 2 936 million (-3.8%);

- EBITDA* – RUR 12 004 million (5.9%);

- EBITDA margin* – 37.4%;

- Net profit margin* – 9.2%;

- Net interest-bearing debt/EBITDA* – 1.28.

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*EBITDA indicator is calculated as the sum of pretax earnings, interest expense, depreciation and amortization adjusted for the amount of interest rece ipts;

EBITDA margin indicator is calculated as the ratio of EBITDA indicator to Sales revenue indicator;

Net profit margin indicator is calculated as the ratio of Net profit indicator to Sales revenue indicator;

Net interest-bearing debt/EBITDA indicator is calculated as the ratio of borrowers' liabilities adjusted for the amount of cash and cash equivalents to EBITDA indicator.

Sales revenue

Revenue, RUR million

2008

2007

Growth rate, %

Local telephony services

10 934

11 119

- 1.7

Intrazonal telephony services

4 829

4 814

0.3

Interconnect and traffic transit services

4 427

4 741

- 6.6

Mobile radio telephony (cellular) services

4 658

4 167

11.8

Telegraphy, data transmission network and telematic services (Internet)

Of which

5 095

3 253

56.6

Data transmission network and telematic services

4 951

3 124

58.5

Mobile radio, wire broadcasting, radio broadcasting and TV services

703

622

13.0

Fees on assistance and agency services

548

590

-7.1

Other telecommunications services

111

132

-15.9

Revenues from non-telecommunications services

758

598

26.8

Total

32 063

30 036

6.7

The dominant factors which had effect on the change of revenues in 2008 were as follows:

1. Increase in the number of Internet broadband access users. As a result of pro-active marketing policy in 2008 the number of broadband access subscribers has grown twofold and reached 785 800 users. The revenues from data transmission network services and telematic services (Internet) have grown by 58.5%. Their share in the total amount of revenues has increased by 5 percentage points – to 15.4%.

2. Consolidation of the Volga mobile operators on the basis of subsidiary company ZAO NSS: in December 2007 OJSC TATINCOM-T, ZAO RTCOM, ZAO Saratov-Mobile, ZAO Chuvashia Mobile and ZAO Penza Mobile merged to ZAO NSS. Despite growth retardation of mobile communications market, and also the reduction of revenues from these services (caused by the reduction of traffic due to recession in economics in the second half of 2008), the consolidation ensured positive dynamics of VolgaTelecom’s revenues. Revenues from mobile radio telephony (cellular) services have grown by 11.8%; their share in the total revenue composition has increased by 0.7 percentage point – to 14.5%.

3. Legislative regulation of activity: abolishment of compensation markup to the price of call zonal initiation and the fee for connection point maintenance. The share of revenues from interconnect and traffic transit services in the total revenue composition has reduced by 2 percentage points to 14%.

As a result of realization of the development program the Company has managed to:

1. Increase the share of Internet and mobile services revenues in the total revenues to 29.97% (+5.7 percentage points vs. 2007);

2. Mitigate the effect of such factors as mobile substitution and saturation of traditional telephony market.

Expenses

Expenses, RUR million

2008

2007

Growth rate, %

Personnel costs

8 738

8 343

4.7

Depreciation and amortization

6 688

5 538

20.8

Telecom operators’ services costs

3 789

3 896

-2.7

Materials, repair and maintenance, public utility services

2 752

2 739

0.5

Other operating expenses, net

4 635

3 793

22.2

Total operating expenses

26 602

24 309

9.4

The primary factors which had effect on the excess of the growth rate of the Company’s expenditure over income were as follows:

- rise in expenditure of “Depreciation and amortization” related to the development and upgrade of network infrastructure intended at meeting solvent demand and improvement of quality of provided services;

- rise in expenditure of “Depreciation and amortization” related to implementation of VolgaTelecom’s plans of development of mobile communication networks within the framework of long-term strategy of mobile business development providing for the increase in the share of presence of VolgaTelecom’s mobile assets in its service area. The Company considers the development of this segment as strategic business trend the value of which in the future will be defined by the quantity of the subscribers’ base;

- writing off of unused licenses of Oracle E-Business Suite (RUB 293 million) to other operating expenses and write down of the cost of Amdocs Billing Suite (RUB 190 million) software product;

- in 2008 provision for doubtful debts amounted to RUR 167 million, while in 2007 provision for doubtful debts was recovered to the amount of RUR 104 million due to paid off debt under privileges for communications services granted in earlier periods.

Investments

In 2008 capital investments have grown by 0.5% vs. 2007 and amounted to RUR 10 625 million. The priorities of the Company’s investment policy were:

Modern communications services (organization of xDSL access, construction and upgrade of mobile communications networks, organization of Ethernet access, construction of Softswitch-based communications networks);

Mobile communications services;

Data transmission network and infrastructure;

Investments in IT.

In 2008 the Company put into operation 440 000 numbers of mobile communications and 416 500 fixed line numbers, at December 31, 2008 the level of telephony network digitalization was 80.0%. At the year-end 508 978 xDSL ports were commissioned which is by 33% more vs. similar indicator of 2007. As a result of development of communications infrastructure the subscribers’ base of GSM cellular assets (consolidated in IFRS statements) accounted for 3 530 000 subscribers (+14.3% growth).

Key financial performances

Indicator

2008

2007

Growth rate, %

Non-current assets, RUR million

49 175

47 009

4.6%

Non-current liabilities, RUR million

14 120

13 540

4.3%

Current liabilities, RUR million

13 455

11 788

14.1%

Net cash from core operations, RUR million

10 984

9 506

15.5%

Net cash used in investment operations, RUR million

8 391

10 552

-20.5%

Net cash used in (received from) financial operations, RUR million

1 410

(1 079)

-230.7%

Net profit margin, %

9.2

10.2

-1 percentage point

Net interest-bearing debt, RUR million

15 349

15 121

2%

Net interest-bearing debt /EBITDA

1.28

1.33

-0.05 percentage point

Net debt*/Revenues, %

47.9

50.3

-2.5 percentage point

* Net debt indicator is calculated as the sum of borrowers' liabilities adjusted for the amount of cash and cash equivalents.

Upon the whole FY 2008 performances conform to VolgaTelecom's development plans in major market segments and predetermine further growth.

Full text of IFRS consolidated financial statements is posted on VolgaTelecom’s site at: www.vt.ru. Supplementary relevant information about the Company is available on www.vt.ru, free access to system of information disclosure SKRIN “Issuer” - www.skrin.ru/issuers/nnsi/, and on the Company’s web pages in Reuters and Bloomberg systems.

Please, note that on June 18, 2009 from 2 p.m. to 4 p.m. on VolgaTelecom’s site www.vt.ru Internet-conference will be held – “VolgaTelecom’s 2008 results as per IFRS”. The questions to the conference partic ipants may be put since 3 p.m. of June 17, 2009. You are welcome to the Internet-conference.