Risk Management

Depreciation of our services and loss of competitiveness, difficulties in developing additional sources of income
Continuous improvement of technology, development of new products and services, increased competition associated with the emergence of new players in the market, and increased use of IP-telephony and other services provided via the internet, may adversely affect the ability to maintain subscriber base, lead to a reduction in market share and operating margin.

To ensure the highest level of quality of our basic communication services, we are systematically increasing the capacity and bandwidth throughput of the network, which is extremely important in the context of the observed continuous increase in the volume of data traffic consumption. We are comprehensively approaching the issue of network development, making the necessary investments in 3G and 4G infrastructure, ensuring the possibility of further network evolution in the direction of the fifth generation, including deployment and operation of 5G test zones, and carrying out pilot projects in the NB-IoT area. From the point of view of marketing activity, an effective method for leveling the adverse impact of VOIP-solutions are integrated V&D tariffs that combine voice and data services. Our key tool to maintain direct contact with the end user and increase the average level of income from the subscriber in the near future will be a gradually developing portfolio of high-level digital services aimed at meeting various customer needs. Both our own developments and high-quality partner products will participate in the formation of such a digital environment.

Retention of basic mobile revenue;
compensation for traditional telecom revenues decrease caused by active development of digital products portfolio;
leadership in the mobile internet and data services segment.

Loss of control over activities and assets in the countries of operation
The risk of termination, suspension of operation or claims by regulators may adversely affect business, financial state and results of operations

We are monitoring the political situation in the markets of operation of the Group of Companies, and we strive to respond quickly to changing conditions in the markets

Achievement of sustainable business development

Risks of acquisitions, investments and mergers with other companies
New acquisitions make it possible to diversify the business of MTS PJSC be additional risks associated with the obligations of the acquired companies, as well as risks of failure to achieve the initial financial and operational goals, problems with the integration of acquired assets, risks associated with a lack of experience in new markets, including political, economic, social, legal and regulatory risks, competition risks, etc.

We see opportunities for growth through our participation in promising new businesses in the digital economy, which enables us to significantly expand the range of services we provide and to enter new markets. When closing transactions in the field of M&A, we conduct a thorough audit of companies, where we plan to participate as a shareholder. Assessment of the feasibility of investments occurs with the involvement of independent consulting companies and takes into account the strategic position, financial results and features of the operating activities of such companies. Further implementation of MTS rights as a shareholder in them corresponds to the best practices of corporate governance. Integration of the acquired business into the management structure of MTS (if such decision is made) is carried out by a special unit with a wealth of experience of this kind.

Expansion of the Company’s business and faster entrance into new markets;
product line expansion; achieving operational synergies between different business areas;
mutual exchange of best practices in management and operations.

Inability to successfully develop the network
In connection with the development, construction and maintenance of the communications network, we need to make purchases of equipment and software, which is associated with significant capital investments.
In addition, limitation of the frequency spectrum available for the development may prevent gaining all the expected benefits from network construction and weaken expansion effect. Network deployment may be connected with difficulties to obtain sites for base stations on commercially viable terms, to collect permits and certificates for telecommunications equipment and/or import and export permits for certain network equipment, which may delay procurement and interfere with network development plans.
Starting from 2017, the issue of frequency resource allocation for the deployment of next-generation (5G) networks has been actively discussed in the telecommunications environment of Russia (including the relevant state authorities). The regulator’s final decisions on spectrum distribution paths for 5G networks will significantly affect the development of the entire mobile communications market and may lead to a number of risks, including (but not limited to) increasing the time required for putting 5G networks into operation, increasing the level of capital and operating costs, the inability to exploit all the technological advantages of 5G due to the separation of 5G infrastructure and networks of earlier generations, the exploitation of market advantages by individual players due to the non-equal distribution of frequency resource or receiving other technological advantages associated with its distribution.

While further investing into the development of infrastructure, we see the opportunity for gradual reduction of our capital expenditures with maintained quality of the services provided. MTS with a number of partners conducts joint procurement procedures, as well as carries out joint construction and operation of network infrastructure elements. In addition to the economic benefits, within the framework of cooperation, technical and functional requirements, approaches and methods are unified.
We are in constant contact and work closely with representatives of regulating bodies, industry associations, network hardware producers and other participants of the telecom market. This cooperation on our part is aimed at protecting the company’s interests, encouraging an atmosphere of healthy market competition, dynamic and timely adoption of new technological solutions and, as a result, building an advanced and diverse customer experience. We firmly believe that all the actions of the regulator, including making decisions on a mechanism for rolling out 5G networks, should aim to support the long-term sustainability of the industry and should take into account the interests of all parties, including service consumers and operators.

Increasing network capacity and data rates to meet growing demand;
effective network planning and investment optimization;
protecting the company’s interests in issues of the distribution of a frequency resource.

Inability to realize the benefits of investing in radio communications systems
Key risks:
impossibility to build 4G and NB-IoT networks in accordance with the planned terms or in accordance with the terms stipulated by the license conditions, difficulties in ensuring quality and required level of service. and demand for 4G services (including NB-IoT) in the markets of operation of MTS PJSC and its subsidiaries will be lower than expected.

