Moscow - July 19, 2007:  Rostelecom (NYSE: ROS; RTS, MICEX: RTKM, RTKMP), Russia’s national long-distance telecommunications operator, today announced audited results for the full year ended December 31, 2006 in accordance with International Financial Reporting Standards (IFRS):

• Consolidated revenue for the full year 2006 increased by 50.3% to RUB 61,559.0 million;
• Domestic long-distance traffic rose 4.0% compared to 2005, international outgoing traffic grew by 9.2% while international incoming traffic increased by 31.2%* ;
• Full year 2006 OIBDA**  decreased to RUB 10,324.0 million compared to RUB 13,862.0 million in 2005, representing an OIBDA margin of 16.8%, due to significantly higher payments to operators under the new interaction system;
• 2006 FY net profit amounted to RUB 1,456.0 million.

Rostelecom’s CEO Dmitry Yerokhin commented:  «Following the liberalization of the long-distance market in 2006, Rostelecom’s business model has changed significantly as the Company began providing long-distance services directly to end customers throughout Russia. Therefore, management’s efforts in 2006 were primarily aimed at adapting operations to take advantage of opportunities presented by the changing environment as well as at strengthening our position in new market segments. The 2006 full year results confirmed the effectiveness of our actions and indicate that the Company will continue its success in the newly liberalized telecommunications market.

In 2006, Rostelecom delivered positive operating and financial performance underpinned by sustained traffic and revenue growth. At the same time, industry reform has also resulted in a surge in expenses that had a negative effect on OIBDA and OIBDA margins.

Within the framework of the transition to a business model focused on retail service, we paid special attention to effective interaction with both subscribers and regional operators that are now engaged as Rostelecom’s agents. The Company continued to successfully cooperate with international operators, while opening new points of presence at international traffic exchanges. As a result, Rostelecom reinforced its leading position in the international long-distance market and achieved significant growth in incoming international long-distance traffic in 2006. Continuing modernization of the Company’s nationwide network along with the active development and promotion of new products and services enabled Rostelecom to drive the increase in revenues from value-added and new services.     

Our priority for 2007 is to strengthen the Company’s market position in both the corporate and residential customer segments by further creating competitive advantages through the development of traditional and state-of-the art services, as well as by entering new markets. Rostelecom employees and management will work together to enhance operational efficiency and continually strengthen the Company’s competitive position, allowing us to capitalize on new opportunities for sustainable long-term growth.”

*   This press-release contains verified domestic and international long-distance traffic data for 2006.
** OIBDA is a non-U.S. GAAP and non-IFRS financial measure, which the Company defines as operating income before depreciation, amortization, loss from impairment of PP&E and goodwill and loss on disposal of PP&E. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our business operations, including our ability to finance capital expenditures, acquisitions and other investments and our ability to incur and service debt.  OIBDA should not be considered in isolation as an alternative to net income, operating income or any other measure of performance under U.S. GAAP or IFRS.

Financial highlights

Consolidated revenue for the full year 2006 increased by 50.3% to RUB 61,559.0 million. Domestic long-distance traffic grew by 4.0% year on year, outgoing international traffic increased 9.2%, while incoming international traffic was up 31.2%. Rostelecom delivered a 17.7% growth in revenues from leased line services to RUB 7,116.0 million due to an increase in demand from operators and corporate customers. Revenue from other business segments, including value-added and new services, rose 62.2% compared to 2005 and totaled RUB 5,322.0 million on the back of active development and promotion of the Company’s intelligent network services alongside the rising market demand for customer equipment servicing.
 
The liberalization of the Russian long-distance market has changed the Company’s operating environment and increased both Rostelecom’s revenues and operating expenses.

On January 1, 2006 the new system of interaction with Russian operators and subscribers for the provision of domestic and international long-distance services (“the new interaction system”) came into effect. In line with the new industry legislation, Rostelecom began providing domestic and international long-distance services directly to residential and corporate customers across the entire Russian Federation. Until 2006, Rostelecom was primarily a wholesale long-distance operator, and derived the bulk of its revenue from transit and termination fees from operators. As the major Russian long-distance retail operator, Rostelecom has been recognizing the total amount of end-user tariffs throughout the country as revenue since January 2006. As a result, the Company’s revenue composition has changed significantly, with a decrease in the proportion of revenues from operators and an increase in the proportion of revenues from subscribers. 

The changes in the market environment have also had cost implications on Rostelecom.  Beginning January 1, 2006 the Company’s services to end-customers across Russia are provided through the last-mile infrastructure of local and regional operators. Subscriber billing and payment collection activities, as well as other customer services are performed by the Company or its agent. The Company now pays  network operators for origination and termination of telephone calls on both an intra-regional and local level, as well as an agent’s fee. Moreover, the Company pays a compensation surcharge to regional operators occupying a “significant position” in the market for the initiation of DLD/ILD calls. As of now, these origination and termination tariffs, as well as the amount of the compensation surcharge are set by the state authorities regulating the telecommunications industry.

