Moscow, November 10, 2004. Sistema today announced its US GAAP consolidated financial results for the six months ended June 30, 2004.

HIGHLIGHTS

• Consolidated revenue up 55% to US$ 2.43 billion
• OIBDA[1] up 61% to US$ 1.12 billion
• Operating income up 71% to US$ 772 million
• Net income up 85% to US$ 171 million
• Total consolidated assets up 7% to US$ 7.35 billion
• 18% increase in shareholders’ equity to US$ 1.17 billion

Evgeny Novitsky, President and CEO of Sistema, commented on the half-year results: “Our businesses demonstrated strong year-on-year growth and further improvements in profitability in the first half of 2004. We continued to focus on developing market-leading positions in service-based industries across Russia and the CIS, and to pursue a highly selective acquisition strategy.  We have also expanded our presence in the international capital markets through the placement of a US$ 350 million 7-year Eurobond issue. Sistema’s improved credit rating was demonstrated by the Standard & Poor’s upgrade to a ‘B’ rating.  Recent developments have included the acquisition of a 51% stake in Kvazar-Micro to form an important part of our Technology Business”.

FINANCIAL SUMMARY

OPERATING REVIEW

Revenue

Sistema’s consolidated revenue increased by 55% year-on-year to US$2.43 billion in the six-month period ended June 30, 2004, from US$1.56 billion in the same period of 2003. Most of the growth was generated by strong organic performance, with revenues for continuing businesses growing by 50% year-on-year. Revenues from the Telecommunications segment grew by 54% year on year to US$ 2.11 billion from US$ 1.37 billion, whilst the Technology segment reported a more than doubling of revenues year on year to US$ 83.0 million from US$ 39.8 million.  Revenues for the Insurance businesses increased by 40% year on year to US$ 123.9 million from US$ 88.4 million, and the Banking segment grew by 33% year on year to US$ 27.3 million from US$ 20.5 million.  The other businesses comprise the group’s real estate, retail and media businesses, which reported a combined 73% year on year increase in revenues to US$ 134.3 million from US$ 77.5 million for the period.  

The Telecommunications Segment continued to be the largest revenue contributor, and represented 87% of total aggregated revenues for the period.  MTS and MGTS were the largest contributors to the growth of the Telecommunications segment revenue, with revenues growing by 56% or US$ 573.4 million and by 31% or US$ 76.1 million respectively.  MTS’s results were driven by a more than doubling year on year of the subscriber base from 11.3 million to 22.8 million, and also reflected the acquisitions of Sibchallenge, TSS and Primtelefon.  MGTS’s growth primarily reflected the increase in subscription fees for private residential and public sector subscribers that took effect in June and August 2003.

The increase in revenues for the Technology Segment was primarily attributable to the organic growth of Strom Telecom and Sitronics. The two businesses’ revenues increased year on year by US$ 23.6 million and US$ 13.1 million, or by 148% and 473%, respectively for the first half of the year.

Revenues from the Insurance Segment grew by 40% in the six months ended June 30, 2004, when compared with the six months ended June 30, 2003.  The growth reflected the promotion of new insurance products and the expansion of the client base in line with the overall growth of the Russian insurance market.

Sistema’s banking activities are conducted through MBRD, which provides a wide range of banking services to both group subsidiary and third party customers in four geographical regions.  Revenues for the period increased by US$ 6.8 million year on year  and were primarily derived from interest received on loans to customers, net of bad debts, which had increased by 16% to US$ 300.9 million as at June 30, 2004 from December 31, 2003.

The real estate, tourism, retail and media businesses were the largest contributors to the organic growth in the Other Businesses Segment with year on year revenue increases of US$ 20.8 million, US$ 15.3 million, US$ 8.6 million and US$ 7.4 million, respectively for the first six months of the year.

Operating income before Depreciation and Amortization (OIBDA)

The group’s OIBDA is defined as revenues less operating costs, plus income from equity interest and the net gain or loss on the disposal of shares in subsidiaries, and before depreciation and amortization charges. Group OIBDA increased by 61% year on year to US$ 1.12 billion from US$ 695.4 million for the six month period. The group’s OIBDA margin therefore increased to 46% for the six months ended June 30, 2004, compared to 44% for the same period of 2003.  The result primarily reflected a year on year increase in MTS’s operating margin to 40% from 36% for the first half of 2003, following lower interconnection and line rental charges payable to other operators for access to their networks. MTS contributed US$ 702.1 million, or 90%, of the group’s aggregated operating income in the six-month period ended June 30, 2004.