We have significant experience in dealing with hardware and software vendors, as well as with regulatory authorities. This enables us to reach agreements under the most comfortable conditions for us, including in terms of delivery times and construction. We take all necessary measures to comply with licensing conditions and other regulatory requirements, as well as carry out timely renewal of licenses and permits.
We conduct regular monitoring of communication quality parameters and promptly react in case of identifying the need for additional capacity and bandwidth throughput in local areas of the network, which enables us to maintain a consistently high level of service quality. With the help of marketing tools, we stimulate usage of data transfer services, thus increasing the degree of network resource utilization

Ensuring the best compliance with IoT technology requirements and infrastructure readiness for 5G implementation;
efficient capital expenditures planning;
increased operational efficiency by optimizing the operating costs associated with network operation.

Economic and Social Instability
Economic and social instability, just like possible future downturns or a slowdown of economic growth in the countries where we operate may lead to a decrease in demand for the provided services, and have a negative impact on the financial condition of our corporate customers and partners, including financial institutions, which could lead to a decrease in our revenues and performance indicators and adversely affect the security of our assets.
For example, an outbreak of a previously unknown strain of coronavirus (COVID-19) negatively affected the global economy, disrupted supply chains, created significant volatility in the financial markets and destabilized them. The coronavirus pandemic, among other things, could lead to a fall in demand for MTS PJSC products and services, including international roaming services, to higher prices from suppliers, as well as their refusal to finance purchases, to a reduction in production or untimely supplies of equipment, subscriber devices and to delayed provision of services. Considering the great uncertainty associated the current epidemiological situation, including measures to counteract the spread of the virus, we are unable to accurately and completely evaluate its potential impact on the business of MTS PJSC, however, we admit that the current situation could negatively affect the business, financial position and performance of MTS PJSC.

We are monitoring the macroeconomic situation in the markets of operation of the Group, promptly and effectively respond to changes in the general economic background with the help of, first and foremost, tariff tools. We are constantly expanding the range of our services and stimulating consumption, increasing the level of satisfaction of our customers in the corporate and mass segments. We pay great attention to ensuring optimal conditions for raising outside financing for us, controlling the level, cost and structure of debentures, which makes it possible, in particular, to neutralize the negative effects of currency exchange rates variations under conditions of high volatility of foreign exchange markets.

Achievement of sustainable business development.

Regulatory Risks
Our business in the countries where we operate is regulated by governments; in particular, through licensing and laws. Legislation in the field of communication services is constantly changing.
For example, the Ministry of Communications of the Russian Federation is currently considering the possibility of changing the concept and regulation of inter-operator interaction. In addition, an issue on changes in the existing approaches and rules in the field of regulating prices for the services of interconnection and traffic transit is being considered. On 11.01.2019, the Federal Law dated 05.01.2019 No. 90-FZ “On Amending the Federal Law “On Communications” and the Federal Law “On Information, Information Technologies and the Protection of Information” (Law on Sovereign Internet) entered into force; its purpose is to ensure sustainable, safe and holistic functioning of the internet in the Russian Federation. In the framework of the implementation of this law, operators will be required, among other things, to install new equipment on the network, which can affect its stability and the quality of the communication services provided. The provisions of the Sovereign Internet Law are general in nature, and although most of the significant by-laws have already been adopted by the Russian authorities, practical implementation may require the adoption of additional by-laws to clarify the provisions of the law. Furthermore, the operators incur additional expenses required to maintain and operate this equipment. According to the Order of the Ministry of Communications of the Russian Federation No. 148 of March 31, 2020, an experiment to provide citizens with free access to socially significant information resources on the internet will be conducted from April 1 to July 1, 2020. The list of the socially significant information resources and sites includes, among other things, social networks, websites of news and information agencies, online stores, websites of banks and delivery services. At the moment, it is not clear what consequences the implementation of this order will have, including possible expenses for operators; there is no understanding when and in what form free access to the socially significant information resources will be realized in the future, however this initiative could potentially have negative consequences for our business, financial standing and the results of our activities. It is still unclear how these initiatives will be implemented, and at the moment it is difficult to estimate how such changes will affect the Company’s operations. These and other potential regulatory changes in the future may entail decrease in revenues/additional costs for the operator, which may adversely affect our financial standing and performance.

We conduct regular monitoring of the legislation in order to meet the requirements set. As market representatives, we participate together with the regulatory authorities in working groups on the optimization of the regulatory framework in the communication industry. Regulatory risks are given special attention within the framework of strategic planning.

Achievement of good operating indicators;
ensuring compliance with regulatory requirements.

Financial Risks
A considerable part of our expenses, costs and financial obligations, including capital expenses and loans (credits and Eurobonds) is denominated in USD and/or EUR, while a large portion of income is denominated in the local currency of the countries where we operate. The situation in our markets, including stability of the banking system, inflation, changes in the exchange rates of local currencies against USD and/or EUR, and the possibility for free conversion of currencies and making currency payments impacts our operating performance and business results. For example, at the beginning of 2020, the ruble depreciated from 61.91 rubles for 1 US dollar as of January 1, 2020, to 80.88 rubles for 1 US dollar as of March 24, 2020, as a result of the COVID-19 outbreak and a drop in oil prices.
The rate of the Company’s development and its financial standing, among other factors depend on debt financing. Crises on financial markets, external limitations and sanction may restrict the ability of the Company to raise debt financing.