Hence, the 48.6% increase in operating expenses compared to 2005 was driven mainly by higher payments to Russian operators which increased by 3.4 times primarily as a result of the new interaction system.  

2006 full year operating profit totaled RUB 1,305.0 million compared to RUB 400.0 million in 2005 – a year-on-year increase of 226.3%.

As a result of higher operating costs, OIBDA for 2006 totaled RUR 10,324.0 million, down 25.5% year on year, representing an OIBDA margin of 16.8%.  

Consolidated net income for the full year 2006  increased by 48.9% to RUB 1,456.0 million compared to RUB 978.0 million in 2005.
 
In 2006 Rostelecom continued to invest in the modernization and expansion of its nationwide network.  Full year capital expenditures increased by 1.8% compared to 2005 to USD 284 million, with similar capex levels projected for 2007. The key objective of Rostelecom’s investment program is to remain a technological leader in the Russian telecommunications sector in order to sustain the Company’s leading position in major and new competitive markets while successfully pursuing new business opportunities.

Rostelecom’s continuous focus on business process improvement and optimization of the organizational structure resulted in a 1.7% reduction in headcount compared to 2005. As of December 31, 2006 headcount amounted to 23.2 thousand employees. Overall headcount reduction in network maintenance was offset by Rostelecom’s entrance in the end-user markets, which required increased staff in the field of marketing, sales and customer service, including staff to support the Company’s Customer Care Centers launched nationwide in 2006.

Domestic Long-Distance (DLD) Services

Growth in Traffic and Revenue from Russian Clients Underscores the Successful Adaptation of the Company’s Business Model to the New Operating Environment in the DLD Market  

The Company’s 2006 DLD revenues increased by 73.1% to RUR 31,370.0 million, primarily as a result of the transition to the new system of interaction with Russian operators and subscribers for the provision of long-distance services effective from January 1, 2006. Domestic long-distance traffic amounted to 9,722.1 million minutes - a year-on-year increase of 4.0%.
To retain leading position in the market and ensure the growth of DLD traffic Rostelecom has focused on strengthening cooperation with IRCs and other local telecommunications operators by engaging them as the Company’s agents, as well as on the development of direct business-to-client relationships with end-customers in the most profitable segments. By January 1, 2007 the Company had launched 71 of its own Customer Care Centers across the country.

International Long-Distance (ILD) Services to Russian Subscribers and Operators

Effective Cooperation with Russian Subscribers and Operators under New Provisions for International Long-Distance Services Bolsters Outgoing International Traffic Growth   

Full year 2006 revenues from ILD services to Russian subscribers and operators and rose 41.1% to RUB 13,271.0 million, mainly driven by the new interaction system with Russian operators and subscribers for DLD and ILD services, which came into effect on January 1, 2006. Outgoing ILD traffic totaled 1,932.8 million minutes – a year-on-year increase of 9.2%.
Rostelecom’s strengthening partnership with Russian operators, and focus on new market opportunities to provide telecommunications services directly to end-customers enabled the Company to retain its leadership in the Russian outgoing ILD market.

Incoming ILD Traffic Transit and Termination Services to International Operators

Strong Growth in International Market Share Supported by Successful Collaboration with International Operators

The Company’s successful efforts to expand cooperation with international operators, to establish new points of presence in the world’s main traffic exchange centers and effectively optimize tariff policies contributed to the continued growth in international incoming traffic volumes.
Incoming traffic from international operators rose 31.2% to 2,460.7 million minutes year-on-year, as Rostelecom further increased its international market share. Full year 2006 revenues from international operators for incoming ILD traffic transit and termination grew by 9.3% year on year to RUB 4,480.0 million.

Revenue from Leased Line Services 

Growth in Revenues from Leased Lines Resulting from Increasing Demand and Strong Relationships with Operators and Businesses 

Rostelecom’s 2006 revenue from leased line services rose 17.7%  year on year and totaled RUB 7,116.0 million.

Other Revenue 

Active Development and Promotion of New Services Generates Increase in Revenues

The Company’s revenue from other business segments rose by 62.2% compared to 2005 to RUB 5,322.0 million, reflecting the growth of value-added and new services. Specifically, supported by a growth in demand, Rostelecom delivered solid increases in revenues from intelligent network services and customer equipment servicing.

Operating Expenses

Total operating expenses for the full year 2006 amounted to RUB 60,254.0 million.  The year-on-year increase of 48.6% was mainly attributable to the aforementioned regulatory reform and restructuring of the national telecommunications sector. As a result, the Company’s payments to Russian operators more than tripled, including payments for call initiation and termination, the compensation surcharges and agent fees. With the opening of access to end-user subscriber markets on January 1, 2006, the new business model also required increased marketing, advertising and staff costs.

