Krasnodar, August 4, 2006: Southern Telecommunications Company (“UTK”) (RTS: KUBN, KUBNP; MICEX: UTEL, UTELP; ADR OTC: STJSY, KUE FRA)], the principal fixed-line telecommunications provider for Russia’s Southern Federal District releases FY2005 audited consolidated financial statements compiled under International Financial Reporting Standards (IFRS). The audit of 2005 financial statements was carried out by Ernst & Young LLC.

• 2005 consolidated revenue rose 8.33% over 2004 to RUR 18,774 mln (USD 652 mln1);
• 2005 OIBDA2 increased 15.19% year on year to RUR 4,944 mln (USD 172 mln) representing an OIBDA margin of 26.33%;
• Operating profit for the reporting period grew 11.42% over 2004 to RUR 1,768 mln (USD 61 mln); 
• 2005 revenues from new value added services3 rose 74.21% to RUR 1,400 mln (USD 49 mln); revenues from local telephone services increased 17.19% to RUR 7,164 mln (USD 249 mln)
• Volume of xDSL-based Internet traffic tripled to 172.6 Tbytes.

Commenting on the 2005 financial results, Alexander Andreev, UTK CEO, stated: « Due to active implementation of the Company’s development strategy "UTK" PJSC succeeded in improving its main financial and performance results:

• Active development of new technologies and up-to-date marketing solutions enabled the Company to increase its revenues from value-added telecom services by 74.21% in 2005;
• In 2005 the Company continued to reduce its investment program: capex volume stood at RUR 3,213.5 million representing a  74.3%-decrease over 2004;
• The staff number had also been cut: as at the beginning of 2006 the number of the Company’s employees on payroll was 37.66 thousand people which was down 4.3% over the beginning of 2005.

In line with the Company’s policy on optimization of the debt size and structure "UTK" PJSC placed series 04 bond issue worth 5 billion rubles. The funds obtained from placement of 04-series bonds were used for restructuring of  UTK’s  debts.

The Company undertook a number of measures to make UTK more attractive for investment community. As a result its market capitalization rose 90.7% over 2004 reaching USD 515 mln as of January 1, 2006.

The Company’s priority objectives for 2006 are to strengthen its market positions, improve business efficiency, drive the growth of new services and increase the Company’s capitalization».

1. KEY FINANCIAL HIGHLIGHTS:

The Company’s 2005 consolidated revenue grew 8.33% to RUR 18,774 mln (USD 652 mln). Revenues from telecom services increased by 8.01% to RUR 17,891 mln (USD 622 mln), other revenues  — by 15.23% to RUR 883 mln.

Revenues up due to development of value-added and local services

The increase in UTK’s 2005 revenues from telecommunications services was mainly due to expansion in the Company subscribers’ base, a 30.3%-increase in average revenue per unit (ARPU) to 139.4 rubles per month and growth in revenues from value-added services and traffic transit services for interconnected operators.

2005 revenues from local telephone services grew by 17.19% to RUR 7,164 mln. Revenues from local telephone calls (monthly subscriber fee and time-based payments for local calls) rose by 35.78% to RUR 6,499 mln.

Most important factors in the 2005 revenue increase from local voice services were an expansion in the Company’s subscriber base to 4,015 ths main telephone units (adding 88.46 ths new subscribers in 2005) and the increase in local tariffs. In 2005 local tariffs increased by an average of 19.8% for the urban population, 22.8% - for the rural population, and 15.3% for the business sector.

2005 revenues from long-distance telephone services decreased 5.43% to RUR 6,954 mln, including RUR 5,799 mln (down 6.28%) from domestic long-distance calls and RUR 1,154 mln (down 0.91%) from international long-distance calls.

Revenues from value-added services (VAS) showed the highest growth rates. 2005 VAS revenues  increased by 74.21% to RUR 1,400 mln. As a result market share of the Company  in the regional value-added market increased from 44.3%  to 48.0% in 2005.

Growth of revenues from interconnection and traffic transit services to national operators was another contributor to total revenue increase. 2005 revenues from services for national telecom operators increased by 8.98% to RUR 666 million.

Revenues from other telecom services 4 increased by 1.41% to RUR 1,708.0 mln.

In 2005 share of revenues from long-distance telecom services decreased from 44.39% to 38.87% while the share of revenues from local telecom services increased from 36.9% to 40%, the share of VAS revenues grew from 4.84% to 7.82% and the share of revenues from services to national telecom operators rose from 3.69% to 3.72%.

In the period under report residential customers accounted for 56.49% of telecom services provided by the Company   (vs.57.95% in 2004), corporate customers — for 35.75% (vs. 34.52% in 2004), government customers — for 7.76% (vs. 7.53% in 2004).

Other revenues from non-telecom services (from sale of cable production, construction, sale of other goods, recreational services and other non-telecom services) increased by 15.23% to RUR 883 mln.

2. The Company’s telecom revenues breakdown and dynamics:

Operating expenses - positive trend in revenue growth compared to the Company’s operating costs due to strict control and costs optimization 

UTK’s operating expenses increased by 8.02% to RUR 17,006 mln (USD 591 mln) in 2005. The Company’s weighted policy on cost control allowed it, for every 1 ruble of revenues from primary activities, to reduce costs by 0.22 %, from 0.908 to 0.906 rubles. Revenue growth exceeded operating costs by 0.31 percentage points.