Interest

Consolidated interest expense for the six-month period ended June 30 increased by 29% year on year to US$ 108.1 million from US$ 83.9 million, primarily as a result of the increase in debt related to MTS’s US$ 300.0 million loan notes issued in August 2003 and US$ 400.0 million loan notes issued in October 2003, as well as Sistema Capital’s US$ 350.0 million loan notes issued in January 2004.  The net interest expense was also partially offset by the retirement of the MTS’s US$ 400 million Floating Rate Notes in May 2004. Interest income for the period totaled US$ 9.6 million for the six months ended June 30, 2004, compared to US$ 7.4 million for the six months ended June 30, 2003.

Net income

Consolidated net income from continuing operations before minority interests and the cumulative effect of accounting changes increased by 90% year on year to US$ 483.8 million from US$ 254.8 million for the six-month period.  The group’s net income margin on this basis increased to 20% from 16% for the period.  Minority interests in the net results of subsidiaries increased by 52% year on year to US$ 277.3 million from US$ 182.6 million for the six-month period, primarily due to the increase in attributable net income from MTS. The group’s net income after minority interests and the US$ 35.5 million negative cumulative effect of a change in accounting principle increased by 85% year on year to US$ 171.0 million for the six months ended June 30, 2004, from US$ 92.4 million for the six months ended June 30, 2003.

Total Indebtedness

Sistema completed a US$ 350 million Eurobond issue in January 2004 and the notes were subsequently listed on the London Stock Exchange.  The notes bear interest at an annual rate of 8.875%. The proceeds of the offering enabled Sistema to refinance a significant part of its short-term indebtedness, including US$ 100 million of credit-linked notes due February 2004. Standard & Poor's upgraded Sistema’s credit rating from ‘B-‘ to ‘B’ in March 2004, based on improving liquidity and the strong performance of the group’s telecommunications assets. This followed the assignment of a Senior Implied Long-Term rating of ‘B1’ to Sistema by Moody's Investor Service in November 2003.

The group’s total indebtedness amounted to US$ 2.49 billion as at June 30, 2004, compared to US$ 2.02 billion as at June 30, 2003. 

RECENT DEVELOPMENTS

In July 2004, Sistema acquired a 51% stake in Kvazar-Micro Corporation B.V., a Ukrainian computer component distributor and software development business, for a consideration equaling US$ 28.0 million.

In August 2004, Rosno acquired a 100% stake in Leader, an insurance company selling property insurance to energy companies.

In August 2004, MTU-Inform sold its 83% stake in PeCom and MGTS sold its 24% stake in MSS to SkyLink.  The total cash consideration for the two transactions was US$ 16.6 million. The Group also sold its 70% stake in Bolshaya Ordynka, a construction company that developed and owned two office buildings in Moscow, in August. 

In August 2004, Sistema amended its Charter to increase the par value of its common shares from 0.1 RUR to 90 RUR. As a result, the group’s share capital was increased by US$ 24.9 million and retained earnings were decreased by the same amount.

Sistema’s shares have been included in the ‘B’ list of the Russian Trading System (RTS) stock exchange with effect from October 28, 2004, and in the “B” list of the Moscow Stock Exchange (MSE) with effect from November 4, 2004.  The shares are listed under the symbol “AFKS”.

As previously announced, Sistema is also considering a listing of its shares on the London Stock Exchange in 2005 through an offering of Global Depositary Receipts. Credit Suisse First Boston and Morgan Stanley are the financial advisors to Sistema for the international listing, with Troika Dialog acting as Russian financial advisor.

OTHER INFORMATION

The June 2004, Sistema's Annual General Meeting of shareholders approved a dividend of RUR 18.5 (US$ 0.64) per ordinary share for the year ended December 31, 2003. The total amount of the dividend of RUR 149.85 million (US$ 5.17 million) is equivalent to approximately 1.3% of Sistema's consolidated net income under US GAAP for the full year 2003.

Sistema has continued to work on improving its corporate governance and disclosure practices during the first half of 2004, which has included the creation of the International Advisory Council to the Board of Directors and the Board of Directors’ Corporate Governance Committee; the adoption of Corporate Governance Code; the establishment of an Investor Relations Department; and the recruitment of a Company Secretary.  Sistema now publishes half yearly interim financial results statements, which are prepared in accordance with US GAAP, and regularly meets with investors. Euromoney magazine named Sistema “Best Corporate Borrower in Eastern Europe” in June 2004.

For further information, please visit www.sistema.ru or contact:

Sistema Investor Relations                                                        Shared Value Limited

Andre Bliznyuk                                                                         Edward Baumgartner

Tel: +7 095 730 1543                                                              Tel. +44 (0) 20 7321 5037

bliznyuk@sistema.ru                                                               sistema@sharedvalue.net

Sistema is the largest private sector consumer services company in Russia and the CIS, with over 25 million customers. Sistema develops and manages market-leading businesses in fast-growing service-based industries, including telecommunications, technology, insurance, banking, real estate, retail and media. Founded in 1993, the company reported revenues of US$ 3.8 billion in 2003, with total assets exceeding US$ 7.3 billion as at June 30, 2004.