A number of portfolio structuring measures have been taken in order to reduce dependence on exchange rate fluctuations, including implementation of currency risk hedging program.

Maintaining investment attractiveness by ensuring investment and operational efficiency growth.

The contracts related to certain issues of our bonds and the bonds of our controlling shareholder, and also some loan agreements include restrictive provisions that limit our opportunities to raise loans and engage in various activities. Failure to comply with these contractual provisions could have resulted in default and, as a result, in a request to immediately repay the debt, which could have negative effects on our business.

We are monitoring the implementation of the provisions of contracts and agreements for granting loans in order to comply with the financial covenants contained in the loan documentation.

Maintaining investment attractiveness by maintaining an optimal level of debt

Risks of technological failures
The ability to continuously provide communications services is one of the basic conditions of licenses and subscription contracts. An occurrence of process failures on our network and information resources due to a system malfunction, accident, or a violation of the network’s security can adversely affect the ability to provide services to subscribers or affect other business processes, which can lead to significant negative consequences for the business, performance results and reputation of MTS PJSC.

In order to ensure stability of the network and continuity of communication services rendering, the network management system is centralized, and the telecommunication network operation system provides for regular maintenance and use of the backup telecommunications equipment.
In order to protect and be able to restore data from information resources for critical facilities, the processes of development and operation of infrastructure include the use of backup equipment, including that with a geographical distribution, and procedures for data recovery testing. Processes and systems for ensuring quality of information systems, as well as change monitoring and control are used in order to protect integrated information systems under the conditions of continuous changes. Information security in network management is provided by a complex system of technical and organizational information security measures.

Achievement of good operating indicators;
achievement of sustainable business development.

Compliance risks
MTS securities are traded on the U.S. stock market, and we are subject not only to Russian, but also to American anti-corruption legislation (US Foreign Corrupt Practices Act), and potentially to the anti-corruption law of the UK (UK Bribery Act). If an inconsistency of our actions or actions of third parties acting on behalf of or in our interests with these requirements is revealed, this may result in criminal and/or civil law sanctions against us. In March 2014, MTS PJSC received a request for information from the US Securities and Exchange Commission and the US Department of Justice regarding the investigation of the former subsidiary in Uzbekistan.
In February 2019, MTS Group reached a settlement with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) in relation to the previously disclosed investigation of the Group’s former subsidiary in Uzbekistan. The Group agreed with the restraining order (the “Order”) issued by the U.S. Securities and Exchanges Commission. The district court of the Southern District of New York approved the agreement (the “Agreement”) on the deferment of prosecution concluded by the Group and the agreement on admission of guilt concluded by the Group’s subsidiary company in Uzbekistan. According to the terms of the agreements with the US Department of Justice, we agreed to pay the United States a fine of $ 850 million (59.1 billion rubles as of December 31, 2018). The Group has accrued a provision for payment of the fine in the amount of USD 850 million (55.8 billion rubles as of the date of accrual) reflecting it as a loss caused by ceased operations in the consolidated profit and loss statement for the year ending on December 31, 2018. In accordance with the terms of the Agreement and the Order, the Group agreed to introduction of independent supervision (monitoring) over compliance with their requirements. According to the terms of the Agreement and the Order, monitoring will be conducted for three years from the date of its establishment and the monitoring period may be reduced or extended depending on certain circumstances. The final decision in this regard shall be made by the US Department of Justice and the US Securities and Exchange Commission.

Starting from 2012, when a separate compliance division was established at MTS, the Company has been systematically developing a system for anti-corruption compliance in accordance with the best international practices.
The Company has special rules and procedures in place for the prevention of corrupt practices, both on the part of employees and with respect to contractors.
The main documents governing anti-corruption requirements within MTS are the Code of Business Conduct and Ethics, Policy “Compliance with anti-corruption legislation.” Besides, procedures for assuring compliance with anti-corruption legislation are fixed in the regulations of the company’s business-processes.

Support of fair and ethical business conduct and abuse prevention

Tax risks
The system of taxation in the countries where we operate is undergoing constant changes; legislation in this area may be interpreted ambiguously. For example, poorly drafted Russian transfer pricing rules may increase the risk of price adjustment by tax authorities and lead to additional tax burden within transfer pricing control. This may complicate tax planning and related business processes, and may also have adverse material impact on our business, financial standing and operating results.

We meet the requirements of the tax legislation in the countries where the Group operates. We respond to any changes promptly and follow the current trends in law-making, as well as the tax laws of Russia and foreign jurisdictions, which allows us to make timely integrated decisions in the field of tax planning and customs regulation. We regularly use the experience of qualified consultants.

Achievement of sustainable business development;
compliance with requirements.