The main contributors to the growth in operating cost were depreciation charges (up 17.4% to RUR 3,176 mln), expenses on creation of provision for impairment of receivables (up 264.71% to RUR 256 mln )  as well as expenses on traffic transit services (up 5.09% to RUR 2,622 mln).

A 0.19%-decrease of wage and salary expenses to RUR 6,006 million was due to staff cuts and network digitization rate growth. The specific weight of this cost item in the operating costs structure decreased from 38% to 35.3%. Besides, this cost item includes expenses on provision of pension coverage under post-employment benefit plans for employees. According to the actuarial assumptions, the defined benefit pension plan expense amounted to RUR 288 mln in 2005 and RUR 216 mln in 2004. Actual return on pension plan assets for 2005 was 4.37%.

In 2005 material expenses decreased by 11.31% from RUR 2,297 million to RUR 2,037 million.

Other 2005 operating expenses of the Company rose by 27.66% to RUR 1,992 mln. This was mainly due to the increase in expenditures for lease of premises (up 42.28%), consulting fees (up 67.88%) and agency fees (up 48.07%). Besides, in 2005 the Company incurred an expense on contribution to Universal service fund. These payments are mandated by the Federal Law on Communications and Government Decree ? 243 of April 21, 2005. Contribution is calculated as 1.2% of the revenues from the telecommunication services decreased by revenues from interconnection services. 2005 universal service reserve amounted to RUR 136.98 mln accounting for 0.8% of total costs. This reserve was calculated on the basis of RAS results.

3. The Company’s operating expenses breakdown and dynamics: 

2005 OIBDA amounted to RUR 4,944 mln (USD 172 mln), OIBDA margin decreased by 1.56 percentage points to 26.33%.

2005 operating profit of UTK PJSC grew 11.42 % to RUR 1,768 million (USD 61 million). As a result the 2005 operating margin of the Company rose from 9.16% to 9.42%.

Other revenues and expenses  

Other revenues of the Company in 2005 decreased by 26 % to RUR 260 million due to a loss of RUR 6 mln on sale of the Company’s subsidiary and a 22.27%-reduction in share of result of associates. Conversely, other expenses increased by 34.2 % to RUR 2,870 million in the reporting period. This was mainly due to a 37.74%-increase in interest expenses to RUR 2,866 million. At the same time, the foreign exchange loss approximated to zero due to reduction of the portion of vendor foreign currency credits in the structure of the Company’s credit portfolio. 

Net financial result 

Income tax expenses stood at RUR 214 mln, a 133.61%-increase over a year ago. In 2005 minority interest decreased due to repurchase of the minority stake in OJSC Kuzminov Stavtelecom and amounted to a loss of RUR 3.9 million. As a result 2005 net loss of the Company  was RUR 1,053 mln (USD 37 mln).

List of the Company’s subsidiaries can be viewed in section 7 of the explanatory note to IFRS financial statements.

Full version of FY 2005 IFRS consolidated financial statements of UTK with notes to them may be viewed on the  corporate web site in “IR section/Financial reports” section.

Certain statements of this press release are “forward-looking statements” within the meaning of the U.S. Securities Acts. The Articles of these Acts stipulating exemption from liability for acting in good faith shall be applied to such forward-looking statements.  

Due to the effects of the risks, uncertainties and other factors described hereinafter the Company’s actual results could be significantly different from the results stated in this press release.

 Such risks include the possibility that the economic and financial environment of the Company  may change affecting its development prospects. There are also risks related to possible change of political and economic situation in Russia, change of the Russian legislation, change of the current or future regulation of the Russia telecommunications sector as well as risks associated with competition and other factors.

Most of the abovementioned factors cannot be controlled or predicted by the Company. Therefore, the Company  does not recommend to rely unreasonably on any statements of this press-release containing forecasts of future events.

The Company does not undertake any obligations to publicly disclose any information about the changes to this press-release with the purpose to reflect events or circumstances which took place after the date of the press-release, or with the purpose to specify unforeseen events that took place, except as maybe required by the Russian federal laws on securities.

[1] Unless specified otherwise, US dollar figures hereinafter are provided at the Central Bank of Russia average exchange rate of USD 1 = RUR 28.7825 in 2005 and RUR 27.7487 in 2004.  
[2] OIBDA is calculated as the sum of operating profit and depreciation.
[3] Value-added telecom services provided by UTK contain services of VPN (virtual private networks) construction on the basis of MPLS and other technologies, data transfer, Internet access (hardwired IP-circuit, dial-up access, xDSL broadband access, Wi-Fi-based wireless access), termination of IP-traffic, digital cable TV network (IPTV), multimedia and multi-service networks on the basis of HFC, Ethernet to the home, and other technologies, video telephony and video conferencing, intelligent networks, content services including on the basis of Call-centers, Hosting and Co-location.
[4] For the purposes of this press release other telecommunication services provided by "UTK" PJSC include rent of telephone channels, cellular services, radio and TV broadcasting, data transfer and telemetric services, documentary services, other telecom services. The latter services primarily consist of revenues received by public switched telephone network (PSTN) exchanges from the rent of direct lines and local junctions.