Staff costs for the full year 2006 totaled RUB 6,242.0 million, a 22.2% increase year on year. Due to further streamlining of the organizational structure, the Company’s headcount was reduced by 1.7 % to 23.2 thousand employees in 2006.

Payments to Russian operators increased by 235.8% to RUB 29,355.0 million compared to 2005, while payments to international operators rose by 3.5% to RUB 7,304.0 million.

As a result, OIBDA totaled RUB 10,324.0 million compared to RUB 13,862.0 million in 2005, while  OIBDA margin amounted to 16.8%.

Depreciation charges for the full year 2006 amounted to RUB 8,418.0 million. The 18% increase over the previous year is a result of significant additions of property plant and equipment in 2005. 

Nevertheless, full year 2006 operating profit more than tripled from RUB 400.0 million a year ago to 1,305.0 million in 2006.

Other Income/Loss 

Other income for the full year 2006 amounted to RUB 1,119.0 million, up 1.4% from RUR 1,104.0 million a year ago.

Income Tax

Income tax expense amounted to RUB 987.0 million in 2006. The 42.0% increase over 2005 is mainly due to the growth in income before taxation. 

Consolidation

Full year 2006 consolidated financial statements include results of operations of Rostelecom and its subsidiaries - Westelcom, GlobalTel, Globus-Telecom, Zebra Telecom and others. Globus-Telecom and Zebra Telecom were acquired by the Company in 2006.

Net profit

In 2006 Rostelecom’s consolidated net profit increased by 48.9% and totaled RUB 1,456.0 million compared to RUB 978.0 million in 2005.

Evaluation and audit of internal control over financial reporting

Rostelecom has notified the U.S. Securities and Exchange Commission (“the SEC’) about the late filing of its Annual Report for the year ended December 31, 2006 on Form 20-F («Form 20-F»). The late filing of Form 20-F is due to the inability of the Company to complete by June 30, 2007 the evaluation and audit of its internal controls over financial reporting as required under the Sarbanes-Oxley Act of 2002 (“SOX”).

The substantial increase in the scope of Rostelecom’s significant business-processes and the new interaction system resulted in the Company’s inability to timely complete of the evaluation of its internal control over financial reporting.

The Sarbanes-Oxley Act requires the U.S. listed companies to establish and evaluate internal controls over financial reporting.

In addition, a registered public accounting firm that prepares the audit report for the Company shall attest to, and report on, the assessment of the effectiveness of the internal control over financial reporting made by the Company’s management. Rostelecom is to comply with this SOX requirement beginning with the Annual report for the year ended December 31, 2006 on Form 20-F
Rostelecom expects to file its Form 20-F with the SEC in December 2007.

Rostelecom will host a webcast of the full year 2006 results conference call on July 19, 2007 beginning at 9.00 AM (Eastern US) / 2.00 PM (London) / 5.00 PM (Moscow).  The webcast will be available both live, and for replay purposes, on the Investor Center of Rostelecom’s website at www.rt.ru/en/icenter.

***

Certain statements in this press release are forward-looking statements within the meaning of the U.S. federal securities laws and are intended to be covered by the safe harbors created thereby.

Those forward-looking statements include, but are not limited to:

• Management’s assessment of the Company’s future operating and financial results as well as forecasts of the present value of future cash flows and related factors;
• the Company’s anticipated capital expenditures and plans to construct and modernize its network;
• the Company’s expectations as to the growth in demand for its services, plans relating to the expansion of the range of its services and their pricing;
• the Company’s plans with respect to improving its corporate governance practices;
• the Company’s expectations as to its position in the telecommunications market and the development of the market segments within which the Company operates;
• economic outlook and industry trends;
• the Company’s expectations as to the regulation of the Russian telecommunications industry and assessment of impact of regulatory initiatives on the Company’s activity;
• other statements regarding matters that are not historical facts.

Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These risks, uncertainties and other factors include:

• risks relating to changes in political, economic and social conditions in Russia as well as changes in global economic conditions;
• risks relating to Russian legislation, regulation and taxation, including laws, regulations, decrees and decisions governing the Russian telecommunications industry, securities industry as well as currency and exchange controls relating to Russian entities and their official interpretation by regulatory bodies;
• risks relating to the Company, including the achievement of the anticipated results, levels of profitability and growth, ability to create and meet demand for the Company’s services including their promotions, and the ability of the Company to remain competitive in a liberalized telecommunications market;
• technological risks associated with the functioning and development of the telecommunications infrastructure, technological innovations as well as the convergence of technologies;
• other risks and uncertainties. For a more detailed discussion of these and other factors, see the Company’s Annual Report on Form 20-F for its most recently completed fiscal year and the Company’s other public filings with The U.S. Securities and Exchange Commission.

Many of these factors are beyond the Company’s ability to control or predict. Given these and other uncertainties, readers are cautioned not to place undue reliance on any of the forward-looking statements contained herein or otherwise. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements (which are made as of the date hereof) to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as may be required under applicable laws.

 Press-release